CYPRUS – INDIA DOUBLE TAX TREATY (UPDATE)

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CYPRUS – INDIA DOUBLE TAX TREATY

CYPRUS – INDIA DOUBLE TAX TREATY (UPDATE)

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India officially rescinds the notification issued to Cyprus

NEW UPDATE 16 DECEMBER 2016

Further to the announcement issued in the Indian Government gazette on 14 December 2016 whereby the rescind of Cyprus as a notified jurisdiction was published, the Indian government has subsequently issued a corrigendum retrospectively rescinds Cyprus notification u/s 94A.

The word “this” in the below sentence, which was effectively referring to the current date (14/12/2016) of the publication in the Gazette, was replaced with the word “the” which now refers to the initial notification issued dated 1/11/2013.

“[…] with effect from the date of publication of this the notification in the Official Gazette.”

On 16 December the Government of India has issued a press release for the completion of the internal procedures for the revised double taxation agreement between India and Cyprus. The press release is set below:

PRESS RELEASE BY THE GOVERNMENT OF INDIA

Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
New Delhi, 16th December, 2016.

PRESS RELEASE
Sub : Notification of Completion of Internal Procedures for Revised Double
Taxation Avoidance Agreement between India and Cyprus

A revised Agreement between India and Cyprus for the Avoidance of Double Taxation and the Prevention of Fiscal evasion (DTAA) with respect to taxes on income, along with its Protocol, was signed on 18th November, 2016 in Nicosia, which will replace the existing DTAA that was signed by two countries on 13th June 1994. The Protocol was signed by Mr. Ravi Bangar, High Commissioner of India to Cyprus on behalf of India and Mr. Harris Georgiades, the Minister of Finance on behalf of Cyprus.

Both sides have now exchanged notifications intimating the completion of their respective internal procedures for the entry into force of the DTAA, with which the revised DTAA shall come into effect in India in the fiscal years beginning on or after 1st April, 2017. The revised DTAA will enable source based taxation of capital gains on shares, except in respect of investments made prior to 1st April, 2017. In addition, the DTAA will also bring into effect updated provisions as per international standards and in accordance with the consistent position of India.

In a separate development, the notification of Cyprus under section 94A of the Income Tax Act, 1961, as a notified jurisdictional area for lack of effective exchange of information, has been rescinded with effect from 1.11.2013 [Notification No. 114/2016 dated 14.12.2016]. The bilateral economic ties between the two countries are expected to be further strengthened by these measures.

(Meenakshi J. Goswami)
Commissioner of Income Tax
(Media and Technical Policy)
Official Spokesperson, CBDT.

 

India officially rescinds the notification issued to Cyprus

UPDATE 14 DECEMBER 2016

On 14 December 2016 the Indian Government published in the Government Gazette the recission of the Notification issued to Cyprus 1 November 2013 officially removing Cyprus from India’s black list.

ANNOUNCEMENT PUBLISHED IN THE INDIAN GOVERNMENT GAZETTE

MINISTRY OF FINANCE
(Department Of Revenue)
(CENTRAL BOARD OF DIRECT TAXES)
NOTIFICATION
New Delhi, 14th December, 2016
No. 114 /2016

S. O. 4033 (E). — In exercise of the powers conferred by sub section (1) of section 94A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby rescinds the notification of the Government of India in the Ministry of Finance, Department of Revenue, Central Board of Direct Taxes, number 86 of 2013 published in the Gazette of India, Part II, section 3, sub-section (ii) vide S.O. 3307(E) dated 13k November 2013, except as respects things done or omitted to be done before such rescission, with effect from the date of publication of this notification in the Official Gazette.

[F.No. 500/02/2015-FT&TR-III] GAURAV SHARMA, Under Secy,

 

India and Cyprus sign the treaty for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion

UPDATE 18 NOVEMBER 2016

On 18 November 2016 Cyprus, represented by the Finance Minister Harris Georgiades, and India, represented by the High Commissioner Ravi Bangar, have signed the treaty for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion (“DTAA”).

Upon the DTAA entering into force the Indian Authorities will rescind retrospectively the classification of Cyprus in the ‘Notified Jurisdictional Area’ as from 1st of November 2013.

As noted in our earlier newsletter, once the notification of November 2013 is formally withdrawn, a Cyprus company can file a return of income in India and claim refund of the amount withheld in excess of the provisions of the Cyprus-India tax treaty. If for example a Cyprus company was the recipient of interest under Compulsory Convertible Debentures and 30% is WHT by the Indian payer, then the Cypriot company can file for a return of tax and obtain the 20% provided it is able to provide a tax residency certificate.

CHANGES IN THE DTAA

Source based taxation

The new DTAA provides for a source-based taxation of capital gains arising from alienation of shares, instead of a residence-based taxation provided under the existing DTAA. This amendment matches the provisions of the India – Mauritius DTAA.

There is however a grandfathering provision on investments undertaken prior to 1st April 2017 whereby the taxation on the disposal of such investments (shares) at any future date will remain with the contracting state of residence of the seller.

Mutual assistance in collection of assets and exchange of information

There are provisions in the new agreement for the assistance in the collection of taxes and also updated provisions relating to the exchange of information based on OECD standards.

Royalties

The withholding taxes on royalty payments are reduced from 15% to 10% which is in line with the tax rate under the Indian laws.

Effective date

The DTAA will enter into force on the date of the completion of the necessary internal procedures and the exchange of notifications by the two countries and shall have effect in India in fiscal years beginning on or after April 1, 2017.

 

Indian Cabinet approves Agreement and the Protocol between India and Cyprus for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion

UPDATE 24 AUGUST 2016

On 24 August 2016 the Union Cabinet chaired by the Prime Minister Shri Narendra Modi has given its approval for signing of an Agreement and the Protocol between the India and Cyprus for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income.

The revised Agreement which is to be signed between the Republic of India and the Republic of Cyprus for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (“DTAA”) and Protocol to this Agreement will replace the existing DTAA signed by both countries on 13th June, 1994.

The DTAA will enter into force on the date of the notification by the two countries (this is expected to be done within 2016), and shall have effect in India from the first day of the next fiscal year (i.e. after 1 April 2017).

BACKGROUND

On 1 November 2013, Cyprus was notified by the Indian Ministry of Finance as a notified jurisdictional area, which meant that transactions carried out by Indian taxpayers with entities based in Cyprus would come under increased scrutiny from the Indian tax authorities and a withholding tax would be imposed on payments by Indian taxpayers to recipients in Cyprus.

In addressing the negative implications arising from this notification the Cyprus government immediately entered into direct consultations with India at the Competent Authority level. The outcome from these consultations was successful.

In December 2013 the Cyprus Ministry of Finance issued a press release stating that it has been agreed that the circumstances that have caused India to notify Cyprus as a “notified jurisdictional area” will be immediately resolved. Into this effect India and Cyprus agreed to adopt the OECD model for the exchange of information and improve the channels of communication.

It has been also agreed that when the rescission of the notification is issued it will have retrospective effect from 1 November 2013 which is the same date the notification was initially provided. Such rescission is expected to be issued soon.

 FINAL POSITIVE OUTCOME ON THE NEGOTIATIONS

As announced by the Cyprus Ministry of Finance on June 29th, 2016, the negotiation on the Double Taxation Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income between Cyprus and India has been successfully completed, in New Delhi.

Narendra Modi will reinforce the strong relations between Cyprus and India by visiting Cyprus in September 2016.

Following the negotiations:

1.) The Indian Authorities agreed that they will proceed with retrospectively rescinding the classification of Cyprus in the ‘Notified Jurisdictional Area’ as from 1st of November 2013.

As noted in our earlier newsletter a Cyprus company can file a return of income in India and claim refund of the amount withheld in excess of the provisions of the Cyprus-India tax treaty. If for example a Cyprus company was the recipient of interest under Compulsory Convertible Debentures and 30% is WHT by the Indian payer, then the Cypriot company can file for a return of tax and obtain the 20% provided it is able to provide a tax residency certificate.

2.) It has been agreed that similarly to the Mauritius – India new double tax treaty that there will be source based taxation for gains from the alienation of shares. However investments undertaken prior to April 1st 2017 are grandfathered with the view that taxation of disposal of such shares at any future date remains with the contracting state of residence of the seller.

This means that capital gains arising from transfer of shares of an Indian company acquired before 1 April 2017 would not be taxable in India. Since Cyprus does not levy any taxes on the sale of “titles” any sale of Indian company’s shares held by a Cyprus company acquired prior to 1 April 2017 will not give rise to taxes either in Cyprus or India.

  

ANNOUNCEMENT OF THE MINISTRY OF FINANCE OF THE REPUBLIC OF CYPRUS

The complete announcement issued by the Cyprus Ministry of Finance is set below.

Source: Cyprus Ministry of Finance

Direct link here.

 

 

HOW CAN LSTS ASSIST YOU

LSTS may assist in:

i.) The establishment of a suitable Cypriot structure for holding the shares of Indian companies.

ii.) Provide further guidance on the new provisions to the new double tax treaty

iii.) Keep you updated on the developments on the matter


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