Tag Archives: Tax

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Cyprus Tax Resident

CYPRUS – POSITIVE AMENDMENTS IN THE TAX LEGISLATION

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TAX RESIDENT IN CYPRUS BY STAYING ONLY 60 DAYS DURING A TAX YEAR

A. INTRODUCTION

On 14 July 2017, the House of Representatives of Cyprus passed an amendment to the Cyprus Income Tax Law (2002 – 2016 as amended) (the “Cyprus Income Tax Law”) whereby an individual who spends in Cyprus 60 (sixty) or more days will be considered as a Cyprus tax resident provided that certain conditions are met.

This can be very beneficial for persons who have business ties in Cyprus since an individual who is tax resident in Cyprus and who is not domiciled in Cyprus is granted an exemption from taxes on dividends received either in Cyprus or abroad.

B. TAX RESIDENT INDIVIDUAL – NEW PROVISIONS

Under the new provisions of the Cyprus Income Tax Law, an individual will be a tax resident in Cyprus provided that all the below conditions are met:

  1. The individual stays in Cyprus for 60 (sixty) or more days in a tax year (1 January – 31 December)
  2. The individual, at any time during the tax year, exercises any business in Cyprus and/or is employed in Cyprus and/or holds a post (i.e. a director) in a company which is tax resident in Cyprus;
  3. The individual maintains a permanent home in Cyprus which can either be owned or rented.
  4. The individual does not remain in any other country for one or more periods which altogether exceed 183 (one hundred eighty three) days in the same tax year and he is not a tax resident in any other country in the same tax year.

It is clarified that an individual who meets the above conditions will not be considered a tax resident of Cyprus provided that, in the same year, he cease to i.) exercise of any business and/or employment in Cyprus and/or ii.) hold of a post in a company tax resident in Cyprus.

C. ENTRY INTO FORCE

The new provisions are effective as from 1 January 2017.


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Settlement of Taxes in Cyprus

Procedure for Settlement of Taxes in Arrears in Cyprus

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A. INTRODUCTION

In February 2017, the House of Representatives of Cyprus passed a law on the procedure for settling tax arrears, which covers the following taxes: 

(a) Income tax
(b) Special contribution for the defense
(c) Immovable property tax
(d) Capital gains tax
(e) Inheritance tax
(f) Special contribution for employed, retired and self­employed in the private sector
(g) Special contribution for refugees
(h) Stamp duties

Based on the provisions of the legislation the taxpayer shall be exempted from paying penalties, interest, charges on specified outstanding tax amounts and such exemption shall apply proportionately depending on
the number of installments that the taxpayer would agree with the Tax Department that will pay in settlement of all outstanding taxes (the “Arrangement”). Also during the Arrangement period no additional penalties, interests or charges will accrue.

An application should be submitted within a period of 3 months from the entry into force of the Law.

In terms of the procedure it should be noted as follows:

1.) The applications should be done on-line through the Ariadni Tax portal.
2.) The application is assessed by the Tax Commissioner within 15 days from the receipt of the application and the taxpayer is informed of the Tax Commissioner’s decision.
3.) If the Tax Commissioner does not respond within the 15-day period, the application is considered admissible and the applicant’s suggestions are adopted.
4.) The applicant should submit an acceptance of the Arrangement within a period of 15 days.
5.) The applicant taxpayer has the right to object to a Tax Commissioner’s decision to decline the application. The objection must be filed within a period of 15 days from the date the Tax Commissioner’s decision is
notified to the applicant. The objection must be assessed within a further period of 30 days.

Provided that the delays of fails to pay a certain number of installments then the Arrangement is cancelled and the taxpayer will need to pay all taxes, interest, penalties and charges.

The date of entry into force of the new provisions would have been specified in a notification that would have been issued by the Tax Commissioner which would have been published in the Official Gazette (the
Notification”).

Such Notification was issued on 23 June 2017.

 

B. SUBMISSION OF APPLICATION FOR THE ARRANGEMENT

The application for entering into the Arrangement must be submitted within three months from the effective date of the Notification. The effective date of the Notification is 3 July 2017 and therefore the deadline of the submission of the applications is 2 October 2017.

The submission should be done through the government internet portal Ariadni and both the Tax Commissioner’s decision and the debtor’s statement of acceptance are made through the website application.

On exceptional cases whereby there are technical issues in submitting the application on-line then such
application can be submitted in the District Tax Offices.

 

C. TAX LIABILITIES WHICH ARE COVERED BY THE ARRANGEMENT

This regulation relates to the following tax liabilities:

(a) The total amount of outstanding taxes up to and including 31 December 2015, which at the date of the application have been assessed by the Tax Department of Taxation and an assessment has been sent to the taxpayer in relation to this, irrespective whether there is already in place a lawful agreement between the Tax Office and the taxpayer for the repayment of such taxes by instalment or through a court order.

(b) Amounts which became payable through the submission of a provisional tax form which concerns the tax for the years up to 31 December 2015 and whereby the taxpayer did not pay such tax, and provided however that the taxpayer has submitted the annual tax return by 3 July 2017 in relation to these taxes.

(c) Tax liabilities which are assessed by the Tax Commissioner after the effective date of the Notification and related to tax years up to 31 December 2015. In such cases, the deadline for the application for the Arrangement shall be made within three months from the date on which the tax becomes payable, on the basis of the tax assessment which has been issued.

 

D. NUMBER OF MONTHLY INSTALLMENTS WHICH SETS THE PERCENTAGE OF EXEMPTION

Overdue taxes can be included in the Arrangement and be subject to the exemption of a percentage of penalties and interest due to non-payment of taxes due as follows:

Monthly instalments(%) of exemption
(a) one off payment 95%.
(b) from 2 to 8 90%.
(c) from 9 to 15 85%
(d) from 16 to 21 80%
(e) from 22 to 28 75%.
(f) from 29 to 35 70%
(g) from 36 to 42 65%
(h) from 43 to 49 60%
(i) from 50 to 56 55%
(j) from 57 to 60 50%

Payment of the agreed installments is made to the banks with the usage of a unique code or in certain cases to the Tax Office.

 

E. VARIOUS OTHER PROVISIONS

(a) Tax liabilities under the Arrangement will not incur additional penalties or interest for late payment, which is otherwise provided under the relevant legislation.
(b) The procedure to be followed is set in the Introduction of this Newsletter.
(c) The regulation is terminated in specific cases of non-compliance by the taxpayer with his obligations as set on the Notification these being:

  • i.) The non-timely submission of the tax returns
  • ii.) The non-settlement of the new tax obligations which arise after 31 December 2015
  • iii.) The delay in payment of the cumulative of 3 installments
  • iv.) The delay in payment of a single installment for more than 3 months including the month that the installment should have been paid

(d) Where criminal proceedings against a taxpayer are pending before the court and the taxpayer applies
for a regulation which is approved, the proceedings are suspended.

 

F. ENTRY INTO FORCE

The new provisions are effective as from 3 July 2017.


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Brexit

CYPRUS – UNIQUE TAX ADVANTAGES WITHIN EUROPE POST BREXIT

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Cyprus: Europe’s Optimal Tax Regime. The synergy created by Cyprus’ modern, simple and attractive tax regime coupled with its advanced and adaptable English Common Law legal system have created the EU’s most efficient and effective tax regime in tax planning and asset protection. Why:

0% Tax on Dividends received – Dividends received by Cypriot tax resident companies are exempt from Cyprus tax (subject to minor exceptions). The extensive network of Double Tax Treaties (“DTTs”) allows beneficial treatment in respect of withholding taxes (“WHTs”) in the source country.

0% Withholding tax on Dividend payments – Dividends paid by a Cyprus tax resident company to its non-Cyprus resident shareholder(s) are not subject to any withholding tax in Cyprus. Thus the non-Cyprus resident shareholder of a Cyprus tax resident company receives the dividends free of any WHT.

0% Tax on trading/sale of titles or shares – The disposal or transfer of titles is exempt from all taxes. Titles are described as shares, bonds, debentures and similar titles as well as rights thereon (options, futures etc). Cyprus is, therefore, the jurisdiction of choice in respect to M&A transactions.

0% Capital Gains Tax is paid in Cyprus on the transfer of immovable property owned by a Cyprus tax resident company abroad (outside Cyprus).

0% Estate Duty is payable on the inheritance of shares in case of the death of a shareholder.

0% Inheritance Tax

0% Net Wealth Tax 

0% Property Tax

0% Tax on Reduction of Capital & Reduction of Share Premium Account 

0% Withholding Taxes on Interest and Royalties – There are no WHTs on interest payments made by a Cyprus tax resident company. There is also no WHT on royalties arising from sources outside Cyprus. 

Lowest uniform corporate tax rate in the EU – 12.5%

International Cyprus Trusts (CIT) may be established to hold the shares of Cyprus companies or simply used as an effective means of asset protection – CITs do not pay any taxation on their profits. Amendments to Cyprus’ Trust Law have restored the CIT as one of the most effective instruments available today.

Unilateral Tax Credit Relief – Unilateral tax credits are granted on any tax paid abroad to any foreign country, irrespective of whether Cyprus has a DTT or not. In such a case the income is not taxed twice but only once.

Double Tax Treaties – Cyprus has an impressive and continually growing network of DTTs, a Cyprus company can benefit from the EU Directives to eliminate WHTs when collecting income from the EU. Unilateral tax credit on foreign taxes withheld at source is also available.

Anonymity of the beneficial owner – Anonymity is imperative to many investors, who do not wish to have their names appear on public record at the Registrar of Companies. In such instances it is possible to appoint a shareholder provided by LSTS, who will hold the shares on trust for the beneficial owner.

Losses can be carried forward and set off against future profits for the next five years.

Group relief – setting off the loss of one company with the profit of another is allowed provided both companies of the group are tax resident in Cyprus.

No Thin Capitalisation Rules – there are no provisions in the Law requiring companies to maintain a particular debt to equity ratio. Consequently, a Cyprus holding company may be capitalised with loans without any risk that interest paid at arms’ length to the parent company will not be deductible.

0% VAT for Holding Companies – holding activities fall outside the scope of the VAT in Cyprus and the Cyprus holding company engaged exclusively in holding activities is not entitled or obliged to register for VAT purposes.

0% Tax on Liquidation – A Cypriot holding company held by non-resident shareholders can cease operations in Cyprus and distribute assets to its shareholders in any form (dividends etc.) without any tax cost to the shareholders.

Non-Domicile Cyprus Tax Resident – Foreign nationals relocating to Cyprus (minimum 183 days) will obtain the status of a Non Domiciled individual, with significant tax benefits:

  • 0% Tax on dividends received by the individual in Cyprus
  • 0% Tax on interest in fixed deposits in Cyprus
  • Individual will only be taxed in Cyprus on their worldwide income
  • Reduced tax on rental income 

 

HOW LSTS CAN ASSIST YOU

LSTS may assist in:

  1. Assessment of your current business to determine income flows, intentions and ultimately to optimise tax gains and eliminate tax leaks.
  2. The establishment of a suitable Cypriot structure for minimising tax losses/leaks.
  3. Tax / Legal / Audit / Compliance / Fiduciary / Trust / Banking Services
  4. Assistance in availing you of the numerous tax advantages of Cypriot tax legislation.
  5. Keep you updated on all developments in Cypriot legislation.

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tax

CYPRUS – RUSSIAN DOUBLE TAX TREATY

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(ARTICLE 13 – ‘Capital Gains’ UPDATE) 

Capital gains tax on Cyprus shares holding immovable property in Russia has been postponed

UPDATE 29 DECEMBER 2016 

In an announcement by the Cyprus ministry of finance on 29 December 2016 it is stated that an agreement has been reached between the Russian Authorities and the Cyprus authorities for postponing the application of the Protocol amending Article 13 of the Cyprus – Russia double tax treaty (as amended in 2010) (the “Treaty”).

In accordance to Article 13 ‘Capital Gains’ of the Treaty the gains on sale of shares of a Cyprus company deriving more than 50% of their value from immovable property situated in Russia would be taxed in Russian Federation rather than Cyprus.  This clause was set to be effective from 1 January 2017.

Based, however, on the agreement reached on 29 December 2016 the application of Article 13 to the Treaty has been postponed and an additional Protocol to the Treaty will be released shortly providing that the application of the revised provisions of the Treaty will not apply until similar provisions are introduced in other bilateral double tax treaties between the Russian Federation and other European countries.

It should be noted that Cyprus does not levy any taxes on the sale of shares or similar titles.

 

 ANNOUNCEMENT PUBLISHED BY THE CYPRUS MINISTRY OF FINANCE

Announcement

Protocol amending Article 13 “Capital Gains” of the Agreement between 
the Government of the Republic of Cyprus and the Government of the 
Russian Federation for the Avoidance of Double Taxation with respect to
taxes on income and on capital.

The Ministry of Finance announces that an agreement has been reached between the Russian Authorities and the Authorities of Cyprus for postponing the application of the Protocol amending Article 13 of the Agreement between the Government of the Republic of Cyprus and the Government of the Russian Federation for the Avoidance of Double Taxation with respect to taxes on income and on capital, which was signed on October 7th , 2010.

In parallel, an additional Protocol is being finalised, providing for the application of the revised provisions of Article 13 of the said Agreement, until similar provisions are introduced in other bilateral Agreements for the Avoidance of Double Taxation between the Russian Federation and other European countries.

December 29th, 2016
MINISTRY OF FINANCE NICOSIA

HOW LSTS CAN ASSIST YOU

LSTS may assist in:

i.) The establishment of a suitable Cypriot structure for holding properties in Russia.

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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deoffshorisation

“Deoffshorisation” Tax free repatriation of assets under liquidation of foreign entities

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“Deoffshorisation”

Tax free repatriation of assets under liquidation of foreign entities

Importance of initiating liquidation proceedings prior to 1 January 2017

 

FOREWORD 

Under the Russian Tax Code (the “Code”) Russian companies and Russian controlling persons can receive assets under liquidation proceeds from foreign entities tax free and also create a tax basis for future sale of these assets, provided certain provisions are met.

In addition to the above a foreign company which undergoes liquidation will not be considered as a tax resident of the Russian Federation, even if it meets certain criteria which under the Code it would have been considered as a tax resident of the Russian Federation.

Below we provide an analysis of the restructuring opportunities under these provisions of the Code. We also analyse the importance of initiating the liquidation proceedings prior to 1 January 2017.

LSTS members are licensed liquidators under the Cyprus Insolvency Practitioners Law, 64(I) of 2015 and can be appointed as liquidators both in relation to Cyprus company liquidations but also on tax haven company (i.e. BVI) liquidations.

 

LIQUIDATION OF FOREIGN ENTITIES AND TAX FREE REPATRIATION OF ASSETS 

Under the Code, property received by a Russian tax resident company or Russian tax resident individual which arose as proceeds from the liquidation of a foreign company i.) will not be subject to tax in Russia and ii.) the tax base of the asset received will be considered to be the value of the asset at the time of distribution of the liquidation proceeds.

Conditions set for tax free liquidation:

  1. Such property must not include cash
  2. The liquidation must be completed before 1 January 2018
  3. The liquidation is completed after 1 January 2018 but this was due to certain restrictions in the personal law of the foreign country but the decision for the liquidation was taken prior to 1 January 2017 and the liquidation was completed at the end of such restrictions.

The analysis of the provisions of the Code is set in Annex 1 hereto.

 

RESTRUCTURING EXAMPLES

  1. Elimination of tax haven companies (B.V.I./ Belize/ Panama/ Marshal Islands):
    1
  2. Elimination of all foreign holding companies:
    2
  3. Introduction of a Russian Holding company for tax planning:
    3
  4. Elimination of tax haven trading companies:
    4

 

TAX FREE REPATRIATION OF CASH FROM FOREIGN ENTITIES

Under the Code, assets which are transferred to the Russian tax resident individual or Russian company are not subject to any tax in Russia provided that these assets are not cash.

In order to overcome this issue the cash must be converted into non-cash assets prior to the transfer.

Possible steps to achieve the above:

  1. The foreign company opens a brokerage account in a large US broker
  2. The Russian individual also opens a brokerage account in the same US broker
  3. Cash is used to buy highly liquid stock (i.e. google, apple, facebook)
  4. The stock is transferred to the brokerage account of the Russian individual as part of the liquidation proceedings.
  5. Russian individual sells the stock and receives cash

 

FOREIGN ORGANISATION REGOGNISED AS TAX RESIDENT OF THE RUSSIAN FEDERATION 

Under the Code a foreign company is considered as a Russian tax resident company if its effective management is in the Russian Federation.

Such criteria, analysed in detail in Annex 1, relate to whether the management decisions and management meetings take place in the Russian Federation.

The foreign entity will not however be recognized as a Russian tax resident even in the case it had its effective management, as this is defined under the Code, in the Russian Federation provided that the liquidation of the foreign company has been completed prior to 1 January 2018.

 

ANNEX 1 – RUSSIAN TAX CODE PROVISIONS 

  1. Article 217 Clause 60 – Income from liquidation exempt from personal taxation

    Income (excluding cash) received by an individual in the form of property or property rights as a result of the liquidation of a foreign organization is exempt from personal taxation provided that:

    1. The taxpayer has submitted to the tax authorities a statement in his tax declaration indicating that such proceeds have been received as part of the liquidation of a foreign entity.
    2. The procedure of the liquidation of the foreign entity has been completed before 1 January 2018
    3. The liquidation is completed after 1 January 2018 but this was due to certain restrictions in the personal law of the foreign country but the decision for the liquidation was taken prior to 1 January 2017 and the liquidation was completed at the end of such restrictions.
  2. Article 220 Clause 2 – Tax base of assets transferred to the Russian tax resident individual under liquidation of a foreign entity

    The Russian individual tax resident should deduct from the sale proceeds of a property or property rights sold the amount of the property or property rights which was received by the foreign entity as a result of the liquidation of such entity under which the income was exempt under the Article 217 Clause 60.

    The amount to be deducted shall be the value of the property or property rights shown in the books of the liquidated organization but not exceeding the market value of such property.

  3. Article 246.2 Clauses 1 and 2 – Foreign companies with effective management in the Russian Federation.

    Foreign companies for which their effective management is in the Russian Federation are considered to be Russian tax residents.

    Regardless of the conditions set in the section below a foreign organization will not be recognized as a tax resident of the Russian Federation provided that a decision has been taken by the shareholders to liquidate the foreign organization and the liquidation procedure has been completed prior to 1 January 2018.

    Conditions setting a foreign company as having the effective management in the Russian Federation:

    The effective management is considered to be exercised in the Russian Federation if the criteria below are met:

    1. Meetings of the board of directors are predominantly (over 50% of meetings in a year) are held in Russia
    2. High-level executive management is predominantly performed in Russia or the executive officers operate predominantly in Russia with respect to the given foreign organization

    If the criteria are met in relation to a number of countries then additional criteria are set in concluding whether the effective management is in the Russian

    Additional criteria for determining the place of effective management of a foreign company are as follows:

    • The accounting or management records are maintained in Russia
    • The company’s records are managed in Russia
    • The place from which operating and administrative procedures (HR management) relating to the company’s operations (as opposed to any group operations) are issued in Russia
  4. Article 277 Clause 2 – Tax base of assets transferred as part of liquidation proceeds of a foreign entity

    In case of liquidation of an organization and distribution of the assets of the liquidated company the gain to the recipient of such property is calculated as the market price of the property received less any amount actually paid to acquire such property.

    If however the liquidation proceeds arise from the liquidation of a foreign organization then the above profit will be disregarded in the tax base of the property received. The tax base of the property received will be set as the lower of the cost of the property shown in the books of the liquidated organization and the market value of such property.

    The above exemption will apply provided that:

    1. The procedure of the liquidation of the foreign entity has been completed before 1 January 2018
    2. The liquidation is completed after 1 January 2018 but this was due to certain restrictions in the personal law of the foreign country but the decision for the liquidation was taken prior to 1 January 2017 and the liquidation was completed no longer than 365 consecutive calendar days after the end of such restrictions.
  5. Article 309.1 Clause 10 – Tax on gains of Controlled Foreign Companies (“CFC”s)

    Gains derived by the CFCs from the sale of securities or property rights in favor of the controlling person of the CFC as well as the costs incurred on the purchase of these securities or property rights are excluded from the profit and loss of the CFC. The cost is determined based on the cost as set in the books of the CFC however it cannot be higher than the market value at the date of the transfer.

    The above exemption will apply provided that:

    1. The procedure of the liquidation of the foreign entity has been completed before 1 January 2018
    2. The liquidation is completed after 1 January 2018 but this was due to certain restrictions in the personal law of the foreign country but the decision for the liquidation was taken prior to 1 January 2017 and the liquidation was completed no longer than 365 consecutive calendar days after the end of such restrictions.

    The cost basis of the securities and property acquired by the CFC will be accounted for as the cost shown in the books of the CFC but not higher than the market value of these securities at the date of transfer.

 

HOW CAN LSTS ASSIST YOU

LSTS may assist in:

  1. Being appointed and act as the liquidator in the members voluntary liquidation of Cyprus and tax haven companies (i.e. BVI)
  2. Providing you with guidance on the provisions of the Code for the liquidation of the company.

 


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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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Review our Updated Cyprus Double Tax Treaty Network

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