Cyprus – India tax treaty enters into force
The new double tax treaty between Cyprus and India has entered into force, replacing the treaty that was in place between the two countries since 13 June 1994.
In according to the provisions of the treaty, the following withholding taxes will apply:
Dividends:
Interest:
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Nil (0) withholding tax (WHT) will apply to interest where the beneficial owner of interest is the government , a political sub-division, a local authority of the other contacting state, or specified institutions
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10% in all other cases
Royalties:
The double tax treaty also contains provisions restricting relief to arm’s length interest and royalties in transactions between related parties.
Capital Gains:
The new treaty replaces the basis for the taxation on capital gains derived by a resident of a contacting state arising from the alienation of shares from the residence-based test of the previous treaty to a source-based taxation test reflecting the provisions recently injected into the India-Mauritius and the India-Singapore treaties.
Moreover, under the grandfathering provisions that have been agreed, shares acquired prior to 1 April 2017 will continue to be taxed on disposal in the contracting state of the seller. This is a significant development eliminating the uncertainty that previously existed for the investors.
Permanent Establishment:
According to the permanent establishment article expands to include a building site, construction, assembly or installation project, or any supervisory activities in connection with such site or project with a duration exceeding six months, as well as the provision of consulting services via employees or other staff with a duration exceeding 90 days during any twelve month period, as well as an individual representative of an enterprise on the territory of the other contracting state exercising agreements on behalf of such enterprise on a regular basis.
Exchange of Information:
The provisions of the new treaty updated in regards to the exchange of information by adopting Article 26 of the OECD Model Treaty into the treaty and assistance between the two countries for collection of taxes. As a result of the new treaty, Cyprus has been excluded by India from the list of non-cooperative jurisdiction, as before Cyprus had failed to provide the requested information to the Indian tax authorities based on the previous double tax treaty.
Fund Opportunities:
The Cyprus‐India treaty improves Cyprus’ position as an investment fund region and will provide further incentive to Cyprus’ growing acceptance as an access to European investors under the Alternative Investment Fund Managers Directive (AIFMD). Cyprus is now capable to accommodate both investors and managers attractive opportunities to invest in an EU fund vehicle in India that is subject to robust regulation, compliance and excellent tax planning infrastructure that is enhanced by the new treaty.
The agreement has been in effect in Cyprus as of 1 January 2017 and in India as of 1 April 2017.