India resolves tax issue with Cyprus

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Two months after successfully renegotiating its tax treaty with Mauritius, the government has successfully come to an agreement with Cyprus on source-based taxes for capital gains, to take effect from the next financial year.

The government is likely to next renegotiate its tax treaty with Singapore to this effect. And, Cyprus, with an earlier reputation as a ‘tax haven’, is to be removed from the government’s ‘blacklist’ in this regard.
“It was agreed to provide for source-based taxation of capital gains on transfer of shares. However, a grandfathering clause (meaning the earlier rule would apply) would be provided for investments made prior to April 1, 2017, in respect of which capital gains would be taxed in the country of which the taxpayer is a resident,” it was stated on Friday.

These provisional agreements will be placed before the Cabinet for approval, after which the new treaty would be signed by the two sides.

Although Delhi has provided for grandfathering for investments made before April 2017, Cyprus will not get the concessional tax rate or transitional benefit for two years, unlike with Mauritius, which got a concessional rate of 50 per cent till 2019 on fulfilling limitation of benefit conditions. “The full tax rate will be applicable from April onwards on investments from Cyprus into shares of Indian companies,” Atulesh Jindal, head of the Central Board of Direct Taxes, told this newspaper.

The government of Cyprus, seventh largest foreign direct investment (FDI) source here, was earlier unwilling to amend the tax treaty, citing India’s with Mauritius. Cyprus was, however, keen on being taken off the blacklist or ‘notified jurisdiction’ list before the General Anti Avoidance Rule (GAAR) for taxes began from the coming April. This is a set of rules designed to give Indian authorities the right to scrutinise and tax transactions they believe to have been structured solely to avoid taxes.

From April 2000 till March 2016, India received FDI worth Rs 42,681 crore from Cyprus, shows official data.

Cyprus was declared a ‘non-cooperative jurisdiction’ by the government in 2013, for not sharing information related to Indian account holders. It was the first tax jurisdiction to be labelled that by India, leading to a 30 per cent withholding tax on all payments made to Cyprus and greater scrutiny of Indian entities receiving funds from there, requiring additional disclosures, including the source of the money. Indian entities with investments from Cyprus also have to forgo deductions on account of expenditure and allowances.

Prior to being blacklisted, Cyprus, like Mauritius, was one of the key destinations through which companies based in Europe and the US routed investments into India, deriving double tax avoidance. For, the tax treaty provided for zero capital gains tax and a low withholding tax rate of 10 per cent on interest payments made to entities based in Cyprus.

India amended its Double Taxation Avoidance Agreement with Mauritius this April. With the change, companies routing funds into India through Mauritius from the next financial year will have to pay short-term capital gains tax at 50 per cent of the rate here during a two-year transition period beginning April 2017. The short-term capital gains tax rate is 15 per cent at the moment. The full rate will be imposed from 2019 on. The concessional rate of 50 per cent would be subject to fulfilment of conditions in a newly-inserted Limitation of Benefit, an expenditure of at least Rs 27 lakh in Mauritius in the previous financial year.

“The development on the India-Cyprus treaty is another welcome step towards providing certainty in tax. The intent to grandfather existing investments should provide comfort to existing investors,” said Gautam Mehra, leader-tax, PwC India.