Cyprus agrees to amend tax treaty ahead of GAAR with caveat

Ahead of India’s rolling out of anti-tax avoidance regulations, Cyprus has shown eagerness to amend the bilateral tax treaty allowing New Delhi to tax capital gains. In turn, has pitched to be taken off the blacklist or being considered a “notified jurisdiction” for not sharing tax information, which implies increased scrutiny for investments coming from Mediterranean island nation, which is the seventh largest foreign direct investment source for India.

Cyprus is learnt to have approved, in-principle, the proposals made by the Indian side on taxing capital gains.

“Cyprus has sought removal from the blacklist and is ready to amend the double taxation avoidance agreement (DTAA) with India. It is very keen for that now since the general anti-avoidance rule (GAAR) is coming into play April 2017 onwards and the Mauritius treaty has already been amended,” said a source.

The move would plug loopholes in capital gains tax exemption for investments from Cyprus. India and Cyprus signed the DTAA in 1994 and around $8 billion has been invested into India from Cyprus between 2000 and 2015. India amended the DTAA with Mauritius in April, allowing the former to impose capital gains tax on shares.

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 prevailing rate 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 onwards. The concessional rate of 50 per cent would be subject to fulfilment of conditions in newly-inserted limitation of benefit (LoB), which is an expenditure of at least Rs 27 lakh in Mauritius in the previous financial year.

Revenue Secretary Hasmukh Adhia had said last month that talks were on with Cyprus to amend the treaty. “If Cyprus does not renegotiate, GAAR provisions will hit the island nation,” he had said.

Cyprus was declared a non-cooperative jurisdiction by India in 2013 over not sharing information related to Indian account holders.

It was the first tax jurisdiction to be labelled so 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 forego deductions on account of expenditure and allowances. The companies have raised the argument that the suspension of tax benefits has hurt investment inflow from Cyprus and the government has overridden the bilateral treaty's provisions.