After Mauritius, it’s Cyprus – India on a roll

Following Mauritius, Cyprus has officially become the second country with which India has renegotiated the double taxation avoidance agreement (DTAA) allowing Indian authorities to tax capital gains on investments routed through the country..The amended DTAA will also grandfather investments made up till April 1, 2017..A statement [pdf] put up on the Cypriot finance ministry’s website late on Thursday reads,.“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. The completion of the negotiation and the agreement reached on all pending issues will pave the way for the removal of Cyprus from the list of notified jurisdictional areas place in November 2013.”.As of August 2013, Cyprus was the 7th largest FDI investor into India with total inflows amounting to around 4% of total FDI flows. From April 2000 till March 2016, India received FDI worth 42,681 crore from Cyprus as per official data records..In November 2013, while exercising its authority under Section 94A of the Income Tax Act, 1961, (Act) the Indian Government notified Cyprus as a ‘non-cooperative jurisdiction’ for failure to provide information which led to a withholding tax rate of 30%, stricter disclosure requirements and stricter scrutiny of entities receiving funds from Cyprus..Prior to being blacklisted, Europe and US based companies would route their investments into India through Cyprus, deriving double tax avoidance. This was because the tax treaty provided for zero capital gains tax and a low withholding tax rate of 10% on interest payments made to entities based in Cyprus.. The effect of the proposed latest amendment will be twofold:.Aligning the changes made to the DTAA with the amendments made to India-Mauritius tax treaty- Not only will there be no retrospective application but all investments made up till 1 April, 2017 will be grandfathered following which the right to tax capital gains will vest with the Indian government. This is a welcome move, which provides investors with ample time to restructure their investments..However, certain inconsistencies remain. While the text of treaty is not out yet, Tushar Sachade, Tax partner at PwC notes that the language used in the India-Mauritius treaty grandfathers ‘shares acquired’ prior to 1 April 2017 as opposed to ‘investments made’ (as provided for under the GAAR)..There is a subtle change in the language of the two, and a question might arise for example, in the case of convertible instruments- say for investments made prior to 1 April 2017 for which the conversion into shares takes after 1 April 2017..India will consider removal of Cyprus from the list of notified jurisdictions with retrospective effect from November 1, 2013, which will bring down the withholding tax rate to 10% from the existing 30%..Amit Singhania, partner at Shardul Amarchand Mangaldas, said that retrospectively rescinding the classification will have significant repercussions for many entities that have deducted tax while making payments to Cyprus entities..“It needs to be seen how the Indian government will provide for refund for those transactions and also provide for revision of withholding tax return,” he said..In contrast with the India-Mauritius tax treaty, which provides a two-year transitional period, there is no such provision with Cyprus. The transitional period allows a 50% reduction in the short term capital gains tax of 15% effectively making it 7.5 % till 1 April 2019 for all investments which qualify the Limitation of Benefit (LOB) criteria which requires an expenditure of Rs. 27 lakh by entities claiming such benefit. Naturally, the LOB clause, which flows from the 50% reduction, is also not available under the India-Cyprus agreement..However, this may not be that significant. Anil Talreja, Tax partner at Deloitte explains why,.“Technically, there’s no LOB even with Mauritius- it is only for the transitional period. In terms of Private Equity and Foreign Direct investments, you do not expect people to exit within two years, so as such it has very limited application. Main application of LOB will be in the case of Foreign Portfolio Investors for short term trades.”.(Image: Source).You can read the Indian government’s press release here: