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Business News/ Politics / Policy/  Cyprus taken off India’s tax blacklist
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Cyprus taken off India’s tax blacklist

Cyprus's removal from the tax blacklist comes after India agreed to changes in the double taxation avoidance agreement in the India Cyprus tax treaty

The revised treaty signed by both the countries last month gives India the right to tax capital gains from sale of shares on investments made by Cyprus-based companies after 1 April 2017. Photo: HTPremium
The revised treaty signed by both the countries last month gives India the right to tax capital gains from sale of shares on investments made by Cyprus-based companies after 1 April 2017. Photo: HT

New Delhi: The Indian government has rescinded a notification blacklisting Cyprus, providing relief to investors who route their investments through the Mediterranean island nation.

The notification has been rescinded retrospectively with effect from 1 November 2013, the date on which Cyprus was listed as a “notified jurisdiction" for not providing financial information sought by the Indian government—as previously agreed upon by both the countries, according to the notification published in the official gazette on 14 December and as confirmed by income tax department officials.

This means that investors can hope for some relief from the Indian tax department for investments routed through Cyprus in the intervening three-year period that attracted some of the stringent provisions like increased withholding tax requirements.

“The Government of India has finally rescinded the notification of Cyprus as a non-cooperative jurisdiction. Coming on the heels of the new tax treaty, this will come as a big relief to investors and Indian companies that have raised capital from Cyprus investors," according to Abhishek Goenka, partner–direct tax, PwC.

Cyprus’s removal comes after both countries agreed to changes in the double taxation avoidance agreement between both them.

The revised treaty signed by both the countries last month gives India the right to tax capital gains from sale of shares on investments made by Cyprus-based companies after 1 April 2017.

ALSO READ | India to levy tax on investments from Cyprus from April 2017

But this will be effective prospectively, similar to the provision made in the India-Mauritius treaty. However, it does not provide for a transitionary period like the one provided by the India-Mauritius treaty, wherein only half the capital gains tax rate will be applicable between 2017 and 2019.

Cyprus was one of the key destinations through which companies based in Europe and the US invested in India, benefiting from the treaty between both countries. In 2015-16, Cyprus ranked eighth in terms of foreign direct investment into India at $3.3 billion.

However, with Cyprus being classified as a “notified jurisdiction", any payment to a Cypriot entity attracted a withholding tax of 30%. No deduction in respect of any other expenditure or allowance arising from a transaction with a person in Cyprus, or a payment made to a financial institution, was allowed unless the assessee provides the required documents.

ALSO READ | With Cyprus treaty cleared, govt faces conundrum on tax refund

If an assessee entered into a transaction with an entity in Cyprus, it was treated as an associate enterprise and the deal as an international transaction attracting transfer pricing regulations.

Transfer pricing is the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied.

The Indian tax department will have to now formulate a mechanism for refunds to investors for excess payments made in the last three years.

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Published: 15 Dec 2016, 11:11 PM IST
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