Cyprus may give India right totax capital gains, but wants to be removed from an Indian blacklist
A delegation from Cyprus is expected to visit India soon to negotiate changes to its double taxation avoidance agreement (DTAA) with India.
Cyprus has agreed to give India the right to tax capital gains similar to the provision in the revised India-Mauritius tax treaty, but wants to be removed from an Indian blacklist, said two government officials who did not want to be identified.
Cyprus was a sought-after route for investors looking to invest in India but its appeal was severely eroded after India declared the Mediterranean island nation a notified jurisdiction three years ago.
“The Cyprus delegation will be in India in the next few weeks to negotiate the revised treaty. They have agreed to the changes in the tax treaty on the lines of the protocol signed between India and Mauritius," said one of the officials mentioned above. “They are also seeking the removal of the tag of a notified jurisdiction," the official added.
As per the revised terms of the India-Mauritius DTAA, India gets the right to tax capital gains made on investments from Mauritius. Earlier, only Mauritius could levy the tax on capital gains and since the tax rate there was close to zero, entities investing from Mauritius did not have to pay any tax.
India is also negotiating similar revisions with other countries, including Singapore and the Netherlands, in an effort to push for a source-based taxation regime.
Cyprus was also one of the key destinations through which companies based in Europe and the US invested in India, benefiting from the treaty between both countries. The treaty provided for zero per cent capital gains tax and a low withholding tax rate of 10% on interest payments made to entities based in Cyprus.
But India, keen to move on tax avoidance and black money, declared Cyprus a notified jurisdiction in November 2013 saying the European nation had failed to share adequate information on tax evaders. As a result, business transaction with entities based in Cyprus came under increased scrutiny of the income tax department. The notification made it difficult for taxpayers to claim deductions on transactions with entities based in Cyprus. It also subjects a taxpayer to enhanced reporting requirements and higher tax outgo.
At present, because of Cyprus’s status as a notified jurisdiction, if an assessee enters into a transaction with an entity in Cyprus, the entity will be treated as an associate enterprise and the deal will be treated 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.
In addition, if any sum of money is received from a person located in Cyprus, the onus will be on the assessee to explain the source of the money in the hands of that person. Also, any payment to a Cypriot entity will attract 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, is allowed unless the assessee provides the required documents.
“Cyprus was a preferred route for investors investing in the real estate and infrastructure sector in India and it being declared a notified jurisdiction three years back severely impacted investments coming in from that country because of increased scrutiny and the 30% withholding tax clause," said Abhishek Goenka, partner direct tax at consultancy firm PwC. “One will have to wait and see how the talks progress between both the countries," he added.