Cyprus to lose capital gains tax waiver from April 2017

ON the heels of the recent change in the India-Mauritius tax treaty that allowed New Delhi to tax capital gains of investors from the island country if it arose from sale of shares of an Indian resident firm, the government has now got Cyprus, another prominent low-tax jurisdiction, to similarly amend a bilateral accord. With the new agreement on the India-Cyprus double tax avoidance treaty, India has moved a step closer to its objective of ending treaty abuse by foreign investors in the country and roundtripping of Indian funds.

The new tax regime with Mauritius that was agreed upon in May automatically applied to Singapore-based companies thanks to the linkage between India’s DTAA with the two countries. While Mauritius and Singapore, respectively, are India’s largest and secondlargest sources of foreign direct investment (FDI), Cyprus is also a significant investor in the country — the European island country was the eighth largest investor in India in 2015-16 with FDI of R3,300 crore.

According to the new agreement, Cyprus investors’ capital gains on investments made in Indian companies after March 31, 2017, can be taxed here.

In the amended DTAA with Mauritius, apart from the grandfathering clause in relation to shares acquired before April 1, 2017, a twoyear (April 1, 2017, to March 31, 2019) transitional phase is provided when the tax rates will be half India’s domestic rates. However, Friday’s statements from the finance ministries of India and Cyprus are silent on any such facility for Cyprus-based investors.

India has also agreed to retroactively rescind its notification dubbing Cyprus as a “non-cooperative jurisdiction”. New Delhi has been putting pressure on the island country to agree to an end to capital tax waiver regime, but the latter used to resist the demand, citing the tax exemptions enjoyed by investors based in Mauritius and Singapore. With the amendment to the India-Mauritius DTAA, India’s negotiating power increased.

Apart from the capital gains exemption that is now being phased out, the India-Cyprus DTAA also allows waiver from withholding tax on dividends and a concessional tax rate of 10% on income from interest, royalties and fee for technicalservices. The amended agreement doesn’t seem to cover these areas; the statements issued by the governments were silent on these.

Analysts said Cyprus’ importance as an investor in the country is already on the wane. “In the past, Cyprus was more preferred by debt funds because of the low withholding tax of 10% on interest and interestingly Mauritius debt funds will now get a better treatment because of the 7.5% withholding tax rate under the revised Mauritius treaty. However any fresh investments from April 1, 2017, either in equity or debt, will be subject to India’s new G AAR provisions,” said Rajesh Gandhi, partner, Deloitte Haskins & Sells.

According to India’s Income Tax Act, capital gain son transfer of shares held for less than 12 months are subject to a short-term capital gains tax of 15%. Gains on shares held for a longer period is treated as long-term capital gains but the tax rate on these is currently zero.

Sources said the Netherlands could be next in line for a similar tax treaty revision with India.

The finance ministry said in a statement: “An official level meeting between India and Cyprus took place in New Delhi on 28 and 29 June, 2016, to finalise the new India Cyprus Double Taxation Avoidance Agreement, wherein all pending issues, including taxation of capital gains, were discussed, and in-principle agreement was reached on all pending issues. It was agreed to provide for source based taxation of capital gains on transfer of shares. However, a grandfathering clause would be provided for investments made prior to 1.4.2017, in respect of which capital gains would be taxed in the country of which taxpayer is a resident. These provisional agreements will now be placed before the Cabinet for its approval, subsequent to which the new tax treaty can be signed by the two countries.”