Tuesday, 23 August 2016

India signs new treaty with Cyprus to provide for source-based taxation of capital gains

On 29 June 2016, the governments of India and Cyprus reached an agreement on a new tax treaty to replace the existing treaty dating from 1994.
Significantly, the governments agreed on a change to the tax treatment of capital gains on the sale of shares. The new treaty would eliminate the capital gains tax exemption under the existing treaty. Such gains would be subject to taxation in the source state, although a “grandfathering” rule would apply for investments made before 1 April 2017; gains derived from investments made before that date would be taxed only in the country in which the seller is a resident.
The proposed changes to the capital gains article were expected in light of India’s recent renegotiation of its tax treaty with Mauritius. The changes also demonstrate the commitment of the Indian government to implement action 6 of the OECD BEPS project (“Preventing the Granting of Treaty Benefits in Inappropriate Circumstances”).
The revised treaty likely will revive trade and economic activity between the two countries and pave the way for the Indian government to remove Cyprus from its list of “notified jurisdictions” with retroactive effect as from 1 November 2013. India included Cyprus on its blacklist on the grounds that Cyprus did not engage in an adequate exchange of information with India.
The provisional agreement with Cyprus will be presented to the Indian cabinet for its approval, after which the new tax treaty can be signed.
Source: Deloitte