Govt Seals Cyprus Tax Haven Route

The country's renegotiated tax treaty with Cyprus will provide for taxation of capital gains in India arising from sale of shares of desi companies. However, all investments undertaken prior to April 1, 2017, will be grandfathered.
A release issued by the Cypriot ministry of finance says, “The agreement reached provides for source-based taxation for gains from the alienation of shares. Investments undertaken prior to April 1, 2017 are grandfathered with the view that taxation of disposal of such shares at any future date remains with the contracting state of residence of the seller.“ In other words, a Cyprus resident investor who has invested in Indian shares prior to this date will not have to pay tax on capital gains in India.
The recent protocol which India signed with Mauritius also provides for grandfathering of investments made prior to April 1, 2017. This release doesn't give any further details, such as that pertaining to any concessional rate of tax on capital gains, post the grandfathering period.
The final round of negotiations between the competent authorities of the two countries took place in New Delhi on June 29. India had earlier agreed to rescind the notification which had dubbed Cyprus to be a non-cooperative jurisdiction once the renegotiated treaty came into force. A fallout of the unilateral notification, issued by India on November 1, 2013, was that all investments via Cyprus were subject to greater disclosure norms and more stringent transfer pricing provisions. For Cypriot resident investors, it also meant a higher withholding tax in India of at least 30% against the more beneficial rates prescribed in the India-Cyprus tax treaty (for eg, interest income attracts a withholding of just 10% under the treaty and Cyprus was a popular route for debt investments into India).
“It has been agreed that, following the entering into force of the amending agreement, the Indian authorities will proceed with retrospectively rescinding the classification of Cyprus in the `Notified Jurisdictional Area' as from November 1, 2013,“ says this official release.
Substantial investments flow into India from Cyprus. FDI inflows from Cyprus during the fiscal 2015-16 aggregated to Rs.3,317 crore.

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