On November 18, India and Cyprus signed a revised agreement for the avoidance of double taxation and prevention of fiscal evasion.
Per a November 18 press release issued by the Indian government, the revised agreement (New DTAA) will replace the existing double taxation avoidance treaty entered into by the two countries on June 13, 1994.
The New DTAA is a result of prolonged discussions between the two countries, with the principal terms having been agreed upon in June 2016.
In line with the recently amended India-Mauritius tax treaty, the New DTAA provides for source-based taxation instead of resident-based taxation with respect to capital gains arising from the alienation of shares. Alienation of shares acquired prior to April 1, 2017 have been grandfathered and, accordingly, disposal of such investments will continue to be subject to capital gains tax in the country where the taxpayer is a resident. Thus, the new source-based taxation regime will apply only to gains arising from the alienation of shares acquired on or after April 1, 2017.
The New DTAA has also revised the provisions regarding the exchange of information between the two countries in order to bring information exchange in line with international standards. This is aimed at enabling the exchange of banking information and permitting the use of such information for purposes other than taxation (with the prior approval of the relevant authority in the country that provides the information).
In addition, the scope of the term “permanent establishment” has been broadened under the New DTAA, and the tax rate on royalty payments has been reduced from the existing rate of 15% to 10%—thereby bringing the tax rate in line with that under Indian tax law.
Cyprus was classified by India as a non-cooperative jurisdiction in November 2013 due to its failure to provide information to the Indian tax authorities under the provisions of the existing tax treaty. In conjunction with the signing of the New DTAA, the Indian government has also, by way of a gazette notification dated December 14, 2016, rescinded the notification declaring Cyprus to be a non-cooperative jurisdiction, with prospective effect.
According to the November 18 press release, the New DTAA is expected to come into effect in India in respect of income derived in financial years beginning on or after April 1, 2017.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Barton W.S. Bassett
Peter M. Daub