The Cabinet approved the revised Double Taxation Avoidance Agreement (DTAA) with Cyprus, a move that gives India the right to tax capital gains on investments routed through Cyprus prospectively from April 1, 2017.
The fresh DTAA with Cyprus, which is considered a haven for money laundering, round-tripping, and profit-shifting, assumes significance coming soon after the signing of the revised pact with Mauritius. India is also in the process of revising its treaty with Singapore.
“As in the case of Mauritius, the treaty with Cyprus had provided for residence-based taxation of capital gains,” according to a government statement. “With the revision of the treaty now approved by the Cabinet, capital gains will be taxed in India for entities resident in Cyprus, subject to double tax relief. In other words, India will have the right to tax capital gains arising in India.”
Low-tax jurisdictionAmit Maheshwari, managing partner, Ashok Maheshwary & Associates said: “Money laundering can happen from anywhere, and obviously low-tax jurisdictions (such as Cyprus) help in money laundering. Cyprus is basically used for structuring debt instruments.”
The revision of agreements with Mauritius and Cyprus could see this debt-restructuring business moving from the latter to the former.
“In the Mauritius revised DTAA, the rate for withholding of debt instruments was reduced to 7.5 per cent,” Mr. Maheshwari said. “In Cyprus, this rate was 10 per cent. It is not clear whether the rate has been revised in the new DTAA. If it has not, then a lot of that business will now shift to Mauritius where the rate is lower.”
Cyprus used to have a DTAA with India but was blacklisted on November 1, 2013, by the Indian government for non-cooperation.
“Excessive taxes paid by way of higher withholding taxes from November 1, 2013 being the date from when Cyprus was notified as a non-cooperative jurisdiction could possibly be claimed as refunds given if the withdrawal of the notification with retrospective effect,” Abhishek Goenka, Partner - Direct Tax, PwC India said.
Another difference between the Cyprus and Mauritius treaty is the limitation of benefit clause.
“A limitation of benefit clause is meant to prevent the misuse of treaties in which they have threshold saying if you invest a particular amount in a country then you are not a shell or paper company,” Mr. Maheshwari said.
“There is no limitation of benefit clause in the Cyprus treaty although there is one in the revised treaty with Mauritius and was always there in the agreement with Singapore.”
Tax collectionThe Cyprus DTAA also includes a provision for assistance in collection of taxes. It also has a revised provision for the exchange of information that would enable the use of information exchanged for other purposes.
