India And Cyprus Sign Revised Tax Treaty

India and Cyprus Sign Revised Tax Treaty

India and Cyprus sign revised agreement for avoidance of double taxation with Cyprus. As per the revised agreement, India shall have the right to tax capital gains arising from the transfer of investments made on or after April 01, 2017. Investments made before April 01, 2017 have been grandfathered and will continue to enjoy the benefits of the erstwhile provisions of the existing agreement for avoidance of double taxation with Cyprus. Gains arising from the transfer of such investments will not be subject to capital gains tax in India on the basis of the revised agreement. No clarity, yet, on whether Cyprus has been de-notified as a Notified Jurisdictional Area. OVERVIEW OF THE REVISED TAX TREATY

Recently, India and Cyprus have signed a revised agreement for the avoidance of double taxation and fiscal evasion ("Revised Treaty"). The Revised Treaty is the outcome of prolonged and extensive negotiations. While the text of the Revised Treaty has recently been published in the Cyprus Gazette,1 the Indian Government is yet to make the text of the Revised Treaty public. However, the Indian government has recently announced the signing of the Revised Treaty by way of a press note dated November 18, 2016, highlighting the major amendments ("Press Note 1"). Press Note 1 follows on the heels of a press release dated July 1, 2016 ("Press Note 2") in which the Indian Government stated that the text of the Revised Treaty was being placed before the Cabinet for approval and a press release dated August 24, 2016 ("Press Note 3") in which the Indian Government stated Cabinet approval had been accorded to the Revised Treaty.

(a) Source Based Taxation of Capital Gains

The Revised Treaty provides for source based taxation of capital gains arising from the alienation of shares, instead of residence based taxation as provided under the existing tax treaty ("Existing Treaty").

However, the Revised Treaty provides for the grandfathering of investments made prior to April 1, 2017. Therefore, the source based taxation under the Revised Treaty shall only be applicable to capital gains arising from the transfer of investments made on or after April 1, 2017, and capital gains arising from the transfer of investments made prior to April 1, 2017 should continue to be taxed only in the jurisdiction in which the taxpayer is a resident.

(b) Expansion of the 'permanent establishment' concept

The Revised Treaty expands the scope of 'permanent establishment', introducing the concept of a 'service' permanent establishment, created where employees of an enterprise furnish services, including consultancy services in a country and such activities continue within the country for a period or periods aggregating more than 90 days within any 12- month period. The Revised Treaty has also specifically includes (i) sales outlets, (ii) warehouses (in relation to a person providing storage facilities for others) and (iii) farms, plantations or other places where agricultural, forestry, plantation or related activities are carried on, within the inclusive definition of 'permanent establishment'. Further, the Revised Treaty provides for the creation of a construction permanent establishment if activities carry on for more than 6 months, instead of the earlier requirement that the activities be carried on for more than 12 months.

Further, the Revised Treaty...

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