After a three year standstill during which Cyprus was declared a “notified” jurisdiction under the Indian tax code due to a perceived lack of information sharing, Cyprus and India have now signed a new double tax treaty replacing the treaty in place since 13 June 1994. The new treaty makes provision for a source based taxation test of capital gains arising from an alienation of shares, replacing the residence based test of the previous treaty. The source based test mirrors the provisions recently inserted into the India-Mauritius treaty. A grandfather clause has also been inserted allowing for disposals up to 1 April 2017 to benefit from the old residence regime test of taxation. This is a welcome development adding certainty for existing investors and imminent restructurings and disposals.

Importantly, the new treaty makes provision for exchange of information by adopting article 26 of the OECD Model Treaty into the treaty and assistance between the two countries for collection of taxes. The definition of a ‘permanent establishment’ has been expanded and the withholding tax on royalties has been reduced from 15 per cent to 10 per cent. The new treaty will enter into force after it has been ratified by the governments of the respective treaty partners, likely to be in April 2017. Once the treaty enters into force, the Indian authorities will rescind the classification of Cyprus as a “notified jurisdiction” retroactively from November 2013.

The favourable withholding tax rates of the previous treaty will continue to apply, being 15 per cent on dividends from India to Cyprus, (reduced to 10 per cent if the recipient is a company which holds at least 10 per cent of the share capital of the dividend paying company), and 10 per cent on interest. Dividends, interest and royalties bear no withholding tax in Cyprus, in accordance with local legislation, when sent to non-Cyprus residents.

Cyprus and India have long enjoyed excellent trade and investment relations and the new treaty which improves the existing agreement between the two countries on the avoidance of double taxation effective since 1994 is expected to foster increased use of Cyprus as a gateway both into and out of India. The eager response of Cyprus to the notification that it will be removed as a “notified jurisdiction” imminently proves that the international services sector is a key priority of the Cyprus government and the authorities are committed to an action plan to tackle transparency and information sharing issues, rectifying any alleged deficiencies with an aim to strengthening investor relations with treaty partners such as India.

Further, in conjunction with Cyprus’ growing popularity as a gateway to European investors under the Alternative Investment Fund Managers Directive (AIFMD), the Cyprus-India treaty enhances Cyprus’ position as an investment funds jurisdiction of choice. Cyprus will now be able to afford both investors and managers greater and more attractive opportunities to invest in India through an EU fund vehicle subject to robust regulation and compliance, at a time when India is experiencing great growth and investment in sectors such as infrastructure, Fintech and healthcare.