Following our previous tax alert sent in July 2016, the Cyprus and India revised Double Tax Treaty (DTT) has been signed on Friday 18 November 2016. The DTT will come into force after the ratification from both parties, and will apply retrospectively from 1 November 2013. Cyprus will also be removed from the “Notified Jurisdictional Area’ with retroactive effect as from 1 November 2013.
The main provisions of the new DTT are summarized below:
· Sale of shares - As per the provisions of the new DTT gains derived from the alienation of shares are taxed at source. Thus, if a Cyprus tax resident company sells shares owned in an Indian tax resident company such a transaction may be taxed in India.
· Grandfathering provisions – Gains from the sale of shares acquired prior to 1 April 2017 will only be subject to tax in the country of the seller, irrespective of the time that these sales are actually sold. Thus, it provides a unique opportunity to proceed with the implementation of new structures whereby a Cyprus company acquires the shares in Indian tax resident companies prior to 1 April 2017 to utilize the tax free sale of shares in the future.
· Dividend payments – The applicable withholding tax in India is 15%. The withholding tax is reduced to 10% if the recipient is owning at least 10% of the share capital of the paying company.
· Interest payments – Subject to 10% withholding tax in India.
· Royalty and service payments – Subject to a 15% withholding tax in India. Reduced to 10% withholding tax for payments relating to technical, managerial or consulting service payments.