India and Cyprus agree to revise tax treaty, remove Cyprus from tax blacklist

India and Cyprus have completed negotiations for a new tax treaty that allows for source-based taxation of capital gains from the alienation of shares and have agreed to Cyprus’s removal from India’s blacklist of “notified jurisdictional areas,” Cyprus’s Ministry of Finance announced June 30.

Under the parties existing tax treaty, India does not have the right to tax capital gains of Cypriot residents from the sale of shares of Indian companies. This provision, plus the fact that Cyprus does not impose capital gains tax, results in such sales being free of tax.

The renegotiated treaty will restore India’s right to tax these capital gains. A similar provision was agreed to by the governments of India and Mauritius in a May 10 tax treaty protocol.

As is the case in the Mauritius/India protocol, India and Cyprus have agreed to generous grandfathering provisions. For investments undertaken prior to April 1, 2017, the right to tax the disposal of such shares at any future date remains with the contracting state of residence of the seller, Cyprus’s Ministry of Finance reports.

The Ministry also said India has agreed to retroactively rescind Cyprus’s placement on India’s blacklist of “notified jurisdictional areas” as of November 1, 2013, once the treaty enters into force.

India, in November 2013, designated Cyprus as a notified jurisdictional area on account of Cyprus’s failure adequately share information on tax evaders. Under Indian law, the designation resulted in enhanced reporting requirements and reduced tax deductions for transactions with Cyprus, as well as increased Indian withholding taxes on Cypriot residents.

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