INDIA- CYPRUS DOUBLE TAXATION AVOIDANCE AGREEMENT

The government of India and the government of the Republic of Cyprus for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains had signed a Double Taxation Avoidance Agreement (“DTAA”) on 18 November, 2016. Thereafter a protocol was signed in December, 2016 and the DTAA along with its protocol consisting mainly of the provisions agreed upon in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) came into force vide a notification dated 20 January, 2017.

Applicability

The DTAA applies to the following taxes in the contracting states:

a. In India:

• the income tax and its surcharges.

b. In Cyprus:

• income tax;
• corporate income tax;
• special contribution for the defense of the Republic; and
• the capital gains tax.

Key takeaways

Following are some of the highlight of the India- Cyprus DTAA:

1. Mutual agreement procedure: Where a person considers that the actions of one or both of the contracting states result or will result for him in taxation not with the provisions of this convention, he may, irrespective of the remedies provided by the domestic law of those states, present his case in front of the competent authority of the contracting state of which he is a resident.
2. Withholding taxes: A withholding tax rates of 10% has been agreed upon for dividends, interests, royalties and fees for technical services. Further, an exemption has been granted to interests earned by government institutions.
3. Resident: Resident of a contracting state means any person who, under the laws of that state, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature and also includes that state and any political subdivision or local authorities.
4. Permanent establishment: The threshold for determining the permanent establishment (“PE”) has been reduced to six (6) months. Further, insurance PE clause provides that an insurance enterprise (except in regard to reinsurance) shall be deemed to have a PE in India, if it collects premiums in the territory of that other state or insures risks situated therein through a person other than an agent of an independent status.
5. Capital gains: Gains earned by a resident of a contracting state from the sale of immovable property situated in the other state, may be taxed in that other state.
6. Shipping and air transport: Profits from the operation of ships and aircrafts in international traffic, shall be taxable only in the state in which the place of effective management is situated.

Inference

The DTAA inculcates provisions in consonance with the international standards and also provides for assistance between the two countries in collection of taxes. This tax treaty has further expanded the scope of the permanent establishments to allow for source-based taxation of business income as well. It also consists of provisions related to exchange of information to the accepted international standards, which has enabled exchange of banking information and its use for purposes other than taxation, with the prior approval of the competent authorities of the country providing such information. The DTAA has further contributed to improved relations between the contracting states and has encouraged mutual cooperation.