On 1st November 2013 India blacklisted Cyprus for not disclosing crucial information on money transferred by Indian citizens conducting business in Cyprus who were suspected for tax evasion.
Based on the exchange of information provisions of the Double Tax Avoidance Treaty signed between the two countries, the Indian tax authorities decided to classify Cyprus as a notified jurisdictional area under Section 94A of the Indian Income Tax Act of 1961. This allows the government to categorize a country in order to constrict tax evasion.
As a result, every payment which was made to anyone in Cyprus suffered a higher withholding tax rate of 30% as opposed to the standard rate of 15%. In addition, for sums received in India from a person located in Cyprus the burden fell on the assessee to adequately explain the source of the money and in the case he/she failed to do so, the amount was regarded as revenue of the assessee.
As consequence of the above measures, investments from Cyprus were limited and it has been a big setback for the Cypriot economy.
In May 2014, a revised and modernised tax treaty between the Republic of Cyprus and the Republic of India was drafted. Article 26 of the previous double tax treaty, concluded in 1994, was the cause of amendment of the treaty as well as the issue of Section 94A that classified Cyprus as a notified jurisdictional area.
On June 29, 2016 in New Delhi, negotiations for the revision of the treaty on income and other pending matters were successfully completed. This allows Cyprus to begin the procedure of removal from the notified jurisdictional area list where it has been listed since November 1st, 2013.
The main reason for amending the agreement is the improvement of the trade and economic relations between India and Cyprus as well as with other countries.
Furthermore, the new agreement provides for a withholding tax on capital gains arising from the alienation of shares. Moreover, a grace period for investments made until April 1, 2017 will apply, with any taxation of the future disposal of these investments to remain in the state of the residence of the seller.
Concluding, it should be noted that the expansion of the existing double taxation treaties is of great economic and political importance to Cyprus and aims to enhance and attract foreign investment and to promote Cyprus as an international business center.
Andri Christodoulou, Eurofast Taxand Cyprus