Revised DTA between Cyprus and India: structuring your inbound investments through Cyprus

2016/december/Revised-DTA-between-Cyprus-and-India

On 18th November 2016 a revised agreement between Cyprus and India for the avoidance of double taxation (DTA) was signed which will replace the existing DTA that was signed by the two countries in June 1994.

Provisions of the new DTA will enter into force once the ratification procedures on both sides are completed, and according to the recent press release issued by the Indian authorities, the revised DTA is expected to come into effect in India as of 1st April 2017. The key highlights from the announcements of the Indian and Cyprus authorities are outlined below.

Key Highlights:

There are 3 routes to becoming an ICON:

  • De-classification of Cyprus as NJA: Indian authorities shall proceed with retrospectively rescinding the classification of Cyprus as ‘Notified Jurisdictional Area’ (NJA) as from 1st November 2013.
  • Source-based taxation on capital gains on shares acquired on or after 1st April 2017: Capital gains arising from the sale of shares acquired on or after 1st April 2017 shall be taxable in India. However, capital gains on the sale of shares acquired prior to 1st April 2017 shall be grandfathered and taxed in Cyprus. This source-based taxation shall be applicable for shares of an Indian resident company or shares of a company whose property consists of immovable property in India.
  • Reduction of WHT on Royalty: Royalty payments to a Cyprus resident shall be subject to 10% withholding tax in India. The rate currently is 15%.

The de-classification of Cyprus as NJA following the revision of the DTA paves the way for more cooperation and opportunities between Cyprus and India. The amendment from resident-based to source-based taxation of capital gains also follows the recent changes made in the DTA between India and Mauritius. The grandfathering of investments made prior to 1st April 2017 should add further certainty for both existing and future structures and investments in India via Cyprus.

At Amicorp we can assist you with your structuring requirements for inbound investments through Cyprus


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HoldCo:

  • Dividends from India shall be tax exempt in Cyprus. There is a 10% WHT on dividends in India according to the DTA, however this WHT is currently not imposed by the Indian authorities.
  • No WHT in Cyprus on dividends to Investor.
  • Capital gains on sale of Investments shall be tax exempt only for those Investments made prior to 1st April 2017 under grandfathering. Capital gains on Investments made on or after 1st April 2017 shall be subject to tax in India.

FinCo:

  • Interest income shall be subject to 10% WHT in India.
  • Notional Interest Deduction (NID)* in Cyprus can reduce taxable interest income from 12.5% to 2.5%, with net effect 0% tax payable in Cyprus through credit received for 10% WHT in India.
  • No WHT in Cyprus on dividends to Investor.
  • If financing done through CCDs, sale of the same shall not attract capital gains tax in India.

* Two-tier structures holding assets other than immovable property situated in India, would still take advantage of the capital gains tax applicable in Cyprus, which would be 0% for any type of securities.

* Notional Interest Deduction (NID): This applies as a deemed interest expense on newly injected capital and can reduce the effective tax rate to 2.5%. NID is calculated by multiplying a ‘reference interest rate’ on the new capital issued by the company. The reference interest rate is the 10-year government bond rate of the State the capital is invested in, plus 3%. However, this cannot be less than the 10-year Cyprus government bond increased by 3%. The allowable deemed expense cannot exceed 80% of the taxable income of the company. In case of a tax loss, no expense can be claimed.

Further assistance from Amicorp

Amicorp Cyprus is available to assist with any queries you might have and help you explore the opportunities that may arise for your business as a result of the revised DTA between Cyprus and India. Amicorp can assist in the set-up and on-going maintenance of Cyprus entities and provide global solutions through its worldwide expertise and presence in more than 30 countries.


For further information, please contact:

Alexandros Gavrielides

Alexandros Gavrielides

Director Sales
Amicorp (Cyprus) Ltd
a.gavrielides@amicorp.com
Elia Nicolaou

Elia Nicolaou

Managing Director
Amicorp (Cyprus) Ltd
e.nicolaou@amicorp.com