Union Cabinet gives nod to revised Indo-Cyprus DTAA

New Delhi: The Union Cabinet on Wednesday gave its approval to the revised double taxation avoidance agreement (DTAA) between India and Cyprus is seen as a major step in the fight against tax evasion, “round tripping” and “base erosion/profit shifting”.

This follows the recent amendment of the DTAA with Mauritius. As with Mauritius, the Cyprus treaty  had provided for residence-based taxation of capital gains. With the revision of the treaty now approved by the Cabinet, capital gains will be taxed in India for entities resident in Cyprus, subject to double tax relief.

In other words, India will have the right to tax capital gains arising in India. The provisions in the earlier treaty for residence-based taxation were leading to distortion of financial and real investment flows by artificial diversion of various investments from their true countries of origin, for the sake of avoiding tax. As in the case of Mauritius, this amendment will deter such activities.

However, there is a grandfathering provision under which provisions of the proposed DTAA in respect of capital gains will not be applicable on shares acquired at any time prior to 1st April, 2017.

A revised agreement is proposed to be signed between the two countries, which will replace the existing DTAA. Negotiations with Singapore are also underway for similar changes.

India and Cyprus have a DTAA since 1994. Cyprus is a major source of foreign funds flows into the country. From April 2000 till March 2016, India received foreign direct investment to the tune of '42,680.76 crore from Cyprus