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INDIA – CYPRUS NEGOTIATE NEW TAX TREATY

Cyprus has agreed to be more cooperative in the process of exchange of information with India, a month after the island was declared a notified jurisdiction by India for failing to effectively provide information to the Indian tax authorities.

Charles Savva
Charles Savva

The Finance Minister of Cyprus flew to New Delhi and following negotiations with the Indian government it was decided that Cyprus will eventually be removed from being a notified jurisdiction provided that there is a new double tax treaty in place, and that the Cypriot tax authorities become more cooperative in providing information to the Indian tax authorities.

Discussions between the two countries took place November 26-28 addressing India’s concerns about Cyprus’ lack of sharing information. It was agreed that “provisions of the new Article 26 of the OECD model tax convention relating to exchange of information” will be adopted in the new DTT. Article 26 grants a framework under which a country can seek information from another one and the rules governing that information.

Further, agreements were made that communication between both sides will be improved with efforts made towards swift processing of requests.

Regarding the re-negotiation of the existing DTT between Cyprus and India, the Cypriot ministry said a new DTT is expected to be finalised soon.

The Cyprus statement also says that after considerable efforts it was agreed during the talks that “once the notification of Cyprus being notified as a notified jurisdictional area under Section 94A of the Indian Income Tax Act, 1961 is rescinded, it would be done with retrospective effect from 1 November 2013, date when the notification of India was issued.”

S-AThe move India undertook declaring Cyprus as a notified jurisdiction increased scrutiny on any business transaction with entities based in Cyprus by India’s income tax department.

The notification was an unpleasant surprise for Cyprus financial services sector as several companies based in Europe and the US route their investments through the island to benefit from its favourable tax regime.

The fact that the Indian government has agreed to lift the notification from the date it was notified is a positive development albeit one that came with a hefty price. The existing double tax treaty between Cyprus and India exists since 1994 and is considered to be among the most beneficial tax treaties which India has. Meanwhile, it is worth noting India, shall be re-negotiating its double tax treaty with Mauritius. In particular, it has been announced that the new treaty between India- Mauritius will contain a Limitation of Benefit clause aimed at preventing treaty-shopping or other inappropriate use of treaty benefits.