The Indian government approved a new India-Cyprus tax treaty on August 24, 2016  that will allow the Indian government to tax capital gains on investments routed through Cyprus.  This is part of a continuing campaign by the National Democratic Alliance (NDA) government of India to plug tax loopholes used by investors to avoid paying taxes in India.  Prior to the NDA’s efforts, Cyprus had been a frequently-used jurisdiction for structuring investments into India from European Union-based investors.

The provisions of the new treaty, which grants the right to India to tax capital gains from the sale of shares on investments made by Cypriot companies after April 1, 2017, are not retroactive, meaning that investments made prior to the April 1, 2017 implementation date will not be affected.  This arrangement mirrors the arrangement of the already-ratified changes to the India-Mauritius tax treaty as well as the arrangement expected to be borne out of a modified India-Singapore tax treaty, which is still in negotiations.

The agreement with Cyprus puts an end to a standoff between the governments of India and Cyprus that first reached a boiling point in November 2013, when the government of India notified the government of Cyprus that Cyprus was blacklisted due to inadequate sharing of information related to tax evasion.  As a result of the blacklist, Cypriot entities faced increased scrutiny from the revenue arm of the Indian government, and outbound payments into Cypriot entities from Indian investors faced a 30% withholding tax.  With the adoption of the new treaty, the blacklisting will be withdrawn, retroactive to November 1, 2013.

The adoption of the new India-Cyprus tax treaty marks yet another step in the NDA’s march toward what it believes is a more fair and broad-based taxation regime.  “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,” said the government in an official statement.  “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,” the release continued. “As in the case of Mauritius, this amendment will deter such activities.”

© 2016 Perkins Coie LLP