India and Cyprus Sign Revised Tax Treaty

30 November 2016

India and Cyprus have signed a revised tax treaty which will replace the existing treaty signed in 1944. On the 18 November 2016, the two countries signed on the new treaty following negotiations earlier this year.

The following changes have been made to the maximum withholding tax rates on dividends, interest, and royalties in the new treaty: 

  • Dividends will be 10%, a change from previously where neither country imposed withholding taxes on dividends
  • Interest will be 10%, unless the beneficial owner of the interest is the government, a political sub-division, a local authority of the other contracting state, certain Indian institutions defined in the treaty or any other institution as may be agreed upon between the competent authorities of the contracting states in which case the withholding tax will be reduced to nil
  • Royalties will be reduced from the previous 15% to 10%

In addition, there are a few other amendments to note:

  • The definition of a permanent establishment (PE) has been broadened to include building sites or construction or installation projects that last more than six months
  • New provisions for source-based taxation of capital gains arising from the alienation of a company’s shares. All investments undertaken before 1 April 2017 will be grandfathered, with taxation rights over gains on the disposal of such shares at any future date remaining solely with the state of residence of the alienator
  • Updates have been applied to an exchange of information article included so to be more in line with internationally accepted standards

The new treaty will only come into force following both Cyprus and India exchanging notification that their formal ratification processes have been finalised. The treaty will only have effect in Cyprus and India, on or after the 1 January and the 1 April respectively.

Cyprus will have its classification as a ‘notified jurisdictional area’ under section 94A of the Indian Income Tax Act 1961, rescinded by the India government once the treaty comes into force.

To read more on the treaty which was amended in June, please click here.