Cyprus Rescinded as NJA in India

Cyprus Rescinded as NJA in India

On April 21, 2017, the tax treaty between Cyprus and India has been revised, and the designation of Cyprus as a ‘‘notified jurisdictional area’’ by the Indian tax authorities has been completely rescinded.

What will the impact be on trade and investment for both countries going forward?

The new double taxation treaty between Cyprus and India, which was signed on November 18, 2016, was ratified in record time, and entered into force four weeks after signature. Its provisions took effect from January 1, 2017 as regards Cyprus taxes, and from April 1, 2017, the beginning of the Indian tax year, as regards Indian taxes. The new DTT replaces an earlier one, which had been in force since 1994.

The main difference of substance between the two DTTs is that, while the 1994 agreement provided that gains from the alienation of shares would be taxable only in the country in which the holder was resident, the 2017 agreement provides that gains may be taxed in the country of residence of the investee company or, in the case of a company whose assets principally comprise immovable property, in the country in which the property is situated.

Since Cyprus imposes no tax on capital gains on shares in companies unless they are derived from immovable property in Cyprus, the 1994 agreement provided investors with a means to fully shelter gains on disposal of shares in investee companies resident in India from any capital gains tax liability by holding them in a Cyprus holding company.

The capital gains tax exemptions encouraged many foreign funds and companies to route investments into India through Cyprus, Mauritius or Singapore, removing a potential source of tax revenue for the Indian government. From 2000 to 2016 the overwhelming majority of India’s inward investment was routed through one or other of the three countries.

In November 2013, with negotiations on the new DTTs still showing no progress, India’s Central Board of Direct Taxes designated Cyprus as a Notified Jurisdictional Area (‘‘NJA’’) under section 94A of the Income Tax Act. Section 94A was introduced by the Indian Finance Act of 2011 and empowered the government to designate as an NJA any country which does not cooperate in exchanging tax information. It deems all transactions between Indian residents and residents of the NJA as transactions between associated enterprises and accordingly subject to transfer pricing regulations, and makes any payments to a person in an NJA subject to withholding tax at a rate of at least 30 percent, penalizing both the taxpayer in India and the non-resident.

In September 2016, an agreement was finally reached on a new DTT between Cyprus and India and signature took place on November 18.

NJA Withdrawn

When the DTT entered into force on December 14, 2016, the Indian tax authorities rescinded the designation of Cyprus as an NJA under section 94A with retrospective effect. At first there was some misunderstanding among the tax authorities and practitioners that the rescission was not retrospective, and on April 21, 2017, the Indian Central Board of Direct Taxes issued a circular making clear that the initial notification had been rescinded with effect from its date of issue, removing Cyprus as an NJA with retrospective effect from November 1, 2013, effectively annulling the designation from the start.

For most businesses, the day-to-day effects of Cyprus’s designation as an NJA were limited to inconvenience and additional administrative burdens, as the withholding taxes were reclaimable. The symbolic effect of the retrospective rescission of the designation is much more significant, as it represents a return to the cordial relations that have existed between the countries ever since Cyprus achieved independence.

The rescission of the NJA designation levels the playing field between Cyprus on the one hand and Singapore and Mauritius on the other as regards investment into India by removing the disadvantages associated with NJA status. For all three, capital gains realized in future on investments made before April 1, 2017 will remain taxable only in the country of residence of the disponor, while capital gains on investments made after April 1, 2017 will be subject to tax in India.

The Cyprus–India DTT is unique in having no limitation of benefits provisions and the information exchange provisions include stronger safeguards against abuse by the tax authorities.

Cyprus has substantial non-tax advantages in terms of trade and investment compared with the other jurisdictions. Cyprus’s membership of the EU and the Eurozone makes it an ideal portal for Indian businesses seeking to establish a base in the EU in order to enter the European market. In terms of cost of establishing and maintaining an operation, Cyprus is comparable with Mauritius and considerably cheaper than Singapore and most other EU locations.

Not only PHS can help you in this matter, but we can offer an invaluable support through our partners in Mumbai, India – Aneri Dani & Associates – specialised in solution-oriented advisory and compliance services on Indian domestic & cross-border taxation and exchange control regulations.

Download our presentation