India, Cyprus finalise DTAA; capital gains to be taxed at source country

India and Cyprus have reached an in-principle agreement on all pending issues on Double Taxation Avoidance Agreement, including taxation of capital gains, which once implemented would help remove the island-nation from a non-cooperative jurisdiction for income tax purposes.

An official level meeting between India and Cyprus in New Delhi last week finalized a new India Cyprus Double Taxation Avoidance Agreement, wherein all pending issues, including taxation of capital gains, were discussed, and in-principle agreement was reached on all pending issues.

It was agreed to provide for source based taxation of capital gains on transfer of shares. However, a grandfathering clause would be provided for investments made prior to 1 April 2017, in respect of which capital gains would be taxed in the country of which taxpayer is a resident.

These provisional agreements will now be placed before the cabinet for its approval, subsequent to which the new tax treaty can be signed by the two countries.

Both sides also discussed the issue of notification of Cyprus under section 94A of Income-tax Act, 1961. It was agreed that India will consider rescinding the said notification with effect from 1 November 2013, and will be initiating the process for the same. Both sides expressed satisfaction with the progress achieved at the meeting, and hoped that it would lead to resolution of all pending matters at the earliest.