India and Cyprus revise the double taxation avoidance agreement (DTAA)

A revised Double Taxation Avoidance and the Prevention of Fiscal Evasion (DTAA) agreement has been signed between India and Cyprus in Nicosia. This revised agreement will replace the existing DTAA that was signed in 1994. Cyprus is a major source of foreign funds flows in India. From April 2000 till March 2016, India received foreign direct investment (FDI) to the tune of Rs 42,680.76 crore from Cyprus.


The new agreement will help in providing assistance between the two countries for the purpose of collection of taxes. It has also updated the provisions pertaining to Exchange of Information to accepted international standards. This will pave way for the exchange of banking information and usage of such information for other purposes, provided prior approval of the competent authority of the information providing country is obtained.


Unlike the existing DTAA which provides for residence based taxation, the new DTAA provides for source-based taxation of capital gains arising from the alienation of shares. However, a grandfathering clause has been included according to which the capital gains made prior to 1st April 2017 would continue to be taxed in the country in which the taxpayer is a resident.


The new agreement has expanded the scope of ‘permanent establishment’ and has reduced the tax rate on royalty to 10% from 15% bringing it on par with the tax rate prevalent under Indian tax laws. In sum, the revised agreement has brought Cyprus at par with Mauritius in terms of tax treatment.


The new agreement is expected to come into effect beginning on or after 1st April 2017.

A DTAA is a bilateral economic agreement between two nations that aims to avoid or eliminate double taxation of the same income in two countries. It is also referred to as a Tax Treaty.