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India reworks tax treaty with Cyprus to check misuse
February, 23rd 2007

India is reworking its tax treaty with Cyprus to check its abuse. The tax treaty offers benefits, akin to India-Mauritius Double Taxation Avoidance Agreement, like exemption from capital gains tax.

New Delhi has already initiated negotiations with Cyprus for bringing changes in the treaty. Cyprus is also considered a tax haven similar to Mauritius. Under the India-Cyprus tax treaty, capital gains arising in India are exempt from tax and dividend income from withholding tax. Cyprus also does not levy any tax on capital gains. There is a lower 10% tax on interest, royalties and fee for technical services. Preventing misuse of tax treaties is weighing heavy on Indias agenda and it is now pushing for renegotiation of agreement with countries considered tax havens.

India may push for bringing limitation of benefit clause in the treaty with Cyprus, a source said. Under, the limitation of benefits clause, entities which are not eligible cannot get any benefit under the tax treaty. India has built in this provision in its treaty with Singapore and it is keen on bringing this provision in its treaty with Mauritius.Limitation of benefit clause, you restrict the benefits of the treaty to certain entities, BSR & Co partner Sudhir Kapadia said.

Though this clause, the governments can deny benefits of the treaty if the affairs with a view to take advantage of the treaty. Listing on the stock exchange in any of the countries, a ceiling for turnover, a certain cap on expenditure on carrying the operations in one of the contracting states are some of the restrictions which could be brought in. New Delhis concerns about the agreement with Cyprus stems from alleged misuse of the treaty by companies that route their investments into the Indian securities market to get exemption from capital gains tax. Preventing misuse of tax treaties has also been laid down in the National Common Minimum Programme of the UPA government.

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