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Cyprus may cease to be capital gains tax haven
February, 12th 2008
The party may soon be over for investors coming into India from Cyprus. The double taxation avoidance agreement (DTAA) between the two countries is all set to lose the capital gains tax exemption benefit.

Both the governments are understood to have concluded negotiations on amendments to the tax treaty, following which residents, both individuals and companies of Cyprus, would have to pay capital gains tax at the rate of 10%.
A limitation on benefits clause to ensure ineligible entities cannot get a benefit under the tax treaty is also proposed to be inserted. The changes in the treaty were likely to be notified soon, sources said.

Cyprus does not impose capital gains tax on its residents, and with India exempting the capital gains under the treaty, investors could avail of the benefits similar to the India-Mauritius DTAA. The dividend income is also exempt from withholding tax. The India-Cyprus tax treaty was notified in 1995.

The proposed amendments to the India-Cyprus tax treaty are akin to the changes in the India-United Arab Emirates DTAA notified recently. Under the India-UAE tax treaty, capital gains have been made taxable in the state where the gains are earned. India is also trying to renegotiate its tax treaty with the island nation of Mauritius. With tax treaties with the UAE and Cyprus losing their tax concessions, it would be easier for New Delhi to wield pressure on Mauritius for amending the agreement.

Interestingly, Mauritius, which is lobbying hard for continuing the tax treaty, has renegotiated the agreement with China and removed the tax concessions. Preventing abuse of tax treaties weighs high on the Indian governments agenda. The tax havens are used by investors to avail tax benefits by routing their investments through shell or paper box companies registered there.
The National Common Minimum Programme of the United Progressive Alliance government has also resolved to prevent the misuse of tax treaties.
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