Revision of India-Singapore Tax treaty; De-notification of Cyprus as a ‘notified jurisdictional area’

Rakesh Dharawat	Hari Gangadharan

In a significant development, a third protocol (Protocol), amending the provisions of the India-Singapore tax treaty was signed in December 2016. The changes brought about by the Protocol are largely similar to the revised India-Mauritius tax treaty.

Under this Protocol, India will get the right to tax capital gains arising on alienation of shares acquired on or after April 1 2017. Shares acquired before March 31 2017 will be grandfathered and gains arising thereon will not taxable in India. For shares acquired and alienated between April 1 2017 and March 31 2019 the tax rate will be limited to 50% of the tax rate applicable in the source country.

To be eligible for the grandfathering or concessional tax rate during the transitory period, certain conditions specified by the limitations on benefit (LoB) clause have to be met by the company claiming the benefit. These include incurring an annual operating expenditure of at least S$200,000 ($140,000) or INR 5 million ($73,000) as the case maybe in the immediately preceding period of 12 months from the date on which the gains arise.

The benefit of reduced tax rates will not be available if the affairs are arranged with the primary purpose of benefiting from the grandfathering clause, or to take advantage of the provisions granting the reduced tax rate, or if the company claiming the benefit is a shell or a conduit company. A shell or a conduit company means any legal entity that is not listed, has negligible/nil business operations, or carries on no real and continuous business activities.

The Protocol provides that the tax treaty will not prevent a country from applying its domestic law and measures concerning the prevention of tax avoidance or tax evasion. It also seeks to provide for bilateral discussions for the elimination of double taxation arising from transfer pricing or the pricing of related party transactions.

The notification issued in 2013 that classified Cyprus as a 'notified jurisdictional area' (NJA) under section 94A of India's Income-tax Act, 1961 was withdrawn in November 2016.

Thus, transactions with Cyprus will no longer attract transfer pricing, or a higher withholding of 30% as contemplated by section 94A.

It is also provided that this repeal has retrospective effect from the date of the 2013 Notification. However, transactions done, or omitted to be done, before the cancellation are expressly saved.

This repeal comes in the backdrop of the revision of the India-Cyprus tax treaty to provide for source-based taxation of capital gains in India (subject to a grandfathering of pre-2017 investments).

Rakesh Dharawat (rakesh.dharawat@dhruvaadvisors.com) and Hari Gangadharan (hariharan.gangadharan@dhruvaadvisors.com)

Dhruva Advisors

Tel: +91 22 6108 1000

Website: www.dhruvaadvisors.com