India has agreed a new double tax treaty with Luxembourg and is finalising a similar deal with Cyprus.Double tax treaties are critical in determining transfer prices between states and regularly include provisions which specifically refer to the elimination of double tax in transfer pricing cases.
The Indian cabinet approved the Luxembourg agreement last week, which covers both avoidance of double taxation and the prevention of fiscal evasion in respect of the taxes on income and capital. "The agreement will stimulate the flow of capital, technology and personnel from India to Luxembourg and vice-versa,” said Deepak Sandhu, a government press officer. “It will provide tax stability and reduce any obstacles in providing mutual co-operation". India has so far signed 71 double tax treaties.
The renegotiation of the double tax treaty between Cyprus and India is approaching completion. Both governments have concluded negotiations on amendments to the treaty. When it takes effect 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. The new treaty is likely to be published in March. Cyprus does not impose capital gains tax on its residents, and with India exempting the capital gains under the treaty, investors could take avail of benefits similar to those in the India-Mauritius agreement.
The original India-Cyprus tax treaty was agreed in 1995. The proposed amendments to this treaty are similar to changes in the recent India-United Arab Emirates tax treaty. 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 Mauritius. As the UAE and Cyprus are losing tax concessions, it would be easier for New Delhi to exert pressure on Mauritius to amend the agreement.
