Negotiations between India and Cyprus on Double Taxation Avoidance Agreement (DTAA) saw its closure on Wednesday, which if approved by the cabinet, will bring tax benefits on capital gains from Foreign Direct Investments (FDIs).

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The bilateral tax treaty provides for ‘source-based’ taxation of capital gains on share sale.

Thus capital gains on investments would be taxed in the country of which taxpayer is a resident.

The double-taxation avoidance agreement also states share sale of investments made before April 1, 2017 will be exempted from capital gains tax.

What is a double taxation avoidance agreement?

This agreement ensures that people do not pay tax twice on the same income. If there is a double taxation agreement, this may state which country has the right to collect tax on different types of income.

Double taxation agreements specify which country has taxing rights over an individual, and, if they both have such rights, which one takes priority. 

Benefits from DTAA

The benefits of DTAA are lower withholding tax (tax deducted at source or TDS), exemption from tax and credits for taxes paid on the doubly-taxed income that can be enchased at a later date.

Indians that have investments in Cyprus will enjoy tax benefits on capital gains.

The government has taken the initiative to revise the treaty with Cyprus as there is a major source of foreign fund flows into the country.

PTI reported that from April 2000 till March 2016 India received Foreign Direct Investment worth Rs 42,680.76 crore from Cyprus.

"Upgrading and expanding the network of Double Tax Conventions, is of high economic and political importance and aims to further strengthen and attract foreign investment in Cyprus as its standing an international business centre is elevated," the report added.

The major countries with which it has signed the DTAA are the US, the United Kingdom, the UAE, Canada, Australia, Saudi Arabia, Singapore and New Zealand.

PTI also reported that the government has also stated that it will revisit the Mauritius DTAA by year end.