The Cyprus – India Double Tax Treaty: A Gateway for Investment Between Europe and Asia

The Cyprus – India Double Tax Treaty: A Gateway for Investment Between Europe and Asia

Introduction

Cyprus and India enjoy longstanding commercial and financial ties, underpinned by the Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the "Treaty"). The current Treaty was signed in Nicosia on 18 November 2016 by the Minister of Finance of the Republic of Cyprus and the High Commissioner of India to Cyprus, together with an accompanying Protocol. It was ratified by Cyprus and published in the Official Gazette of the Republic on 25 November 2016, entered into force on 14 December 2016, replacing the original agreement of 1994, and has applied in Cyprus since 1 January 2017 and in India since 1 April 2017.

The signing of the revised Treaty marked a turning point in the tax relationship between the two countries. It restored Cyprus's position as a credible and fully compliant jurisdiction for structuring investment into and out of India, led to the rescission, with retrospective effect from 1 November 2013, of Cyprus's classification as a "notified jurisdictional area" under section 94A of the (then applicable) Indian Income-tax Act 1961, and aligned the bilateral framework with the OECD Model Tax Convention and modern international standards of transparency.

The commercial significance of the corridor is substantial. According to India's Department for Promotion of Industry and Internal Trade, cumulative FDI equity inflows from Cyprus into India reached approximately USD 16.06 billion for the period January 2000 to March 2026, placing Cyprus ninth among source jurisdictions, with investment spanning construction and development, services, pharmaceuticals, consultancy, software and hardware, automotive, shipping and manufacturing.

Why the Treaty Matters

India is one of the world's largest and fastest-growing economies, while Cyprus, as a member state of the European Union with an extensive treaty network, serves as a natural platform for inbound and outbound investment. The Treaty allocates taxing rights between the two states in a clear and predictable manner, relieves double taxation on business profits, dividends, interest, royalties and capital gains through the credit method, and provides certainty to investors on both sides.

Key Provisions

Scope. The revised Treaty applies to taxes on income only; the taxation of capital, covered by the 1994 agreement, was removed from both the title and the scope. Where the place of effective management of a person other than an individual cannot be determined, residence is to be settled by the competent authorities by mutual agreement within two years of the invocation of the mutual agreement procedure.

Withholding tax rates. The Treaty caps withholding tax in the source state at 10% on dividends, 10% on interest, and 10% on royalties and fees for technical services, in each case subject to beneficial ownership requirements. The 15% rates applicable under the 1994 agreement to royalties, to fees for included services, and to portfolio dividends were accordingly reduced or removed. The interest article additionally exempts a wider range of State-related institutions, including the Export-Import Bank of India and the National Housing Bank, and permits the competent authorities to extend that list by exchange of letters.

Two (2) practical points deserve emphasis:

• The Protocol recorded that, because dividends distributed by an Indian company were at the time exempt in the shareholder's hands under Indian domestic law, no withholding would in practice arise for so long as that system continued. That system has since changed: following the abolition of dividend distribution tax, dividends are taxable in the hands of shareholders, and the Treaty's 10% cap is now the operative limit for a Cyprus-resident beneficial owner, in place of the higher domestic non-resident rate.
• The "make available" requirement was removed from the definition of fees for technical services, which now covers payments of any kind for managerial, technical or consultancy services, including the provision of technical or other personnel. The article is therefore materially wider in scope than its predecessor, notwithstanding the reduced rate, a point frequently overlooked in intra-group service and management agreements.

Cyprus, for its part, imposes no withholding tax under domestic law on dividends or interest paid to non-residents (subject to the limited defensive measures introduced in recent years for payments to jurisdictions on the EU list of non-cooperative jurisdictions), and no withholding on royalties for rights used outside Cyprus, which in practice makes Cyprus a highly efficient platform for repatriating income.

Capital gains. The most consequential change was the move to source-based taxation of gains on the alienation of shares. Gains realised by a Cyprus tax resident on the disposal of shares in an Indian company may therefore be taxed in India, as may gains on shares in a company whose property consists directly or indirectly principally of immovable property situated there.

Crucially, the Protocol preserves the previous residence-based treatment for investments made before 1 April 2017: gains on the disposal of shares acquired at any time prior to that date remain taxable only in the state of residence of the alienator, whenever the disposal occurs. Since Cyprus does not tax gains on the disposal of shares and securities (save where the gain derives from Cyprus-situated immovable property), grandfathered structures continue to enjoy full protection. Shares acquired on or after 1 April 2017 fall outside that protection.

For legacy holdings, acquisition-date evidence is therefore a substantive tax asset. Share registers, subscription and transfer documentation, corporate resolutions and payment records should be retained and capable of production, with particular care where holdings have since been affected by reorganisations, bonus issues, conversions or intra-group transfers.

Permanent establishment. The definition was broadened in line with India's consistent treaty policy, and the thresholds are lower than many investors assume:

• the construction, assembly and installation threshold was reduced from twelve months to more than six months;
• a service permanent establishment clause was introduced, triggered where the furnishing of services, including consultancy services, through employees or other personnel continues, for the same or a connected project, for periods aggregating more than 90 days in any twelve-month period;
• an insurance permanent establishment clause was introduced, and the agency test was widened beyond authority to conclude contracts to capture the habitual maintenance of a stock of goods from which deliveries are regularly made, and the habitual securing of orders wholly or almost wholly for the enterprise;
• the illustrative list was extended to include a sales outlet, a warehouse operated by a person providing storage facilities to others, and a farm or plantation; "delivery" was removed from the preparatory-and-auxiliary exclusions.

Correspondingly, the force of attraction rule was removed from the business profits article: only profits attributable to the permanent establishment itself may be taxed in the source state.

Transparency and cooperation. The Treaty contains updated provisions on the exchange of information (Article 26), reflecting internationally accepted standards and permitting the exchange of banking information and its use for purposes other than taxation with the prior approval of the supplying state's competent authority, together with a new article on mutual assistance in the collection of taxes (Article 27). These provisions were central to restoring confidence between the two tax administrations and to the rescission of Cyprus's earlier classification under section 94A.

The BEPS Overlay: The Multilateral Instrument

The Treaty is further modified by the OECD Multilateral Instrument (MLI). Both states signed the MLI on 7 June 2017; it entered into force for India on 1 October 2019 and for Cyprus on 1 May 2020, and its provisions generally took effect in respect of the Cyprus–India agreement for taxes withheld at source on amounts paid or credited from 1 April 2021, and for other taxes for taxable periods beginning on or after that date. A synthesised text prepared jointly by the two competent authorities is published by India's Income Tax Department.

The principal consequence is the principal purpose test ("PPT"), under which treaty benefits may be denied where it is reasonable to conclude that obtaining the benefit was one of the principal purposes of an arrangement, unless granting it would be in accordance with the object and purpose of the Treaty.

Recent Developments

Grandfathering confirmed as outside the PPT. By Circular No. 1 of 2025 dated 21 January 2025, India's Central Board of Direct Taxes clarified that the PPT applies prospectively, and that the treaty-specific grandfathering commitments in India's agreements with Cyprus, Mauritius and Singapore fall outside the purview of the PPT, being instead governed by the specific provisions of the respective treaty. This is a welcome confirmation for holders of pre-April 2017 investments, removing a material area of uncertainty and reducing the scope for dispute on exit.

Cyprus tax reform, effective 1 January 2026. The first comprehensive overhaul of the Cyprus tax system in more than two decades applies from tax years commencing 1 January 2026. Its principal elements include an increase in the corporate income tax rate from 12.5% to 15%, adjustments to personal income tax bands and the tax-free threshold, abolition of the deemed dividend distribution regime, a reduction in the Special Defence Contribution rate on dividends, and the retention of key incentives including the Notional Interest Deduction and the intellectual property regime. The headline rate remains competitive, and the abolition of deemed distribution and the reduced contribution on dividends materially simplify the position for many structures.

India's Income-tax Act, 2025. India has enacted a comprehensive reform of its direct tax framework through the Income-tax Act, 2025, which received Presidential assent on 21 August 2025 and came into force on 1 April 2026, replacing the Income-tax Act, 1961. The new Act substantially consolidates and simplifies the statute, approximately 536 sections in place of 819, and a single unified concept of "tax year" replacing the previous year / assessment year distinction, with consolidated withholding provisions and expanded presumptive taxation. The Treaty itself continues to apply unaffected, but statutory references in existing advice, agreements, tax indemnities and withholding procedures will need to be re-mapped to the new Act.

Structuring Through Cyprus

For Indian businesses expanding into Europe, and for European and international investors entering the Indian market, Cyprus offers a compelling combination of advantages alongside the Treaty: a competitive corporate income tax rate within the European Union; exemption for gains on the disposal of shares and securities; no withholding tax on outbound dividends and interest to non-residents (subject to the limited exceptions noted above); exemption for foreign dividend income subject to conditions; an EU-compliant intellectual property regime; full access to the EU directives; and a common law legal system familiar to the Indian business community.

Proper implementation remains essential, and the emphasis has shifted decisively from rates to substance:

• Beneficial ownership and the PPT. Relief on dividends, interest and royalties depends on beneficial ownership, and treaty benefits generally are subject to the PPT. Board composition and genuine decision-making in Cyprus, resources proportionate to the activity, and contemporaneous documentation of commercial rationale are the practical answer to both.
• Indian domestic anti-avoidance. India's general anti-avoidance rule applies independently of the Treaty; treaty entitlement is necessary but not sufficient.
• Procedural compliance. A Cyprus tax residency certificate and the prescribed Indian declarations are conditions of relief at source, and their timing should be built into distribution and payment calendars.
• Permanent establishment discipline. The six-month construction threshold and the 90-day service threshold are readily crossed by project teams and secondees. Day counts across connected projects should be tracked prospectively rather than reconstructed on assessment.
• Grandfathering files. For pre-April 2017 holdings, the evidential file should be closed out now, not at the point of exit.

Structures should be established and maintained with appropriate management and control in Cyprus, and reviewed periodically in light of evolving domestic and international rules.

How Anastasios Mylonas & Co LLC Can Assist

Anastasios Mylonas & Co LLC advises international and Indian clients on the establishment and administration of Cyprus companies, the structuring of cross-border investments under the Cyprus–India Treaty, tax residency and substance requirements, and all related corporate, real estate and transactional matters. We work alongside Indian counsel and tax advisers on inbound and outbound structuring, acquisitions and exits, and on the review of legacy structures against current anti-abuse standards.

For further information, or to discuss how the Treaty may benefit your business, please contact our offices.

This publication is provided for general information purposes only and does not constitute legal or tax advice. Specific professional advice should be sought before acting on any of the matters discussed herein.