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Protocol to Tax Treaty between India and Singapore Signed

On 30 December 2016, officials from India and Singapore concluded negotiations with the signing of a new protocol to the 1994 income tax treaty between the two countries. The protocol is the third to amend the treaty. The main revision to the treaty is the removal of the capital gains tax exemption, which was contingent upon the exemption under the 1982 India-Mauritius tax treaty remaining in effect. The India-Mauritius treaty was amended via a protocol signed in May 2016, which included the removal of the exemption (previous coverage).

With the new protocol, the taxation of capital gains will be transitioned as follows:

  • Shares acquired before 1 April 2017: Gains will remain taxable only in the residence state of the alienator, subject to the condition that the expenditure on operations of the alienator in its residence State is at least SGD 200,000 if Singapore resident or INR 5 million if Indian resident for each of the 12-month periods in the immediately preceding 24 months from the date on which the gains arise (these are conditions for the alienator to not be deemed a shell/conduit company);
  • Shares acquired on or after 1 April 2017:
    • For gains that arise during the period 1 April 2017 to 31 March 2019, the tax rate imposed on such gains will be limited to 50% of the tax rate applicable on such gains in the State in which the company whose shares are alienated is resident, subject to meeting the above annual expenditure condition for the immediately preceding 12 months from the date on which the gains arise;
    • For gains that arise after 31 March 2019, the gains will be taxable in the State in which the company whose shares are alienated is resident.

The protocol also includes that the benefits of the transition (exemption / 50% taxation) will not apply if the alienator's affairs were arranged with the primary purpose to take advantage of the benefits.

In addition to the capital gains revisions, the new Protocol also:

  • Amends Article 9 (Associated Enterprises) to provide for both countries to enter into bilateral discussions for the elimination of double taxation arising from transfer pricing or pricing of related party transactions; and
  • Adds Article 28A (Miscellaneous), which includes the provision that the treaty will not prevent a Contracting State from applying its domestic law and measures concerning the prevention of tax avoidance or tax evasion.

The protocol will enter into force after the ratification instruments are exchanged. However, if it is not in force by 31 March 2017, it will automatically enter into force on 1 April 2017.

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