The death of Cyprus as a tax haven for investors in India comes with many lessons, says Dharmesh Trivedi, Chief Financial Officer, Urban Infrastructure Venture Capital.
The Republic of Cyprus is a island in the Mediterranean Sea with water surrounding it. The international community considers the northern part of the island as territory of the Republic of Cyprus occupied by Turkish forces. Cyprus is a major tourist destination in the Mediterranean region. It is a very high income economy and has a very high Human Development Index. The Republic of Cyprus is a member of the Commonwealth since 1961 and was a founding member of the non-aligned movement. It joined the European Union on May 1, 2004 and formally joined the Eurozone from January 1, 2008. Cyprus is also a major tourist attraction and sees millions of tourist visiting to see the white sand beaches.
Cyprus is an offshore jurisdiction which specialises in providing offshore services like incorporation of the offshore companies, offshore insurance and the formation of a Cyprus trust.
A well-developed country, Cyprus is considered as a tax haven since it has a low tax regime for offshore as well as resident companies.
Facts & Trivia
Chartered Accountancy & Bachelor’s in Law
The main advantage of Cyprus in so far as the tax benefits for international business company as well as the international trust is concerned is given in the table below.
Other advantages of being in Cyprus can be enumerated as follows:
• The name of the trust owners are not disclosed to the Registrar
• No financial reporting by the trust to any authority in Cyprus required
• Privacy of the offshore bank accounts holders maintained
• Beneficial owners of the offshore companies need not be disclosed with the Registrar of Companies
• Incorporation of companies permitted using nominee shareholders and directors (the names will not be disclosed except when there is criminal investigation)
• Cyprus has signed double tax avoidance agreement with many foreign countries
ADVANTAGE CYPRUS: Island preferred due to its low tax regime
|International Business Company||Only if all the owners of the company are foreigners to the country|
|Rate of Tax||Companies pay 10% tax on their annual Profits (Of late this has increased to 12.5%)|
Withholding Tax & Capital Gains Tax
Interest earned by offshore banks
|No taxes applicable|
|No tax on income earned outside the territory|
Trust interest and dividends
|No exchange control for companies and trusts|
Due to advantageous witholding tax on debt instruments relative to other tax havens such as Mauritius (10 per cent relative to 40 per cent), it has often been the preferred route for debt transactions even for companies incorporated in other jurisdictions.yprus is the seventh on the list of the countries sending the foreign direct investment (FDI) money through the tax efficient route to India with a cumulative investment of $7.6 billion of the total $224.9 billion that came into India between April 2000 and June 2014.
Suspension of Tax Treaty
In recent years, the Government of India made its displeasure known to Cyprus for its unwilligness to share information on the possible tax evaders under the agreement entered between the two in 1994 for avoidance of double taxation.
In November 2013, it declared Cyprus as a non-cooperative jurisdiction and accordingly suspended the tax benefits available under the treaty. Thus Cyprus became the first nation to be declared a notified jurisdiction under 94A of Income Tax Act because of its failure to share information on tax avoiders.
The Government had also introduced stringent penal provisions in 2011-12 Budget to deal with such countries that don’t share information on tax evasion.The suspension of the treaty meant that all payments made to Cyprus would now attract a 30 per cent withholding tax and Indian entities receiving money from Cyprus were required to disclose the source of funds. They were also required to forego deduction of expenditure and allowances with respect to any transaction with a Cyprus-based entity.
The government of India is still keen on revisiting the sops available under the treaty to ensure that only genuine investors benefit from the favourable tax treatments and amending the bilateral agreement to include the limitation of the benefit (LOB) clause. Further also it wants the LOB to be a part of the Double Taxation Avoidance Agreement (DTAA). The matter is, hence, unlikely to be resolved soon.
The other problem faced by Cyprus is that its major banks have sustained severe damage from the Greek bond default in March 2013 and have closed their doors to avoid flight of capital.
With a large inflow into India coming via Cyprus, this case is a good proxy to understand the tax-related global and domestic developments.
The notification has made it difficult for Indian tax payers to claim deduction on transaction with the entities in Cyprus. It has also increased the tax outgo for the tax payers and are also subjected to enhanced reporting requirements.
To simply put it if a transaction is entered into with entity in Cyprus then
• Cyprus entity would be associated enterprise
• Attract the international transfer pricing regulations
• No deduction would be allowed in respect of the expenditure or allowance to the Indian entity
• Any payment to Cyprus entity would attract withholding tax of 30 per cent
• Any receipts from Cyprus entity would have to be explained.
Moreover, with majority of the debt inflows being funneled via Cyprus, there could be a cascading effect on the other offshore destinations as well. For instance, even Mauritius-incorporated companies channel their debt portion via Cyprus.
Hence, one must figure out which sectors will be affected more due to this situation. Major consequences will be:
• No fresh inflows will come by way of equity or convertible debentures would be received by India
• Money already received will not flow back as it has a huge tax implication of 30 per cent tax by the Indian entity
• The investors may opt for the conversion of the same into equity shares which may have a huge risk as equity capital is risky capital
• Most important is that equity money as well as convertible instruments both are unsecured and hence get the least priority in case of winding up of the company
‘India needs to take a decision on Cyprus quickly, given the amount of investments routed from the nation.’
Due to this continuing uncertainty regarding Cyprus, investors may adopt a wait and watch policy before bringing in foreign direct investment into India. Due to the huge impact on investments, it is critical that India takes a quick decision on the Cyprus route. Once the DTAA is amended, the classification of Cyprus as a notified jurisdiction area under section 94A would be rescinded with retrospective effect from Nov 1, 2013. For now, it seems Singapore is the safest route to invest in India for future investments. For existing commitments, it is simply a policy of wait and watch.