Cyprus may no Longer be a Tax Haven for Funds

After blacklisting Cyprus for not sharing information on tax evaders, India is now looking to take away the favourable tax treatment available to investors from the European tax haven under the bilateral tax treaty between the two countries.

New Delhi is looking to amend a clause in the 19-year-old tax treaty that offers benefits akin to India-Mauritius double taxation agreement - exemption from tax on capital gains and a lower rate of 10% tax on interest, royalties and fees for technical services.

Cyprus is seventh on the list of countries sending foreign direct investment (FDI) to India as it's a tax-efficient route.

"We are looking to amend the treaty... All options are on the table," said a finance ministry official, adding that the option of incorporating a provision known as the 'limitation of benefit' is also being discussed.The two sides have already held discussions and indications are that India will have its way. India received $296 million as FDI from Cyprus in the April-September period out of cumulative flows of $7.19 billion.

New Delhi made clear its displeasure with Cyprus for not providing information on tax evaders under the agreement between the two countries for avoidance of double taxation of income and prevention of tax evasion in force since 1994.

Alleged misuse of treaty

Stepping up the pressure, India had in November declared Cyprus as a non-cooperative jurisdiction and suspended tax benefits available under the treaty.

The non-cooperative jurisdiction tag meant that all payments made to Cyprus attracted a 30% withholding tax and Indian entities receiving money from there were required to disclose the source of funds and forego deductions of expenditure and allowances arising on account of a transaction with any entity from Cyprus.

Cyprus was the first tax jurisdiction to be dubbed non-cooperative under stringent penal provisions in the 2011-12 Budget to deal with countries that don't share information on tax evasion.

India subsequently softened and agreed to drop the tag after Cyprus included a detailed tax information exchange agreement in the bilateral tax treaty for active exchange of information.

Both sides had detailed discussions after India's stern action.

New Delhi is still keen to revisit the tax sops available under the treaty just as it is doing with Mauritius. Mauritius has already indicated its willingness to incorporate a 'limitation of benefit' clause in the treaty to ensure only genuine investors benefit from favourable tax treatment offered by the pact. "Limitation of benefit should be there in a treaty as proper checks and balances are required... In fact, such a provision can be very reassuring as it ensures that the treaty benefits would be available if you meet the conditions," said Sunil Jain, partner, J Sagar Associates. India had in 2007 attempted to amend the treaty to remove the capital gains tax exemption but negotiations fell through.

New Delhi's concerns stem from the alleged misuse of the treaty by investors from other countries that route their investments into the India to take advantage of the tax exemption.

Economic Times, New Delhi, 27-12-2013