Foreign fund flows may get all-clear to take Cyprus route

Foreign funds and private equity investors, putting money in debt as well as equity in India, were taken aback when India last month notified Cyprus as a “notified jurisdictional area” under the Indian income-tax law. This meant higher walls of compliance that made Cyprus come across as a less attractive tax haven. It’s unclear what provoked India’s stand on Cyprus. Industry circles perceive that this was a fallout of the offshore jurisdiction’s response to certain enquiries by the Indian tax department. But within a few weeks of the notification by India, the Cyprus Government initiated discussions with Indian authorities in India to sort out the matter. A Cyprus finance ministry press release hinted that the two countries could be close to finding a solution.

According to the treaty, investors from Cyprus are spared of short-term capital gains tax – a benefit that puts Cyprus at par with Mauritius – and are charged a lower withholding tax on interest earned on debt investments. Consultations were held between officials of the two governments .

According to communique to clients by PwC, “Both delegations agreed that the circumstances that had caused India to notify Cyprus as a”notified jurisdictional area” under section 94A of the Act on 1 November 2013, can be immediately addressed by: (a) agreeing to adopt the provisions of the new Article 26 of the OECD Model Tax Convention (approved by the OECD Council on 17 July 2012) relating to Exchange of Information in a new tax treaty between the two countries; (b) improving the channels of communication and exerting every effort in facilitating each other in processing requests and responses in a swift and effective manner.”

The Cyprus government release also states that once the notification of Cyprus being notified as a “notified jurisdictional area” under section 94A of the Act is rescinded, it would be done with retrospective effect from 1 November 2013 which was the date of issue of the original notification. Further, the press release also indicates that the revised tax treaty (post renegotiation) between the two countries is expected to be finalised soon.

The future of Cyprus as a tax haven had come under question earlier this year after it ran into a financial crisis with several banks looking for a lifeline.

A combination of low withholding tax and zero tax on capital gains has over the years made Cyprus more attractive as compared to tax heavens like the Netherlands and Luxembourg, to overseas investors and foreign funds buying Indian fixed income assets.