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Investments via Cyprus to attract capital gains tax


Cyprus Tax Treaty Gets Cabinet Approval
The Union cabinet on Wednesday approved the revised double taxation avoidance agreement (DTAA) with Cyprus which will help close gaps and enable Indian authorities to tax capital gains in the country for investments originating in the Mediterranean island nation.
The move follows the recent amendment of DTAA with Mauritius. As in case of Mauritius, the treaty with Cyprus had provided for residence-based taxation of capital gains.

“With the revision of the treaty now approved by the cabinet, capital gains will be taxed in India for entities resident in Cyprus, subject to double tax relief. In other words, India will have the right to tax capital gains arising in India,“ according to a government statement.

Since assuming power in May 2014, the NDA government has taken several steps to clamp down on tax evasion, round tripping of funds and had reworked the treaty with Mauritius, which had been pending for nearly two decades. The statement said the provisions in the earlier treaty for residence-based taxation were leading to distortion of financial and real investment flows by artificial diversion of various investments from their actual countries of origin, for avoiding tax. “As in the case of Mauritius, this amendment will deter such activities. Negotiations with Singapore are also under way for similar changes,“ the statement said. Talks are on to revise the India-Singapore tax treaty. India had put Cyprus on a blacklist for failing to share information on tax evasion. With the revision of the treaty , India is expected to remove Cyprus from that list, which will provide relief to investors from that country who had seen increase in compliance costs, tax consultants said.“This is the best possible solution for those who have made investments through Cyprus as well as balancing the need to have similar DTAA provisions with other countries,“ said S P Singh, senior director at consultancy firm Deloitte Haskins and Sells.

Tax authorities now need to revise a similar treaty with Netherlands to ensure that all gaps are closed and companies pay tax at least in one jurisdiction. However, inthe case of the Netherlands, if an asset is sold to a foreign buyer, the tax treaty allows for capital gains tax exemption.

Global consequences of Brexit

1. Brexit would be the strongest repudiation of the post World War II consensus favouring global integration. The consensus is already fraying against the backdrop of increasing protectionism and anti-immigrant sentiment worldwide. Brexit will only add to this sentiment.

2. It could undermine global growth prospects. The EU is the largest trading partner for many countries such as India and China. Any unravelling of the EU market means uncertainty as it is an export destination and this is likely to have an impact on exports from all major parts of the world. For example, at present exports to the UK account for 0.7 % of Asian countries’ GDP. Some studies estimated that a Brexit would reduce British imports by 25% worldwide within two years.

3. If Britain votes to leave, investors will rush to safety and precipitate unpredictable moves in global markets as capital moves from risky assets (possibly emerging markets) to safer havens.

4. Much of the EU’s money comes from its member states. And the UK is one of the larger contributors. A British exit from the EU would rock the Union by ripping away its second-largest economy with one of its top two military powers and by far its richest financial centre. This could also give rise to more nations contemplating exit from the EU. Greece, for example, held a referendum last year when its citizens overwhelmingly rejected EU’s bailout norms. Many Britons working within the vast EU bureaucracy would have to look for alternate employment.

Consequences for India

1. India sees the UK as a “springboard” or “gateway” into Europe. Many Indian companies are listed on the London Stock Exchange and many have European headquarters in London. (According to Indian government numbers, there are 800 Indian companies in Britain). Brexit will take away this advantage.

2. India has been negotiating a free-trade agreement with the EU since 2007 and a “yes” vote for Brexit will have a direct bearing on this. If Britain stays put, then India need not rework its strategy. If Britain leaves, then this will mean that India will need to negotiate a separate pact with the UK.

3. Brexit can affect India’s flagship IT sector given that the UK accounts for 17% or one-sixth of the sector’s global exports that topped $100 billion (approximately Rs.6.70 lakh crore). For one, Brexit will increase overhead costs, setting up new headquarters, perhaps in both Europe and Britain.

4. There are some who see an advantage for skilled migration from India to Britain, thanks to Brexit. But given that one of the arguments in favour of Brexit is the large numbers of European migrants coming into Britain, this perception of advantage could be somewhat misplaced