Tuesday, 19 July 2011 08:15

Investments in / from India via Cyprus - July 2011

India is becoming an economic superpower with a huge potential. According to the United Nations Conference on Trade and Development (UNCTAD) India ranks second worldwide in foreign direct investment (FDI - Foreign Direct Investments) in 2010 and is expected to continue to remain among the top five attractive destinations for international investors in the coming years. Similarly there is a surge by major Indian Investors for outward investments (e.g. TATA group and the acquisition of Jaguar and Land Rover).

With such a volume of investment flows, international tax planning is becoming more than essential. Traditionally and due to ethnic and cultural ties with Mauritius was the preferred jurisdiction for channeling investments in and out of India and according to latest statistics, 42% of FDI into India is routed from Mauritius. A closer examination of India’s Double Taxation Agreements (‘DTA’) reveals that only in the DTAs with Cyprus and Mauritius there is provision for taxation on capital gains in the country where the investor is (and not in India). This is a huge advantage for the two islands since the savings for investors who choose to direct their investments in India through Cyprus and Mauritius can be maximized (disposal of securities such as shares are exempted form tax in Cyprus and Mauritius, thus could result in 0% tax).

It is also interesting to note the maximum rates of taxation for income from such investments provided in the DTA of two countries with India, which presented below. We also include a comparison with Singapore’s DTA, which ranks second in FDI in India with rate 10%.

                      Mauritius                        Cyprus                               Singapore               
Dividend 10%/15% 10%/15% 10%/15%
Interest 15% 10% 10%/15%
Rights 15% 15% 10%/15%
Capital Gains    Exempted Exempted Exempted Conditions

 

As can be easily understood by reviewing the table above, the DTA with Cyprus provides for the lowest maximum rate of tax that India may withhold on interest paid to investors of abroad (external investment through bonds -bonds / debentures), while there is no difference between the withholding tax rates for other investment instruments in the DTAs of Cyprus and Mauritius.Taking into account that Cyprus offers a 'European passport' to investors, the legitimacy of an onshore EU member state, but also the continuous targeting by Indian tax authorities on the structures using the Mauritius for tax evasion,one can understand why Cyprus gradually climbs up in the list of preference of international businesses for investments to / from India (in 2010 Cyprus ranked seventh in FDI to India with 4%). This trend is expected to continue for the next few years and international investment analysts estimate that FDI in India from Cyprus will exceed 25% of total FDI to the country until 2015.

For questions, comments and selection of topics that might interest you please contact the author of the column:

Charilaos Hadjiioannou, BSc, ACA