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India's move to blacklist Cyprus for withholding information

India's move to blacklist Cyprus for withholding information

On 1 November 2013 India blacklisted Cyprus for not disclosing crucial information on money transferred by Indian citizens conducting business in Cyprus and who are suspected for tax evasion. Taxand Cyprus and Taxand India investigate the potential implications this could have on investments between the two countries. 

The Indian Tax authorities have decided to categorise Cyprus as a notified jurisdictional area (NJA) under Section 94A of the Indian Income Tax Act 1961. While the Double Taxation Avoidance Agreement (DTAA) between India and Cyprus, executed in 1994, provides that both countries would exchange information as is necessary for carrying out the provisions of the DTAA, or those of the domestic laws of each country for the prevention of fraud or evasion of taxes, the genesis of this notification seems to be non-cooperation from authorities in Cyprus on requests from India.   

Following this new step, every payment currently made to anyone in Cyprus will suffer a higher withholding tax rate of 30% instead of the marginal rate of 15%.

Further, for sums received in India from a person located in Cyprus the burden falls on the assessee to adequately explain the source of the money in the possession of such person or in the possession of the beneficial owner, and in the case of failure to do so, the amount shall be regarded as the revenue of the assessee.

In addition, Indian taxpayers will be denied deductions in respect of expenditure and allowances arising from transactions carried on with any entity from Cyprus unless the assessee maintains and furnishes an authorisation allowing for seeking prescribed information from the said financial institution.

Faced with this, there is no doubt that investments from Cyprus will gradually shrink unless Cyprus tax authorities start complying with the requirements set out in the Double Tax Treaty with India in regards to exchange of information. There is no doubt that this update is a big setback for the Cypriot economy and external policy.

It is important to note however recent information reveals that Cyprus-based foreign investments in Indian equities only amounts to a slight portion of the entire Foreign Institutional Investment inflows.

Discover more: CBDT notifies Cyprus for lack of effective exchange of information

Your Taxand contacts for further queries are:
Chris Damianou
T. +357 22 699 222

Eylem Philippou

Mukesh Butani
T. +91 124 339 5010 

Also published in Thomson Reuters' Taxnet Pro, 15 November 2013

Taxand's Take

The Indian Revenue has been aggressively looking to scrutinise some of the well established tax positions and arrangements. A slew of anti-avoidance measures have been brought into the Act, and with this purpose. Secion 94A is one such attempt, to almost unilaterally impact investments into or transactions with a NJA, such as Cyprus now. The section by itself does not authorise a denotification of a country, but it would be interesting to keep a watch on the political ramifications and consequent developments on the DTAA front.  

In this case, the Cyprus Government does not remain inactive and imposes vigorous attempts to clarify and resolve the situation and is doing so by arranging direct consultations with the relevant authorities of India. The main objective is to finalise the longstanding revision of the said treaty between the two countries, which will eventually lead to Cyprus’ removal from India’s blacklist.

Taxand's Take Author

Chris Damianou