Cyprus Taken By Surprise - Notified As Non-Cooperative Jurisdiction By India

Author:Mr Ashish Sodhani, Shreya Rao and Ruchir Sinha
Profession:Nishith Desai Associates
 
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CBDT notifies Cyprus as a non-cooperative jurisdiction for failure to provide information. Transfer pricing provisions under the ITA to apply to all transactions that are entered into with a person in Cyprus. Withholding tax rate of 40% on interest and redemption premium on debentures. No deductions for any payment made to a financial institution in Cyprus or for any expenditure arising from a transaction with a person located in Cyprus to be allowed unless the taxpayer furnishes the requisite information. Source of any sum received from a person in Cyprus shall need to be explained satisfactorily - failure of which shall lead to the sum being treated as income for the taxpayer. On November 1, 2013, the Central Board of Direct Taxes ("CBDT") issued a press release1 notifying Cyprus as a non-cooperative jurisdiction for failure to provide information. This information was requested for under the Exchange of Information ("EoI") provisions under the tax treaty between India and Cyprus ("Tax Treaty").

It is important to keep in mind that Cyprus and India have, over the years, developed commercial and economic relations covering a whole gamut of areas of cooperation including education, trade and tourism. As of August 2013, Cyprus was the 7th largest FDI investor into India with total inflows amounting to around 4%2 of total FDI flows. A key reason for this, apart from certain strategic advantages that Cyprus offers were the favorable provisions in the Tax Treaty which exempt capital gains income and provide a beneficial rate of tax on interest income earned by Cyprus entities f rom Indian investments. Cyprus entities have therefore been popularly used for making investments into Indian companies, particularly in debt heavy secto rs such as real estate and construction.

The recent debt crisis in Cyprus created some apprehension in relation to these investments. Cyprus was required to raise an additional EU 5.8 billion, a significant part of which is being raised by way of charge on bank deposits in Cyprus. Liquidation of the second biggest Cyprus bank has also led to decreasing levels of interest in investors to invest through Cyprus. Investors were apprehensive as to the impact of this charge as well as the viability of investments through Cyprus. This unexpected notification by Indian revenue authorities is likely to cause further concern, not just in respect of investors from Cyprus but also other jurisdictions.

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Transfer pricing...

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