Cyprus-registered funds that invest in Indian debt instruments are refraining from taking their redeemed investments back to the island nation. Fears over safety of their money, following the economic turmoil in Cyprus, which prompted the nation to impose haircuts on bank accounts, raise taxes and introduce capital controls, are forcing funds to stop remittances to that country. These funds are private equity entities and institutions.
“There is some uncertainty over the safety of the money sent to the country. People are adopting a wait -and-watch approach,” said Pranay Bhatia, partner, Economic Laws Practice.
Cyprus, in accordance with the conditions set by the International Monetary Fund and European Union for a Euro 10-billion bailout package, had agreed to impose a tax on bank deposits in the country. This means that some of the country’s depositors would have lost a portion of their money. The nation also increased the tax (special defence contribution) on interest on deposits paid to Cyprus tax residents from 15 per cent to 30 per cent.
So, while interest income coming into Cyprus from India would only be taxed at 10 per cent, once it is deposited in Cyprus, any additional interest generated on such a deposit from within Cyprus faces higher taxes.
Also, corporate tax in Cyprus had been raised from 10 per cent to 12.5 per cent. Capital controls or restrictions on money flows have also been imposed.
All these have prompted these foreign funds to keep their money in India for the moment. Suresh V Swamy, executive director, tax & regulatory services at PricewaterhouseCoopers, said: “Funds based out of Cyprus are cautious in remitting money to the country. Their preference is to park money in their rupee accounts to the extent they are able to reinvest in India, until some clarity emerges on the situation in Cyprus.”
This aversion to Cyprus is in stark contrast to the situation when foreign funds with a focus on debt investments would base their operations out of Cyprus to take advantage of a treaty with India, which entitles them to a lower rate of tax on interest income.
The lower withholding tax on such income at 10 per cent compared to 15 per cent in Singapore and 40 per cent in Mauritius was a reason for the nation’s popularity.
Now, as Cyrpus’ popularity among foreign investors wanes, some entities are looking to route their redeemed money through other tax-friendly nations for foreign funds.
Lalit Kumar, partner at J Sagar Associates, recently had a client seek that his fund not be structured from Cyprus. “Investors are shying away from setting up in Cyprus. They would rather look at other jurisdictions although Cyprus has lower tax on interest than either Singapore or Mauritius,” he said.
Lower withholding tax on interest income makes this an attractive jurisdiction for debt-oriented funds
What has changed?
Financial crises in the country means that bank accounts take a hair cut. Country has also raised various domestic taxes
What's happening now?
Investors are not sending money back to their base in Cyprus. New investors are shying away from setting up establishment in the country