From UPSC perspective, the following things are important :
Prelims level : Cyprus Confidential
Mains level : Tax avoidance vs. evasion
- The Cyprus Confidential investigation unveils a web of offshore entities controlled from India, shedding light on financial transactions orchestrated by individuals in India.
Cyprus Confidential and Its Scope
- Global Offshore Probe: Cyprus Confidential explores 3.6 million documents, unveiling companies established in Cyprus by global elites.
- International Collaboration: Over 270 journalists from 60 media outlets across 55 countries and territories participate in this investigation.
- Data Sources: The investigation draws on documents from six offshore service providers in Cyprus, revealing not only Indian investors but also entities formed by prominent business conglomerates to leverage Cyprus’ favorable tax environment.
The Indian Perspective:
Setting Up Offshore Entities in Cyprus
- Indian entities: The investigation aims to lift the secrecy surrounding offshore entities, exposing how they are controlled from India, with financial instructions originating from individuals within the country.
- Legality: Establishing offshore companies in Cyprus is not illegal. India has Double Taxation Avoidance Agreements (DTAAs) with various countries, including Cyprus, offering advantageous tax rates.
- Tax Residency Certificates: Companies utilize tax residency certificates in these countries to legally benefit from reduced tax rates. These jurisdictions are characterized by loose regulatory oversight and stringent secrecy laws.
India’s Tax Treaty with Cyprus
- Pre-2013: Before 2013, India and Cyprus had a tax treaty exempting investors from capital gains tax, attracting substantial investments. Cyprus also had a low withholding tax rate of 4.5%.
- 2013 Onward: India categorized Cyprus as a Notified Jurisdictional Area (NJA) in 2013, leading to higher withholding tax rates and transfer pricing regulations for transactions involving NJA entities.
- Revised DTAA in 2016: A revised DTAA was signed in 2016, rescinding Cyprus from NJA with retrospective effect from November 1, 2013. This treaty introduced source-based taxation of capital gains and a grandfathering clause.
Tax Benefits in Cyprus
- Tax Rates: Offshore companies and branches managed from Cyprus are taxed at 4.25%, while those managed from abroad and offshore partnerships enjoy complete tax exemption.
- Dividends and Capital Gains: No withholding tax on dividends, and no capital gains tax on the sale or transfer of shares in offshore entities.
- Estate Duty Exemption: No estate duty on the inheritance of shares in offshore companies.
- Import Duty Exemption: No import duty on the purchase of vehicles, office, or household equipment for foreign employees.
- Beneficial Owner Anonymity: Ensures anonymity of the beneficial owners of offshore entities.
India-Cyprus DTAA and Its Significance
- Tax Planning: The DTAA enables Cyprus, with its favorable tax regime, to be a jurisdiction for tax planning. Foreign investors often set up investment firms in Cyprus to invest in India and benefit from the DTAA.
- Alternative to Mauritius: Cyprus is now an alternative to Mauritius for establishing offshore entities for Indian investments, as dividends paid from India are subject to withholding tax but not to taxation in Cyprus.
Offshore Trusts in Cyprus
- Cyprus International Trust Law: Offshore trusts under this law are exempt from estate duty and income tax, provided the trustee is Cypriot. Confidentiality is guaranteed.
- Tax Avoidance: Offshore trusts allow businesspersons to avoid taxes they would have paid if income from overseas operations had been remitted to their country of residence.
- Limitations of Indian DTAA: A DTAA does not prevent the Indian Income Tax department from denying treaty benefits if a company is found to have been inserted as a shareowner in India solely to avoid tax. In such cases, the entire transaction may be questioned.
- The India-Cyprus offshore connection is a complex landscape with legal tax planning, secrecy, and regulatory challenges.
- The Cyprus Confidential investigation has brought these nuances to light, prompting scrutiny and raising questions about the intricacies of offshore financial activities.