Mauritius gets debt advantage over Cyprus

Text of revised tax treaty with Cyprus shows New Delhi gave it relatively less concession on interest levy

The island nation of Mauritius will emerge a preferred nation for debt investments into India, particularly those by private equity firms, as compared to Cyprus from 2017-18. 

This is due to lower tax rates. The withholding tax rate will be 10 per cent on interest payments made to entities based in Cyprus on debt instruments under the revised double taxation avoidance agreement. While, the government has reduced the tax to 7.5 per cent in the case of Mauritius under the revised treaty with that nation. It was earlier expected that the tax rate with Cyprus would also be reduced to 7.5 per cent.

This is likely to make Mauritius more attractive than Cyprus for debt funds, unlike the present situation. The text of the revised India-Cyprus tax treaty has been issued by the latter. Now, investors will look for the tax provisions in the new treaty with Singapore, being negotiated.

Many PE funds with investment in Indian real estate and infrastructure might now look to invest via Mauritius to avail of the 2.5 per cent tax benefit on interest income, said Rajesh Gandhi, partner, Deloitte, Hqskins & Sells.
 

Amit Maheshwari, managing partner with Ashok Maheshwary & Associates, said the lower tax rate with Mauritius makes the country a more favourable one for debt investments. 

After the revised treaty, the government removed Cyprus from the list of 'notified jurisdictional area', a 'blacklist', providing big relief to investors and Indian companies that had raised capital from Cyprus investors. The government has also expanded the scope of permanent establishments for investments from Cyrpus to include sales outlets, storage houses or centres for delivering goods in the definition.

Cyprus, seventh largest foreign direct investment (FDI) source into India, was earlier unwilling to amend its tax treaty, citing India's deal with Mauritius. Cyprus was, however, keen on being taken off the blacklist before the General Anti Avoidance Rule for taxes began from April 2017. Although Delhi has provided grandfathering (new rule to apply to new cases) on investments from Cyprus, no transitional benefits for two years have been extended as in the case of Mauritius. 

India has provided grandfathering of investments from Cyprus prior to April 1, 2017, as with Mauritius, but the full short-term capital gains tax of 15 per cent (at present) will be applicable on investments from Cyprus in Indian companies after that.

In contrast, investment from Mauritius will be taxed at half the prevailing capital gains tax rate, 7.5 per cent, till March 31, 2019, termed transitional benefit. From April 2019, the full capital gains tax will apply.

Also, New Delhi now has the right to tax capital gains on investment in shares. 

Prior to being blacklisted, Cyprus, like Mauritius, was one of the key destinations through which companies based in Europe and the US routed investments into India, deriving double tax avoidance as the tax treaty provided for zero capital gains tax and a low withholding tax rate of 10 per cent on interest payments made to entities based in Cyprus.

From April 2000 till March 2016, India received FDI worth Rs 42,681 crore from Cyprus.