Cyprus Confidentiality

CYPRUS CONFIDENTIALITY

 Why in The News?

The Cyprus Confidential investigation carried out with the help of the International Consortium of Investigative Journalists (ICIJ), uncovers that Indian individuals are in control of offshore entities, managing financial transactions from within India.

This discovery is gaining attention for its significance in terms of financial transparency and regulatory issues.

Investigation Highlights:

1. Indian Nexus: The investigation sheds light on Indian investors obtaining Cypriot citizenship through the Golden Passport scheme. Documents reveal the establishment of entities by major business houses capitalizing on Cyprus’ favorable tax regime.
2. Global Collaboration: More than 60 media houses participated in the investigation, emphasizing the global nature of offshore financial dealings. The revelations transcend borders, implicating entities and individuals from diverse countries.

India’s Perspective:

1. Control from India: The documents expose how entities with offshore residency were controlled from India, challenging the notion of true offshore independence. Financial instructions for transactions within these entities originate from individuals based in India.
2. Legal Framework: Establishing offshore entities in Cyprus is legal, facilitated by Double Taxation Avoidance Agreements (DTAAs) with several countries, including India. Such jurisdictions’ confidentiality and lax regulatory oversight attract businesses seeking legal tax benefits.

Evolution of India-Cyprus Tax Arrangements:

1. Pre-2013: A tax treaty exempted investors from capital gains tax, making Cyprus an attractive destination. The low withholding tax further fuelled its popularity among businesses for investments in India.
2. Post-2013: Cyprus was categorized as a Notified Jurisdictional Area (NJA), leading to higher withholding tax rates and stringent regulations. A revised DTAA in 2016 shifted to source-based capital gains taxation, aligning with changes in India-Mauritius tax treaties.

Tax Benefits in Cyprus:

1. Low Tax Rates: Offshore companies in Cyprus are taxed at 4.25%, while offshore branches and partnerships enjoy complete tax exemption.
2. No Withholding Tax: Dividends from offshore entities face no withholding tax, enhancing the appeal of Cyprus for foreign investors.
3. Anonymity Assurance: Cyprus guarantees anonymity for beneficial owners of offshore entities, providing a level of confidentiality.

Offshore Trusts in Cyprus:

1. Legal Framework: Cyprus International Trust Law permits offshore trusts, offering tax exemptions if property, income, settlor, and beneficiaries are outside Cyprus.
2. Confidentiality Clause: The law ensures that offshore trusts need not be registered, promoting confidentiality in financial dealings.

 India’s Right to Scrutinize:

While India has DTAAs with countries like Cyprus, it reserves the right to question entities if it suspects tax avoidance. DTAAs do not impede the Indian Tax Department from denying treaty benefits for entities inserted solely to evade taxes.

Cyprus Confidential exposes a complex network of offshore financial maneuvers with implications for multiple nations, emphasizing the need for stringent global cooperation to curb tax evasion and maintain financial transparency.

Practice Mains Question:

1. Examine the impact of the Cyprus Confidential investigation in unveiling the control of offshore entities by Indians. Discuss its relevance to financial transparency and the global regulatory landscape in a brief yet comprehensive manner.