Faltering banks and fickle funds

Cyprus is to Russia what Mauritius is to India. Thanks to a double taxation avoidance agreement (DTAA) between Cyprus and Russia, the Mediterranean island nation is the largest source of foreign investment into Russia and as a result, the banking crisis gripping Cyprus has even triggered calls for the Russian government to step in.

While Cyprus is less important for India – it accounts for only around 3% of foreign direct investment as opposed to nearly 40% that is routed through Mauritius – a 1994 DTAA between India and Cyprus has made it an attractive jurisdiction for routing investments into India’s fledgling domestic corporate debt market.

Benefiting from treaties

The reason for this is to be found in the structure of withholding taxes payable in India. Until the most recent budget, withholding tax on interest income paid out of India was 40% on debt instruments denominated in rupees and 20% and on debt instruments denominated in a foreign currency. This could be reduced to 10% under the India-Cyprus DTAA. In comparison, the India-Mauritius DTAA does not reduce the withholding tax on interest income, while the India-Singapore DTAA reduces it to 15%.