Decision to blacklist Cyprus for not providing tax data will hit developers and realty funds
India’s recent decision to blacklist Cyprus for not providing tax data will hit developers and realty funds. Investors who have routed their funds through Cyprus are likely to face a big decline in returns as developers will now be expected to withhold higher tax amounts. So far, these investments were structured around 10% withholding tax, which is likely to jump to 30%.
Cyprus, which ranks seventh on the list of FDI destinations for India, has so far been used extensively for raising debt and quasi-debt. But given the possibility of higher tax incidence and lack of clarity on policy, PE firms are now routing their offshore funds through destinations such as Singapore, giving Cyprus the short shrift.
“The move could significantly impact current structures that have made investments through Cyprus. With the arm’s length pricing requirements between unrelated entities, withholding rate being increased and the possibility of expense disallowance, there could potentially be serious cash flow issues,” said Ruchir Sinha, Head, Private Debt and Private Equity at legal firm Nishith Desai Associates.
Given the possible impact of this decision on private equity funds’ returns, they are considering other destinations. Around 85% of the private equity funds inflow into Indian real estate came through Cyprus and Mauritius together as these destinations are considered as tax havens. But the scenario is going to change now.
“People have started looking at Singapore as a possible route due to a new guideline that says we need to have substance. Singapore can attract talent and has defined substance. It is an attractive destination as attracting manpower will not be difficult. Mauritius as a country will be difficult to attract substance,” said Vishakha Mulye, Managing Director and CEO of ICICI Venture Funds.
“Singapore is emerging as the next destination due to brand Singapore that is associated with credibility and transparency and therefore has larger acceptance from the investor community. Netherlands is another emerging destination that is replacing Cyprus,” Navin Kumar said.