Michael Voudouri, who was convicted of a £10m money laundering scam, is understood to have been apprehended in Nicosia accused of using a forged passport.
He faced a hearing on Tuesday.
Voudouri, from Bridge of Allan, Stirling is expected to face a bill of more than £11m when the authorities in the UK finally catch up with him.
A spokesman for the Crown Office said: “We are aware that Michael Voudouri has been arrested and is currently in custody in the occupied part of Cyprus in connection with alleged immigration offence
“We await the outcome of those proceedings with interest.”
Voudouri admitted depositing proceeds of so called “carousel” VAT frauds into back accounts in Cyprus, Greece and Switzerland.
He then jumped bail and when he was due to be sentenced in November 2012 he failed to appear in court.
Voudouri, 46, who cheated the tax man out of millions by claiming VAT on bogus transactions, has been at large since then.
He is thought to have been living in the occupied part of Cyprus which makes extradition difficult.
In August, HMRC named Voudouri as being in its top 30 most wanted tax dodgers a year on from a previous appeal.
Voudouri was also not present for a hearing at Edinburgh High court in January. A confiscation hearing was set for July.
