Mauritius authorities tighten rules on Indian treaty relief

Monday, 14 October 2013
Mauritius-resident companies wishing to claim relief from Indian taxation will soon have to demonstrate a significant economic presence on the island.

India's federal tax authorities have long complained that the India-Mauritius double taxation treaty is abused by investors. They claim that brass-plate companies are set up in Mauritius by Indian resident investors, purely to channel funds into Indian companies without having to pay Indian capital gains tax (CGT) on their investments (Mauritius companies are exempt from CGT). Large multinational firms also use the technique, and the upshot is that nearly 40 per cent of foreign direct investment into India comes via Mauritius.

Now the Mauritius Financial Services Commission (FSC) has issued new draft guidance intended to restrict so-called round-tripping.

There are already 'economic substance' rules in place aimed at ensuring that only companies that are properly controlled and managed in Mauritius are issued a Tax Residency Certificate (TRC) – which is now a legal requirement for a company to claim treaty relief. As from January 2015, though, the conditions for obtaining a TRC will become more stringent.

Applicant companies must have office premises in Mauritius and hold assets of at least USD100,000 in the jurisdiction – probably including land and financial securities. They must also employ at least one full-time resident at an administrative or technical level.

Their annual expenditure in Mauritius must also be at a level that is 'reasonably expected' of any similar company controlled and managed from Mauritius, where reasonableness is judged subjectively by the FSC.

Other new conditions relate to the qualifications and level of experience of the company's directors. Companies making application for renewal of their TRC after 1 January 2015 will need to ensure that the extra conditions are satisfied.

Some of these conditions are similar to those in the India-Singapore Tax Treaty, according to New Delhi tax firm BMR Advisors. According to BMR chairman Mukesh Butani, they suggest that Mauritius is preparing for India's general anti-avoidance rule that will be implemented from April 2015. The GAAR will expose foreign institutional investors to extra scrutiny and possible sanctions from the Indian tax authorities, and many are said to be considering relocating from Mauritius to other jurisdictions.

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