Structuring investment in India – Does Mauritius Holdco work?

Air-Mauritius

Tax authorities worldwide distaste the word “treaty shopping” as such. In recent times, OECD has worked out guidelines for BEPS and most U.S. tax treaties have “Limitation of Benefit” clause that prevents abusive tax planning. However, there may still be some opportunities available to U.S. investors in India; one such avenue is investing via Mauritius Holdco structures.

A lot of foreign investors prefer to route their investment through Mauritius in India. Since the India- Mauritius double tax avoidance agreement offers exemption from capital gains tax to Mauritian residents. It has been the key incentive provided by the Indo-Mauritius tax treaty where by tax on capital gains is exempted for investors from Mauritius. As per the last finance bill almost 42% of the foreign direct investment into India is routed through Mauritius.

The Indian High Court recently upheld that The Tax residency Certificate issued by Mauritius authority would be sufficient in claiming the tax benefit.

In a recent verdict by Indian High Court against the advance ruling made to Serco BPO Private Limited, the court upheld: “Once it is accepted that the certificate has been issued by the Mauritian authorities, the validity thereof cannot be questioned by the Indian authorities.”

The Income Tax authority raised questions on the residency of Blackstone Mauritius and Barclays Mauritius and was of the opinion that selling of shares of SKR BPO was mere a tool of tax avoidance.

Few important takeaways from the court decision:

  • The tax resident certificate is sufficient evidence to establish the taxpayer as resident of Mauritius.
  • Capital gains routed through investment into India through Mauritius would remain not taxable.

Though 2013 Indian Budget bill raised the same issue that mere residency certificate though necessary but may not be sufficient to claim benefits of the India – Mauritius Income tax treaty. The Income tax authority might have wider discretion to determine whether a foreign investor had used treaty benefits for the only reason of tax avoidance.

Recent High Court verdict is welcome news for foreign inbound structures. Accordingly, once the Tax Residency Certificate is received from Mauritian authority, the treaty should not be questioned to.

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India changes tax law; makes MAT provisions inapplicable to foreign investors

Visitors ride in a carriage at the entrance of the Jewel of the Nizams

Welcome news for foreign investors in India!

Following is the Press release by Ministry of Finance:

“Through the amendment the Government proposes to clarify that MAT provisions will not be applicable to FIIs/FPIs not having a place of business/ permanent establishment in India, for the period prior to 01.04.2015. Pending such amendment, CBDT will convey to the field formations the decision of the Government to accept the recommendation.

The Report of the Committee is available on the website of the Finance Ministry and the Income-tax Department at www.finmin.nic.in and www.incometaxindia.gov.in

Foreign Earned Income Exclusion – Timing is Everything!

Not many U.S. expatriates realize that the foreign earned income exclusion is an election and is not automatic. In a recent tax court Nancy McDonald learnt this in a painful way when her exclusion was denied. Nancy McDonald V. Commissioner TC Memo 2015-169.

IRC Section 911(a) provides that a qualified individual may elect to exclude from gross income the foreign earned income of such individual. To qualify for the foreign earned income exclusion (FEIE), the taxpayer must satisfy a three-part test:

  1. Taxpayer must be a U.S. citizen who is a bona fide resident of a foreign country for an entire taxable year or physically present in a foreign country during at least 330 days out of a 12-month period, sec. 911(d)(1);
  2. Taxpayer must have earned income from personal services rendered in a foreign country, sec. 911(d)(2); and
  3. Taxpayer’s tax home for the period must be outside of the United States, sec.911(d)(3).

Although a taxpayer may satisfy these three requirements, the opening words of section 911(a)—“At the election of a qualified individual”—make clear that the taxpayer must also affirmatively elect to exclude the foreign earned income from his or her gross income.

Nancy McDonald, a U.S. citizen, left the United States in October 2009 to work overseas. Her Form 1040, “U.S. Individual Income Tax Return”, for that year was due on April 15, 2010. Ms. McDonald did not request an extension of time to file her 2009 return and did not timely file it. The IRS evidently received, from Ms. McDonald’s employer, information about her wages; and in January 2012 the IRS prepared and filed for Ms. McDonald a substitute for return for 2009, pursuant to section 6020(b).

On April 9, 2012, the IRS issued to Ms. McDonald a notice of deficiency (NOD) for 2009 based on the substitute for return. It was determined that there was a deficiency of $19,449 in tax and additions to tax under sections 6651(a)(1) and (2) and 6654.

On May 18, 2012, Ms. McDonald filed her Form 1040 for 2009. The Form 1040 reported income of $101,244, but Ms. McDonald attached thereto a Form 2555, “Foreign Earned Income”, and claimed thereon an FEIE and excluded $23,032 from her total income. With her return Ms. McDonald sent the IRS a payment of $3,018, the balance due reported on her return. The IRS processed Ms. McDonald’s return and payment and closed the first NOD in July 2012.

Subsequently, the IRS selected Ms. McDonald’s 2009 return for audit. As a result of the audit, on June 20, 2013, the IRS issued Ms. McDonald a second NOD, upon which this case is based. The second NOD disallowed Ms. McDonald’s claimed Foreign Earned Income Exclusion because she:

  1. did not make a valid election and file Form 2555 with a timely filed return;
  2. did not elect to exclude the foreign income on a previous return; and
  3. did not otherwise comply with the procedural rules to make a valid election to exclude the foreign income under section 1.911-7(a)(2).

In recent times when number taxpayers are coming forward to catch up and comply with the filing requirements due to FATCA impacts, this case serves as an important reminder as lack of knowledge can be a trap for the unwary. There are ways to avoid such scenarios. CPA Global Tax professionals can help.