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.