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

U.S. Law firms consulting in India – trap for the unwary

International legal and independent professionals consulting in India often have issues receiving funds from their clients in India. India has stringent exchange control regulations contained in the Act called Foreign Exchange Management Act – FEMA. Accordingly all foreign remittances must go through certain procedures. Additionally, Income Tax Department asks for “Tax Residency Certificate” (TRC) from the US service provider so that the treaty benefits can be allowed. If TRC is not produced, the payer must withhold tax from the income remitted to US service provider. This is true regardless of where the services were provided.

Until recently, it was mandatory that TRC issued by foreign tax authority must contain all items required by the government of India in order to exempt any tax withholding requirements. As many of us are aware, Internal Revenue Service issues the US tax residency certificate in Form 6166 which cannot contain additional information as required by government of India. Due to this, in many cases, the Indian income tax department rejected the TRC issued by IRS and that resulted in withholding tax in India.

However, after a few representations, the government of India and the tax department agreed to accept the US residency certificate in its present Form 6166.

Accordingly the following documents are required to successfully receive payments form Indian companies without any withholding:

  1. Form 10F
  2. Permanent Account Number  (PAN or tax ID number)for India
  3. US Form 6166 for the relevant tax year
  4. Signed letter on US law firm’s letterhead stating that the law firm does not have a permanent establishment (PE) in India under the US – India tax treaty article.

Since the tax year in India runs from April 1 to March 31st, it is possible that some clients in India may request that the firm provide TRC issued by IRS in 2015 for payments processed in January through March 2015. Therefore US law firms may want to begin the process of collecting relevant data and partner signatures in advance, so as to file Form 8802 in a timely manner. This will expedite the process to receive TRC from IRS soon. Note that currently IRS charges a $85 user fee and processes the TRC within 45 days.

Please contact us to receive our assistance on both sides of the border.

“One Person Company” concept introduced in India

Recently Companies Act 2013 was enacted in India. One of the concepts that was introduced for the first time is OPC or One Person Company concept. Practitioners of the erstwhile Companies Act of 1956 never could imagine that a Company can be formed just by one person! However, siding with the developed countries’ corporate laws, this certainly is a welcome change. It is remaining to be seen as to how the concept will be received by the business as well professional community in India.

The Companies (Incorporation) Rules, 2014 provides as following:

  • A natural person who is an Indian citizen and resident in India shall be eligible to incorporate an OPC and to become a nominee for the sole member of the OPC.
  • Corporations, foreigners or a non resident individual cannot incorporate an OPC;
  • A person cannot incorporate more than one OPC or become a nominee in more than one OPC. However, such a person can be a member of one OPC and nominee of another OPC;
  • Where a member of an OPC becomes a member of another OPC by virtue of his nomination in that second OPC, he shall opt out of either one of the OPC within a period of 180 days;
  • A minor cannot become a member or nominee of an OPC or hold shares with beneficial interest; An OPC cannot carry out NBFC activities including investment in securities of anybody corporate.
  • Every OPC will mention “One Person Company“ in brackets below the name of such company wherever it is printed, affixed or engraved. Hence, the name should be mentioned as “ABC  (One Person Company)“  and not any other way.

It is perceived that the new development will not be attractive from the Indian income tax point. Indian tax law imposes a secondary tax on dividend (called distribution tax) on the Companies. If OPC has to pay the dividend tax, it looses its attractiveness as compared to a sole proprietorship.

It will be interesting to watch the evolution of the concept and see if the law will accommodate foreign investors and allow them to use OPC in future.

“Investment in US property” inclusion is not qualified dividend – Tax Court affirms

In Osvaldo Rodriguez et ux V. Commissioner, the fifth circuit recently upheld the decision in a transaction involving inclusion of IRC 956 income with respect to the taxpayers’ Controlled Foreign Corporation (CFC) in Mexico.

Osvaldo and Ana Rodriguez, husband and wife, were citizens of Mexico and permanent residents of the U.S. They were the sole shareholders of Editora Paso del Norte, S.A. de C.V. (Editora). Editora had been incorporated in 1976 under Mexican  law, and in 2001 it had established operations in the U.S. as a branch under the name Editora Paso del Norte, S.A. de C.V., Inc.—a controlled foreign corporation (CFC).  On their amended 2003 and original 2004 U.S. federal income tax returns, the taxpayers included in gross income $1,585,527 and $1,478,202, respectively, for amounts of Editora’s earnings invested in U.S. property and taxable directly under IRC 951(a)(1)(B) and IRC 956. 

Taxpayers treated the IRC 951 inclusions as qualified dividend income subject to preferential qualified dividend rates. IRS determined that the Code Sec.  951 inclusions were taxable at ordinary income rates.

The fifth circuit upheld the decision and ruled that the amounts included in the Rodriguez’s gross income under IRC 951(a)(1)(B) and IRC 956 with respect to their CFC’s investments in U.S. property were not qualified dividend  income under IRC 1(h)(11). 

India budget proposals and foreign investors

Indian Finance Minister presented the annual budget yesterday that contains host of income tax provisions that need attention for an efficient tax planning by a foreign investor. Some of the key provisions are:

  • Royalty and technical fee paid to a foreign person is now subject to 25% withholding tax rate instead of 10%. Lower rate maybe available for the investors from treaty countries.
  • Introduction of FIRPTA kind of withholding tax – all buyers (including NRIs) of real property in India would be subject to 1% withholding tax (TDS) on the sale price of the real property. If the seeler does not have a Permanent Account Number for tax purposes, the withholding tax would be assessed at 20%
  • There was a confusion if tax residency certificate is conclusive evidence to establish residency of foreign country in order to claim treaty benefits; it has been clarified that it may not be sufficient evidence although it will be necessary
  • Mortgage interest is now allowed to be dedducted in a limited amount provided certain conditions are met
  • Direct Tax Code will be introduced prior to the end of current budget session according to the Finance Minister
  • Surcharge on foreign company’s taxable income to increase from 2% to 5% if the taxable income exceeds Rs. 100 million ($2 million)
  • Dividend distribution tax surcharge to increase from 5% to 10%; however, 15% rate on dividend received by the Indian company from its foreign subsidiary will continue for one more year

Additional information is available from CPA Global Tax professionals.