Protocol amending the India-Mauritius Double Taxation Avoidance Agreement
India and Mauritius signed a new Protocol on 10th May 2016 to amend the 1983 India-Mauritius Double Taxation Avoidance Agreement (“Treaty”).
The main changes brought to the Treaty are:
Capital Gains Taxation
- Under the Protocol amending the Treaty, any gains arising from disposal of shares held in an Indian company will be taxable in India as from 1st April 2017. Any capital gains from transfer of shares acquired by a Mauritius tax resident company on or before 1st April 2017 in a company resident in India shall be taxable in Mauritius as per the existing provision of the treaty.
- Gains from disposition of shares acquired before 1st April 2017 are grandfathered. This change gives a window of opportunity for structuring investments into India as companies incorporated and investment made before the above-mentioned date will still qualify for capital gains exemption even if the disposal happens after that date.
- In respect of capital gains arising during a designated transition period of 1st April 2017 to 31st March 2019, there will be a sharing of taxing right such that the tax rate in India will be limited to 50% of the domestic tax rate of India subject to the fulfillment of the conditions set out in the Limitation of Benefits (LOB) clause (see below) by the seller. In other words, if the LOB conditions are not complied, full tax will apply even during the transition period.
- Following expiration of the transition period on 1st April 2019 onwards, the full domestic tax rate will apply in India for the disposal of shares. Investment in long term listed securities will be taxed at the rate of 0% provided securities transaction tax is paid. The continuing advantage of using a Mauritius structure is that no minimum alternative tax (MAT) will be applicable. MAT is levied at the rate of 18.5% in cases where the normal income tax payable under domestic law is less than 18.5% of the book profit computed under the Indian Income Tax Act. The India Finance Act 2016, clarified that MAT will not be applicable if the investment is made from a treaty partner country or from other countries as long as there is no fixed place of business in India.
- The Protocol only makes reference to shares. Other instruments such as derivatives (futures/ options), Debentures (convertible and non-convertible), units of Indian mutual funds and interest in LLPs will be taxable under the classification of “Other Property’’, and the taxing right will be in the resident state; Mauritius.
Limitation of Benefits
- A Mauritius company incorporated post 1st April 2017, for an eventual disposal before 1st April 2019, will need to satisfy the Limitation of Benefits (LOB) clause to reduce the Indian capital gains tax rate by 50%. To meet the criteria set in the LOB clause, the company must show that it is not a shell or conduit company.
- A Mauritius resident company is deemed not to be a shell/ conduit company if it is listed on a recognized stock exchange in Mauritius, or its total expenditure on operations in Mauritius is more than Mauritian Rupees 1,500,000 (approximately USD 42,000) in the immediately preceding 12 months from the date the concerned gains arising.
Interest income on loans to Indian Residents
- Interest arising in India to Mauritian residents will be subject to withholding tax in India at the rate of 7.5% in respect of debt claims or loans made after 31st March 2017. However, interest income of Mauritian resident banks in respect of debt claims existing on or before 31st March 2017 shall be exempt from tax in India.
- This change gives significant advantage for structuring debts from Mauritius as the interest on the loan will carry the lowest withholding tax rate of all countries that India has signed treaties with.
- “Other income” arising in the source country to be taxed in the source country. Currently, “other income” was taxed in the resident country.
Exchange of Information
- The Protocol also provides for updates to the article relating to Exchange of Information Article and the assistance in tax collection provision. These two articles are in line with international standards.
These changes should not affect the current business of our existing clients due to the introduction of a grandfathering provision protecting investments made before 31 March 2017.
Mauritius companies wishing to invest post 1st April 2017 and dispose before 31st March 2019 should increase their substance in Mauritius to be able to meet the LOB test and gain from the sharing of taxing rights.
Mauritius is a tried, tested and trusted International Financial Centre. Our regulation and legislation are in compliance with international norms and standards. Our global business industry has matured by providing a stable economic and political environment that is conducive to business operations.
Our platform for debt structuring and fund management together with our expertise and talented resource pool make us the jurisdiction of choice to structure investments into India.
As the leading fund and corporate administrator in Mauritius, Cim Global Business will be delighted to assist you in the process of establishing your corporate and fund structures in Mauritius.
For any additional information, feel free to contact:
Head of Business Development
Cim Global Business
Head of Structuring
Cim Tax Services
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