India's Supreme Court Validates the Use of Mauritius Treaty for Inbound Investment
The Indian Supreme Court ruled earlier this month that capital gains realized by foreign investors on their investments in India which are held through Mauritius companies will be exempt from Indian tax by virtue of the provisions of the India-Mauritius Treaty (“the Treaty”).
Most Foreign Direct Investment (“FDI”) into India during the past decade has been routed through Mauritius holding companies. The reasons for the choice of Mauritius as a holding company domicile are:
In the absence of a treaty capital gains realized on investments in India are subject to tax in India. The provisions of the Treaty provide that a Mauritius resident (which includes a Mauritius resident company) will be exempt from tax on capital gains realized in India. As Mauritius does not tax capital gains the gains realized on the Indian investments consequently will not be taxed either in India or in Mauritius.
The above position was confirmed in a Circular issued in April 2000 by the Indian Central Board of Direct Taxes (“CBDT”). In that circular the CBDT stated that a “Certificate of Residence” (known as a Tax Residence Certificate) issued by the Mauritius Tax Authorities would constitute sufficient evidence as to residence and beneficial ownership in Mauritius for entitlement to the benefits of the Treaty.
The publication of the Circular resulted in a legal challenge by local public interest organizations alleging that India was losing significant revenue as a result of the Treaty provisions. In May 2002, the Delhi High Court ruled in favor of the public interest bodies by quashing the Circular.
The Delhi High Court order caused widespread uncertainty among foreign investors regarding their tax liability in relation to their investments in India. After extensive hearings in January and February of 2003, the Supreme Court finally pronounced its ruling on 7th of October 2003 setting aside the Delhi High Court order and upholding the Circular to be valid.
The Supreme Court in its ruling expressly stated that the “treaty shopping” implicit in the use of the Treaty was permissible and such treaty shopping can be regarded as a necessary evil for the promotion of economic development and inbound investment into developing countries.
The Court also ruled that in the absence of any anti-treaty shopping provisions in a treaty, treaty benefits could not be denied to the residents of a country even though such residents might be treaty shoppers. In the opinion of the Court, if a country is concerned about treaty abuses it should introduce the requisite provisions in its domestic laws to prevent such use of the jurisdiction by non-residents of the country.
International Business Company Formation, Inc. can assist you in forming companies in Mauritius. For Mauritius Global Business Company Category 1 (eligible for the Treaty), please see http://www.ibcf.com/mauritius-international.html. For category 2 companies (not eligible for the Treaty), see http://www.ibcf.com/mauritius-offshore.html.
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