Investing in India through Mauritius Structures
Over the past 30 years, Mauritius has firmly established itself as an international financial centre, becoming a gateway to investment in Asia and Africa. Inviting features of this country include a stable political environment, attractive fiscal policies and easy access – with daily direct flights to major cities on three continents. The presence of international law firms, an efficient banking system and a reliable modern infrastructure also attract.
By virtue of long historical ties and strong cultural affinities (almost 70% of the Mauritius population, of around 1.3 million, is of Indian origin), India and Mauritius have fostered cordial affiliations since the 18th century. Diplomatic relations were inaugurated in 1948, before Mauritius became an independent state, and ever since, India and Mauritius have cooperated closely in numerous fields.
In 1983, a Double Taxation Agreements (DTA) was signed between the two governments. Its aims were to encourage mutual trade and investment, to cater for the avoidance of double taxation, and to prevent fiscal evasion with respect to taxes on income and capital gains. In particular, Article 13 of the DTA stipulates that capital gains earned by the alienation of movable property forming part of the business property of a permanent establishment in either country will be taxed in that other country. Under Mauritian law, and more precisely under the Income Tax of 1995, capital gains are not taxed. Hence, capital gains arising from the sale of shares of an Indian company held by a Mauritian company are effectively exempted from tax in both countries.
The investment vehicle pertaining to this DTA is either a Domestic Company or, more generally, the Global Business Company, Licence Category 1 (GBL1). This is a tax-resident company which carries business outside Mauritius and whose activities and ownership are restricted to non residents. In order to qualify for tax exemption in India, the GBL1 needs to demonstrate substance in Mauritius by proving that it is managed and controlled from Mauritius.
The effective corporate tax rate for a GBL1 is generally 0% and a maximum of 3%. GBL1 are governed by the Income Tax Act 1995, under which they are taxed at the flat rate of 15%. Mauritius law allows an underlying foreign tax credit, equal to the amount of foreign taxes paid, up to the amount of tax due in Mauritius. In the absence of proof, the amount of foreign tax paid is presumed to be 80% of the Mauritius tax. There is no capital gains tax, nor withholding tax on dividends and interest paid to non-residents.
Despite the clarity of this stance, Indian tax authorities have repeatedly tried to tax such capital gains in India. Their main argument is that the DTA would not be applicable in specific situations (round-tripping, lack of substance of the company in Mauritius, abuse of the DTA, etc). Consequently, several court cases as well as the Central Board of Direct Taxes of India (CBDT – The Authority on Direct Taxation) have declared that the applicability of the DTA to a Mauritius company depends on its actual tax residence in Mauritius, of which the Tax Residency Certificate (TRC) issued yearly by the Mauritius Revenue Authority (MRA) is proof. This evidence must be accepted as such by the Indian Authorities.
Some quarters in India have regularly asked for a revision of this DTA. Theis has been fuelled by pressure groups from India, with the main cause of concern being the existence of ‘round tripping’ – that many investors are, in fact, Indians who set up companies in Mauritius and invest in their own country from Mauritius with a view to avoid Indian taxes.
Historical figures show that Mauritius stands out as the main source of Foreign Direct Investment (FDI) into India. For the period between April 2000 and September 2015, FDI inflows from Mauritius into India amounted to over US$ 91 billion. This represents around 34% of the total FDI. Given this mutually-beneficial investment route for both countries, could changes be brought to the DTA?
For years now, both countries have worked together through the Joint Working Group for amendments in the treaty. It has been deemed necessary for Mauritius to clear any uncertainties arising under the DTA ever since proposed measures were announced in the Indian budget in 2012, particularly the introduction of the General Anti-Avoidance Rules (GAAR), which empower the Indian tax authorities to deny taxpayers the benefit of an arrangement that they have entered into for an impermissible tax-related purpose.
Notwithstanding this mutually beneficial investment route, rumours have abounded for 20 years about changes to be brought to the DTA. Even though additional conditions have been added gradually by the Financial Services Commission of Mauritius (FSC) to ensure adequate substance of any GBL1 wanting to avail itself of this DTA, no change has been brought to the DTA itself.
That was until 11 May 2016, when it was disclosed by the Minister of Financial Services in Mauritius that the DTA had been revised already last year and changes agreed, but only disclosed now. This notwithstanding numerous articles published by ex-Ministers of Finance, academics and experts, who unanimously called for a status quo. The issue remains extremely sensitive – with its economic, social, financial, and political ramifications.
- The changes are essentially as follows
- India will have the right to tax capital gains on disposal of assets in India, and no longer Mauritius, as from 1 April 2017.
- From that date until 31 March 2019, the tax rate in India will be half the standard rate, conditional to a limitation of benefits (LOB) clause, i.e. that the Mauritius company
- spends at least MUR Rs 1.5 M., some US$ 40,000. As from 1 April 2019, taxation will be at the full rate in India.
- Withholding tax of 7.5% in India on interest on bank loans from Mauritius banks as from 1 April 2017.
- Grandfathering clause for all investments or loans made before 31 March 2017, which will remain untaxed in India until sale or maturity.
- Enhanced exchange of information clauses, to be disclosed.
The Hon. Prime Minister of India, Mr Modi stated on an official visit in Mauritius on 12 March 2015 that no changes would be brought to the DTA, which might harm Mauritius. It is anticipated that other DTA which India has will now be reviewed with the same aim, leaving Mauritius in no worse position than its ‘competitors’, although no mention of most favoured nation (MFN) has apparently been included in this DTA revision.
In addition, Indian tax laws are being modified, which will impact all investments. The new Direct Taxes Code (DTC) contains General Anti Avoidance Rules (GAAR). GAAR was first proposed in 2009. Its implementation is now planned in April 2017.
The consequence of these increased taxes is that investors will likely want to see a growth in the expected rate of return before taxation, to compensate. Let’s hope this will not dampen the flow of investments into India, in particular through Mauritius.
Case Study: Captive Insurance Act 2015
In December 2015, the Mauritian National Assembly passed the Captive Insurance Act 2015, whose aim is to diversify the financial and corporate services sector as well as to boost the captive insurance market in Mauritius. The Act caters to the growing interest for such insurance in Mauritius and applies uniquely to ‘pure captives’. A captive is a subsidiary company that is incorporated to provide insurance for its parent company and its group affiliates. It is a form of selfinsurance that allows for substantial savings to be made on insurance premiums that would otherwise be paid to external insurance firms, and to insure low occurrence but heavy financial risks, such as consequences of terrorist acts.
The Act defines the requirements, obligations and licensing procedures of pure captive insurance businesses. It stipulates that captive insurers must hold a Category One Global Business Companies Licence (GBL1) along with an external insurance licence from the Financial Services Commission (FSC). In order to obtain the latter licence, the captive must apply through a captive insurance agent.
Furthermore, as a GBL1, the captive insurer will also profit from Mauritius’ Double Taxation Agreements (DTAs) and Investment Protection and Promotion Agreements (IPPAs).
As an incentive to promote this developing market, the Act amends the Income Tax Act 1995 by providing for a maximum of 10 years tax holiday for captive insurance companies.
“Historical figures show that Mauritius stands out as the main source of Foreign Direct Investment (FDI) into India.”
“On 11 May 2016, it was disclosed by the Minister of Financial Services in Mauritius that the DTA had been revised already last year and changes agreed.”