Most inbound investment into India is run through offshore holding companies in Mauritius or Holland. Foreign investors go through the two countries in order to take advantage of favorable tax treaties. The main treaty benefit is the potential to escape capital gains taxes in India when the investment is sold.
Any holding company set up in Mauritius to invest into India must be a “tax resident” of Mauritius in order to benefit from the tax treaty. The Central Board of Direct Taxes in India issued a circular in April 2000 indicating that it would accept a certificate of tax residence from Mauritius without asking further questions. A court in New Delhi quashed the circular in May this year as part of a long-running battle to deny “shell” holding companies in Mauritius any treaty benefits. The Supreme Court suspended the lower court action on November 18. A hearing in the case is expected early next year.