INDIA confirmed that foreign companies that invest into India through Mauritius are entitled to tax reductions under the India-Mauritius tax treaty.

The main benefit from the treaty is no capital gains taxes have to be paid when an investor exits from India by selling his shares in an Indian company.  The sale of shares by a “tax resident” of Mauritius is exempted from tax under the treaty.

India has tried to deny treaty benefits in the past on grounds that the companies through which foreigners invest are merely shell companies with too little link to Mauritius to qualify as “tax residents” of the country.  However, the Indian Supreme Court put the issue to rest in a decision on October 10.  The Supreme Court said it is up to Mauritius to decide who is a “tax resident” of the country and once Mauritius decides, its determination must be respected by the Indian authorities, even if the result is that income goes untaxed in both countries.  Some treaties have “limitation of benefits” clauses that prevent treaty shopping where foreigners look for a third country with a favorable tax treaty through which to invest.  However, the India-Mauritius treaty lacks such a clause.  The Supreme Court declined to read one into it.

Roughly a third of foreign investment into India is run through Mauritius.  Of the 20,000 offshore companies registered in Mauritius, nearly 6,000 invest into India.  Many of the others invest into Pakistan and China, two other countries with which Mauritius has favorable tax treaties.

Keith Martin