August 08, 2005 | By Keith Martin in Washington, DC

INDIA and Singapore have a new protocol to their tax treaty.

Singapore is hoping the protocol will cause investors to make future investments into India through Singapore holding companies. Most investments into India today are made through either Mauritius or Holland.

Under the protocol, a foreign investor will be able to avoid capital gains taxes in India on the sale of shares in an Indian company — when the investor exits a project — provided the holding company the investor forms in Singapore to invest is considered a tax resident of Singapore. “Shell” holding companies will not be  considered Singapore tax residents. However, a holding company is automatically not a “shell” if it has spent at least S$200,000 on operations in Singapore in the preceding months before the shares are sold.

The protocol took effect on August 1. Companies doing new projects in India would probably do well to compare the tax results from investing through Mauritius versus Singapore.