September 01, 2012 | By Keith Martin in Washington, DC

Mauritius remains under pressure from India to modify a tax treaty between the two countries. The treaty lets Mauritius companies holding shares in Indian companies avoid capital taxes when the shares are sold.

The two governments held bilateral talks again in late August on revising the treaty. India wants Mauritius companies to have more substance in order to benefit from the treaty.

The uncertainty is harming the economies of both countries, the Mauritius finance minister said.

Forty-two percent of investment into India during the period 2000 through 2011 went through Mauritius companies. The trade in offshore companies accounts for 5% of gross domestic product in Mauritius. India is particularly upset about “round tripping” where Indian residents circle investments in Indian companies through Mauritius to avoid capital gains taxes upon exit.

The Authority for Advance Rulings in India continues to respect the treaty in the meantime. It held in at least three cases in July and August that Mauritius companies could not be taxed on capital gains. The tribunal said that it did not matter that the capital gains will go untaxed in Mauritius.

Mauritius is targeting new business with Africa, where it has double taxation treaties with Botswana, Lesotho, Madagascar, Mozambique, Namibia, Rwanda, Senegal, Seychelles, South Africa, Swaziland, Tunisia, Uganda and Zimbabwe. Treaties with the Congo and Zambia are awaiting ratification, and treaties with Egypt, Ghana, Kenya, Malawi and Nigeria are awaiting signatures.

Meanwhile, China rejected a claim by a Chinese foreign joint venture that dividends paid to a joint venture partner in Mauritius qualify for a reduced withholding tax rate of 5% under the Mauritius-China tax treaty. (Chinese withholding taxes on dividends are normally 10%.) The authorities concluded that the Mauritiutax treatys company was merely a front for the real investor in another country because it had no employees, carried out no real business in Mauritius and had only $9.81 million in registered capital but invested $150 million in the joint venture, and only two of seven board members were domiciled in Mauritius.

Keith Martin