INDONESIA formally cancelled its income tax treaty with Mauritius on June 24. The cancellation will take effect next January 1. 

Foreign investors with projects in Indonesia often set up an intermediate holding company in Mauritius to own shares in a project company in Indonesia. Mauritius is an island in the Indian Ocean off the east coast of Africa. The investors then argue that the tax treaty with Mauritius means they are subject to withholding taxes at only a 5% rate — rather than 20% — on dividends received from the project company and they are exempted from any capital gains taxes when they later sell the project company shares.

Investors are now looking at Holland and Labuan Island as alternative locations for such holding companies. There are questions whether Labuan companies qualify for treaty benefits in some countries. The island is part of Malaysia.