INCENTIVES AVAILABLE TO INDIAN COMPANIES

INCORPORATING A COMPANY IN MAURITIUS

Authored by- Prateek Garg, Ninth Semester, B.Sc., LL.B.

(Hons.),

Gujarat National Law University, Gandhinagar

Email: prateekgarg.gnlu@gmail.com

CONTENTS

1. INTRODUCTION…………………………………………………………………………….

3

2. TAXATION IN MAURITIUS……………………………………………………………….

4

3. EMERGENCE OF MAURITIUS AS INDIA’S FAVOURITE

OFFSHORE TAX HAVEN.......................................................... 6

4. JUDICIAL VIEW ON THE DTAA………………………………………………………. 7

5. CURRENT SCENARIO REGARDING INDO-MAURITIUS DTAA………………..8

6. CONCLUSION……………………………………………………………………………….

. 9

7. APPENDICES………………………………………………………………………………..

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INCENTIVES AVAILABLE TO INDIAN COMPANIES INCORPORATING A COMPANY IN MAURITIUS

Introduction

Although Mauritius is well known as an international tourist destination, it was not so

well known as a flourishing business destination of world class standard until

recently. However, being strategically located at the cross-roads of investments in the

Indian Ocean region, the Republic of Mauritius has enjoyed unprecedented socio-

economic development with a substantial economic growth averaging 5% for the past

20 years.1 The Government introduced a wide range of incentives to attract

investments, and as a result, while the agricultural sector used to dominate, up-market

tourism followed by textile production now accounts for the greater part of the

Mauritian economy.

The nineties saw Mauritius develop as an international business and financial centre.

It allowed offshore banking in 1988 and offshore business services in 1992. Mauritius

ranks first in respect of FDI inflows to India amongst all the countries with

cumulative inflows amounting to US $ 10.98 billion. Top sectors attracting FDI

inflows from Mauritius (from January 2000 to December, 2005) are electrical

equipment, telecommunications, fuels, cement & gypsum products and services sector

(financial & non-financial). Mauritius has been granted 39 Technical Collaborations

since 1991.2 The top five sectors attracting technology from Mauritius are fuels,

chemicals, hotel & tourism, telecommunications and industrial machinery, in that

order. During the last 10 years, approved Indian direct investment in joint ventures

and wholly owned subsidiaries in Mauritius has been to the tune of US $ 1141.42

million. Indian exports to Mauritius have been US $ 248 million in 2004-2005 and

Indian imports from Mauritius have been US $ 7 million in the same period.3 It was

one of the first six countries to undertake to adhere to the Financial Action Task Force

on Money Laundering (FATF)4 recommendations against money laundering and

terrorist financing and benefits today from thirty three double taxation avoidance

treaties.5

1 Mauritius: the future is bright!, available at http://www.alliance-mauritius.com/business-opportunity.php (last accessed: December 20, 2007)2 INFRASTRUCTURE: INDIA -MAURITIUS TO WORK FOR GREATER FDI INFLOW at http://www.indlawnews.com/EC1844380C5E7E269C1E2116696BA40E (last accessed December 14, 2007)3 Ibid.4 The FATF was established by the G7 summit held in Paris in 1989. The FATF is an independent international body and its Secretariat is housed at the Organization for Economic Co-operation and Development (OECD).

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Taxation in Mauritius

Double Taxation Avoidance Treaties

Mauritius has focused its development as a global business centre on the use of its

network of double taxation treaties. Substantial foreign investments have been

channeled through Mauritian offshore vehicles and this is expected to increase as the

Mauritius treaty network expands and as investment prospects in the region keep

improving. India has signed Agreements with Mauritius in Civil Aviation, Avoidance

of Double Taxation, in Economic, Educational and Cultural Cooperation, cooperation

in Agriculture and Bio-technology.

In addition to the trade in goods, there is an expanding relationship in the field of

bilateral investments. Investment in Mauritius through Indian companies and vice-

versa take advantage of the favourable bilateral Double Tax Avoidance regime and

the low rates of taxation in Mauritius has grown exponentially in recent years making

such investment amongst the largest. In 2000, investment through Mauritius

accounted for 19% of the total FDI inflows into India. Investment from India into

Mauritius have also grown and reached a peak in 1995 amounting to 48% of the total

FDI in Mauritius. Since then the investment from India has tapered off.6

The Indo-Mauritius DTAA: An Overview

Under Article 13 of the Indo-Mauritius Double Taxation Avoidance Agreement,

(DTAA) capital gains, arising on alienation of movable property (eg. shares,

debentures, etc) situated in India, to a resident of Mauritius are taxable only in

Mauritius. Similarly, capital gains arising to an Indian resident for investment in

shares of Mauritian company are taxable only in India. Both the countries can tax

capital gains as per provisions contained in their respective tax laws. This tax sharing

arrangement was reached by and between the parties on 24th day of August 1982,

when the treaty was signed. This position was aptly clarified by the CBDT vide its

circular no. 682 dated 30th March 1994. Some key features of the Agreement along

with comparative advantage of Mauritius over Singapore are enumerated below:

‘Double Non-taxation’: Unlike most other DTA Agreements of India, Art. 13.4

of the DTA Agreement with Mauritius exempts, from Indian Income Tax, the

capital gains derived by residents of Mauritius from the transfer of shares in the

Indian Companies. This coupled with the non- taxation of capital gains under the

5 Mauritius: The Best Place To Combine Business And Leisure, available at http://www.mondaq.com/article.asp?article_id=52890 (last accessed: December 26, 2007)6 High Commission of India, INDIA-MAURITIUS BILATERAL RELATIONS, at http://indiahighcom.intnet.mu/inm_bilatrlRel.htm (last accessed December 14, 2007)

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Mauritius Tax law, leads to what is popularly called ‘double non-taxation’. This

feature of non-taxation of such capital gains in India as well as in Mauritius has no

doubt helped the economy of Mauritius, but has also resulted in large foreign

investment in India via the Mauritius route through shell companies incorporated

in Mauritius.7 It is also suspected that this non-double taxation has led in some

instances to ‘round tripping’ of investment in Indian companies which set up a

company in Mauritius that invests in India through a foreign country.8

‘Comparative Advantage over Singapore’: Investment in Mauritius has got

another reason for Indian companies to invest in Mauritius rather than in

Singapore, which is another country with which India has entered into a DTA

Agreement. The incentive of ‘double non-taxation’ available to Indian companies

investing in Mauritius is not available to the same investing in Singapore. Unlike

the Indo- Mauritius Tax Treaty, the protocol with Singapore contains a

‘Conditions of Benefit’ clause under Art. 39 of the treaty.

A comparative chart enlisting some of the key provisions of the DTAA treaties signed

by India with Cyprus, Malta & Mauritius is given in APPENDIX 1.

Emergence of Mauritius as India’s Favourite Offshore Tax Haven

Over the past few years, Mauritius has suddenly emerged as India’s favourite tax

haven. The DTAA, in order to keep a check that businesses that operated in both

countries did not get taxed twice, has turned out to be a boon for Indian investors.

Mauritius has become the perfect conduit for anyone to bring in enormous sums of

money to India or even take it out anonymously, and without paying any taxes.

Although Mauritius is not the only country with which India has a DTAA, it is the

combination of the Agreement and some Mauritian laws passed years after the

7 I.P. Gupta, INTERNATIONAL LAW IN RELATION TO DOUBLE TAXATION OF INCOME (With Particular Reference to India), LexisNexis - Butterworths, New Delhi8 For a critique of this matter, refer the Report of the Comptroller and Auditor General of India: ‘Union Audit Report on Direct Taxes (2003-2004) - Report No. 13 of 2005’.9 Art. 3

(1) A resident of a Contracting State shall not be entitled to the benefits of Art. 1 of this Protocol if its affairs were arranged with the primary purpose to take advantage of the benefits in Art. 1 of this Protocol.

(2) A shell/ conduit company that claims it is a resident of a Contracting state shall not be entitled to the benefits of Art. 1 of this Protocol. A shell/ conduit company is any legal entity falling within the definition of resident with negligible or nil business operations or with no real and continuous business activities carried out in that Contracting state.

(3) A resident of Contracting state is deemed to be a shell/ conduit company if its total annual expenditure on operations in that Contracting state is less than S $ 200.000 or Indian Rs. 50,00,000 in the respective Contracting state as the case may be, in the immediately preceding period of 24 months from the date the gains arise.

(4) …

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Agreement was signed, that has turned this tiny country into the most-favoured tax

haven as far as India is concerned.10

Indian Finance Ministry officials claim that Mauritius is increasingly being used by

Indian businessmen as well to launder money, shore up their holdings in their own

companies and to indulge in all manner of financial chicanery.11

The Agreement stipulates that a Mauritian firm investing in India will not be taxed in

India and vice versa. Coinciding with the opening up of the Indian economy in 1991-

92, Mauritius passed a law that allowed any foreign investor to set up a global

business company in the country provided they complied with some minimal

conditions and paid a nominal fee to the Mauritian authority. These companies could

operate in complete secrecy, would pay only a nominal tax (3 percent net), have no

real operations or assets within Mauritius, but enjoy all the privileges of the Double

Taxation Avoidance Convention (DTAC).12

Mauritius levies practically no tax on capital gains. The Indo-Mauritius DTAA has

helped Foreign Institutional Investors (FIIs) routing their investments through that

country to get the benefit of nil tax on the capital gains made in the Indian stock

market.13

Business Schemes14

The Government of Mauritius introduced a Regional Headquarters Scheme to

promote the country as a prime base for regional headquarters in March 2000. The

Scheme is aimed at corporations wishing to provide headquarters services to related

companies in the region.

Key incentives offered to international investors under the Scheme:

A ten year tax holiday on foreign sourced income and a 15 % corporate tax

thereafter.

Tax-free dividends

Duty-free import of office furniture, equipment

Duty-free import of a maximum of two cars for expatriate staff.

10 Anjuli Bhargava, Inside India’s Favourite Tax Haven, available at http://www.businessworld.in/content/view/88/128/ (last accessed: December 26, 2007)11 Ibid.12 Ibid.13 T. C. A. Ramanujam, Tax treatment of FII income, available at http://www.thehindubusinessline.com/2007/01/27/stories/2007012700380900.htm (last accessed: December 26, 2007)14 Noshir M. Lam, Mayur Nayak, Mitil Chokshi, Mauritius- International Business and Tax Strategies, First Edn, 2002, Snowhite Publication Pvt. Ltd., Mumbai

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Concessionary personal income tax for two expatriates and non-resident

Mauritian employees for the first four years of employment.

Access to global banks and financial services.

Safe and secure living conditions.

Modern infrastructure & telecommunications facilities

Qualified professionals fluent in English and French

Preferential access to regional (and global) markets

Excellent network of double taxation avoidance treaties.

No exchange control

Freeport facilities

Permanent Residence Scheme for operators investing US $ 500,000 and

above.

Judicial View on the DTAA

The Supreme Court of India in a recent case of Commissioner of Income Tax v.

P.V.A.L. Kulandagan Chettiar15, held that

“Taxation policy is within the power of the Government and section 90 enables

the Government to formulate its policy through treaties entered into by it and even

such treaty treats the fiscal domicile in one State or the other and thus prevails

over the other provisions of the Income Tax Act.”16

The Court vide this judgment held that treaties for avoidance of double taxation

between India and other countries will override Indian Income Tax Act provisions and

the income derived by a non-resident Indian from his immovable property in Malaysia

is exempt from tax in India under the Indo-Malaysian double taxation avoidance

treaty. This ruling could be seen to have a bearing on certain pending petitions

challenging the Indo-Mauritius Double Taxation Avoidance Treaty, wherein it has

been alleged that the Indian government was losing huge amounts in tax, as many

companies were operating in India after registering in Mauritius just for the purpose

of avoiding payment of tax.17

In the Azadi Andolan case18, the Hon’ble Supreme Court of India, while extensively

dealing with the validity of the Indo-Mauritius DTAA, pointed out that if there is

15 (2004) 6 SCC 23516 Ibid.17 India’s treaties with other countries override IT Act: SC, Source: The Economic Times, June 1, 2004.18 Union of India v. Azadi Bachao Andolan & Anr., [2003] 132 TAXMAN 373 (SC)

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revenue loss, it is for the Government to act and not for the courts to intervene by way

of interpreting the statutes and circulars.

Current Scenario Regarding Indo-Mauritius DTAA

India has proposed a re-negotiation of the existing tax treaty as part of the ensuing

negotiations on the Indo-Mauritius Comprehensive Economic Co-operation

Agreement (CECA) so as to include safeguards against third country residents from

enjoying the Indo-Mauritius tax treaty benefits.

If Mauritius agrees to the re-negotiation of the tax treaty with India, India may push to

incorporate the “limitation on benefits” clause in the Indo-Mauritius tax treaty to

check the usage of conduit companies for claiming treaty benefits. The recently

amended India-Singapore tax treaty provides for a limited version of “limitation on

benefits” clause.19

As per a media report20, the Government of India is proposing to amend the existing

Double Taxation Avoidance Agreement between India and Mauritius (“DTAA”). As

per the media report, the proposal is that the treaty benefit and in particular exemption

from capital gains tax in India will only be available to those Mauritius companies

which satisfy the following conditions:

The company is listed on a recognized stock exchange,

The company should have a total expenditure of $ 200,000 or more in

Mauritius, for at least two years prior to the date on which the capital gains

arise.

The proposition is in line with the protocol signed by India with Singapore on June

29, 2005, wherein if a resident of either of the states satisfies either of the above two

conditions, it would be eligible to be exempt from taxation on capital gains arising in

the other country.21

Conclusion

19 India-Mauritius tax treaty may be reviewed, Source: Economic Times - August 20, 2005 20 India to push for change in tax treaty with Mauritius, Source: The Times of India, January 6, 2007, available at http://timesofindia.indiatimes.com/NEWS/India_Business/India_to_push_for_change_in_tax_treaty_with_Mauritius/articleshow/1068539.cms (last accessed: December 26, 2007)21 Ibid.

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In the recent past, controversy in relation to taxability of offshore sale or transfer of

security in a foreign company [offshore special purpose vehicle (SPV)] has been

consuming the energy of taxpayers and tax administrators, alike. Recently a writ

petition with regard to the Hutch- Vodafone transaction has been filed by Vodafone

Essar in the Bombay High Court pertaining to the controversy that has arisen as a

result of the Indian Revenue Authorities’ desire to tax transfer of ownership in an

SPV located outside India, which has legal ownership in an Indian company. One of

the major reasons for this controversy having arisen is absence of a double taxation

treaty with Hong Kong22, which will result in the Indian Revenue thrusting the

domestic law provisions, which besides being restrictive; will not afford the shield

that treaties with tax-friendly jurisdictions shall offer.

Although many objections have been raised against the Indo-Mauritius DTAA by the

Revenue Authorities from India, it cannot be denied that the incentives conferred

upon by the Agreement are providing to be a boon for the Indian investors. On one

hand, the Mauritian Government is apprehensive about the revenue loss that it would

incur by the proposed amendment; wherein on the other hand Indian Government is

losing a lot of revenue in absence of any express provision in the DTAA by which the

Indian investors are availing ‘double non-taxation’. Therefore, it could be concluded

that the benefits available to Indian investors investing in Mauritius would not be

perpetual because of serious considerations of the Indian government towards

amending the said Agreement.

22 Hong Kong is the jurisdiction where the SPV has been floated.

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APPENDIX 1

Summary of Indian treaties with Cyprus, Malta & Mauritius23

S. No. Provision Cyprus Mauritius Malta1. Application to

Offshore Companies

Yes Yes [Excludes GBC Category 2 companies under the Companies Act, 2001)

No [Yes for local companies]

2. Withholding TaxInterestDividendsRoyalties

10%10%15%

20%5/15%15%

10%15%15%

3. Capital GainsImmovable PropertyMovable Property

Taxed in India

Taxed in Cyprus at 0%

Taxed in India

Taxed in Mauritius at 0%

Taxed in India

Taxed in Malta at 0%

4. Permanent Establishment:a) for building, construction, assembly projectsb) for business through broker or agent

12 months

Wholly on behalf of the enterprise

9 months

Exclusively or almost exclusively on behalf of the enterprise

6 months

Wholly or almost wholly on behalf of the enterprise

5. Director’s Fees Taxed in the country where paying company is registered

Taxed in the country where paying company is registered

Taxed in the country where paying company is registered

6. Tax Sparing Credit

Yes Yes Yes

23 Noshir M. Lam, Mayur Nayak, Mitil Chokshi, Mauritius- International Business and Tax Strategies, First Edn, 2002, Snowhite Publication Pvt. Ltd., Mumbai

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