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: [email protected]
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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