The concerns about the use of Mauritius as a favourable tax route for investment into India which were raised following the refusal by the Indian Authority for Advanced Rulings to rule that the route applied to the National Westminster Bank have been somewhat allayed, as a result of a recent Advanced Ruling on the Mauritius route.
The "Nat West" Ruling was made public earlier this year. "Nat West" Bank held shares in an Indian banking company, HDFC Bank, through two wholly-owned Mauritian subsidiaries. It was intended that the Mauritian subsidiaries would enjoy the reduction in Indian dividend withholding tax under the treaty from the full rate of 20% to 5% on all dividends paid to the Mauritian subsidiaries by the Indian company.
The Authority said that the structure was prima facie designed for the avoidance of tax as the tax incidence would have been greater had the UK company invested directly in India instead of through its subsidiaries, the Mauritian companies.
The Authority further concluded that the real owner of the dividends from the Indian company were not the Mauritian companies but the UK parent. This denial of the legal personality of the Mauritian companies has caused considerable concern among corporates using the Mauritian route to India and has been widely criticized as unjustified and contrary to the trend of international tax law.
THE "AIG" RULING
The latest Advance Ruling was given to the American Insurance Group, ("AIG"), on 14th August 1996, and made public in September. The Indian Commissioner of Income Tax opposed AIG's request for a ruling and urged the Authority to reach the same conclusion as in the "Nat West" Ruling.
The Authority, however, concluded that a ruling cannot be declined on the ground that the transaction was designed for the avoidance of Indian income tax. Although taxes were a factor, there were other relevant commercial considerations for the entity being located in Mauritius.
In the AIG case, the ruling was delivered in relation to an investment by AIG through its own Mauritian subsidiary in an Indian rupee fund for infrastructure investment. The rupee fund was organised as a contributory trust in India. Parallel investments in the same Indian infrastructure projects by a Mauritian offshore fund raised by AIG and managed by an AIG fund management company, which also manages the rupee fund, were not covered by the Ruling.
The Authority took the view that as there were a number of investors from several jurisdictions, a central location was needed for the entity. Mauritius made sense in terms of being tax neutral, and offering savings on costs for legal, accounting and other professional services.
Under the Ruling, the AIG Mauritian subsidiary qualified for a reduction to 15% on dividend withholding tax and not to 5%. The 5% reduction only applied where the recipient of the shares held them directly. In this case, the AIG Mauritian subsidiary held the shares indirectly, in that it invested in an Indian trust, and it was the trust which held the shares in the Indian companies.
The Authority's reasoning on the logic of pooling of investments in Mauritius suggests that the Authority would have viewed the AIG offshore fund in Mauritius in the same light as the AIG-Mauritian subsidiary. In the case of the AIG offshore fund, the 5% rate of withholding tax would have been applied, as the Mauritian fund company holds the shares in the Indian companies directly and not through the medium of a trust.
The AIG Ruling is being viewed as an endorsement of the Mauritian route. Provided there is adequate planning, the Mauritian structure can obtain the important benefits of the treaty.
The content of this article is intended to provide general information on the subject matter. It is not, therefore, a substitute for specialist advice.
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