On 10 May 2016 in Mauritius, representatives of the governments
of India and Mauritius signed an agreement which provided the
amendment of the provisions of the double tax treaty agreement that
was signed between the two countries on 1983.
Since 1996 the Indian government has made ongoing efforts to
change the following provisions of the existing treaty, namely to
stop the round-tripping of funds and eliminate the issues derived
from treaty abuse.
Under the current treaty, capital gains arising from the
disposal of shares in an Indian company, are taxable only in the
country of residence of the selling shareholder (and not in India).
Similarly a company resident in Mauritius that does not have a
permanent establishment in India, which disposes its shares in an
Indian company is liable for capital gains tax (CGT) only in
Mauritius. As Mauritius does not levy CGT, no tax is levied either
in India or in Mauritius.
The completed protocol is yet to be announced; however the main
amendments include changes to the taxing rights on capital gains
and limitation of benefits.
As from 1 April 2017, Article 13 of the current treaty is
expected to be revised, hence capital gains arising from disposal
of shares of a company resident in India will be taxable in India.
As per the agreement, investments finalised before 1 April 2017
will not be affected and will continue to be taxed in Mauritius.
During the transition period between 1 April 2017, till 31 March
2019 any capital earning generated on the sales of investments
acquired after 1 April 2017 will be taxed in India at a reduced
rate of 50% of the domestic tax rate; as long as it completes the
conditions of the Limitation of Benefits (LOB) article. The full
domestic Indian tax rate will apply from 1 April 2019.
The Limitation of Benefits (LOB) article provides that a
resident of Mauritius avails from the reduced CGT rate provided
that it satisfies the main purpose and bona fide business test, and
is not a shell or conduit company. The annual expenditure threshold
that a Mauritian company has to meet is Mauritian Rupees (MUR) 1.5
Another alternation of the double tax treaty agreement refers to
the provisions of Article 26. According to Article 26, exchange of
information must be aligned with international standards. The
agreement also presents provisions for support in collection of
taxes and source based taxation of other revenue.
The majority of foreign portfolio investors and foreign firms
choose to invest in India through Mauritius, mainly because of the
tax benefits that they derive from the current agreement. During
the last few years, Singapore seems to have emerged as a preferred
destination due to the uncertainty around Mauritius. Other
destinations that offer capital gains tax exemption to investors
are Cyprus and the Netherlands.
It is expected that the amended tax scheme for Mauritius will
also be applied to capital gains for Singapore tax residents.
According to the Article 6, the Singapore tax treaty will remain
enforced only while the CGT exemption under the Mauritius treaty is
in force. Additionally on 29 June 2016, the Cyprus Ministry of
Finance publicised that it had completed negotiations for a new tax
treaty with India that allows for source-based taxation of capital
gains from the alienation of shares.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Common Reporting Standard (CRS) has been initiated by the Organization for Economic Cooperation and Development (OECD) aiming at improving international tax compliance and preventing tax evasion, through the automatic exchange of information between the countries that implement CRS.
The DITC has stated that it will issue updated CRS Guidance Notes in the first quarter of 2017 to cover the Regulations.
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