India Shuts Down Mauritius Route: Time to Rethink Investment Structures

13 May 2016
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Key takeaways

  • End of Exemption from Indian Capital Gains Tax. Prior to the amendment, a tax resident of Mauritius was eligible for an exemption from capital gains tax in India on a sale of shares of an Indian resident company. The Protocol amends the India-Mauritius tax treaty so that such a sale will be subject to tax in India at the applicable Indian tax rates on capital gains.
  • Grandfathered Transactions. Shares acquired prior to April 1, 2017 are grandfathered and will not be affected by the Protocol. Accordingly, investors can continue to invest in shares of Indian resident companies through properly structured Mauritius holding companies until April 1, 2017 and be exempt from Indian capital gains tax. As long as the shares are acquired before April 1, 2017, the exemption from capital gains tax is available regardless of when such shares are disposed of.
  • Two-Year Transition Period. The Protocol provides for limited relief from full Indian capital gains taxation for a two-year transition period. Investments by Mauritius tax residents that are made on or after April 1, 2017 and that are sold prior to April 1, 2019 will benefit from a 50% reduction in the applicable Indian tax rate if a so-called “limitation of benefits” (“LOB”) article, discussed below, is satisfied.
  • Limitation of Benefits (LOB) Provision. The LOB provision will be met if a Mauritius resident (i) is not a shell or conduit company and (ii) satisfies the “main purpose” and “bona fide business” tests. A resident will be deemed to be a shell/conduit company if its total expenditure on operations in Mauritius is less than Rs. 2,700,000 (approximately 40,000 US dollars) in the immediately preceding 12 months. The press release does not provide details on what constitutes “main purpose” or “bona fide business.” The LOB provision apparently is not relevant to the sale of shares in a grandfathered investment.