The Indian - Mauritius Income Tax Treaty (1982), as amended by the 2016 protocol, granted capital gains tax exemption and a lower tax rate for dividend income earned by Mauritian tax residents from companies resident in India. However, the Indian tax authorities have been denying, at least since 2003, these benefits on the grounds of treaty shopping by foreign non-residents that establish tax residency in Mauritius for the purpose of making an investment in India, via an intermediary structure.
Background
Current situation
On 7 March 2024, India and Mauritius signed an amending protocol to update the current Indian - Mauritius Income Tax Treaty, that is now aligned with the international Base Erosion and Profit Shifting (BEPS) standards through the amending of the preamble to the treaty and incorporating the Principal Purpose Test (PPT).
The way forward
The protocol introduces a new article “27B Entitlement to Benefits”. It mentions that regardless of any other provision in the treaty, no benefit will be granted under the treaty if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted, directly or indirectly, in that benefit.
The effective date for the application of this protocol is still unknown but it’s stated that this protocol will be effective from the date of its entry into force, without regard to the date on which the taxes are levied or the taxable years to which the taxes relate. Currently, additional diligences are being made near the Indian tax authorities to confirm the years that will be covered by this protocol due to the current lack of clarity.
KPMG comment
The future amendments into the Income Tax Treaty will create additional challenges for intermediary structures to access the treaty benefits.
We would be happy to assess your existing (fund) structures/investments in India and assist you with any restructuring.
Should you have any questions/comments, do not hesitate to contact us.
