Mauritius Plans to Plug Tax Treaty Loopholes

The measures could include listing in Mauritius bourses for companies that are using the country to invest in India.

"We are looking to redefine substance to add more commercial nexus to the economy of Mauritius ....The changes we are looking at could be listing on stock exchange here, if it is appropriate," Mauritius Financial Services Commission chairman Mark Hein told ET. However, there would be separate conditions for investment holding companies, Hein said, since they have a different structure and listing would not be suitable for them.

The changes may increase costs for investors using the island nation to invest in India. India gets nearly 40% of its foreign direct investment from Mauritius, most of which is third country investment.

The commission has already issued guidelines to cap the number of companies in which a person can be a director. New Delhi had raised concerns over a single person being on board of multiple companies, indicating that most of these companies were just shell companies.

Mauritius has also put in place stringent norms to check any round-tripping of funds. "The conditions make it clear that no company can invest funds derived from India unless it has permission from the RBI... This declaration is also part of the special licensing conditions to get a tax residency certificate renewed every year," Hein said.

India is yet to respond to Mauritius' suggestion over insertion of a 'limitation of benefit' clause in the bilateral tax treaty that effectively exempts tax on capital gains made in India on investments routed through the country.

Article 13 of the treaty provides that capital gains arising in India from investments into India from Mauritius can only be taxed in Mauritius. Since Mauritius does not tax capital gains, investments routed through the country escape capital gains tax, making it an attractive stopover destination for foreign investors coming into India.

The clause will limit benefits of the treaty to genuine investors from the island nation or those third country investors that carry out substantial business there.

Such a limitation clause exists in the India-Singapore tax treaty. Investors coming into India through Singapore have to meet certain conditions such as minimum expenditure of $200,000 in Singapore and a track record of two years to avail the benefit of the tax treaty.

Globally, limitation of benefit clause includes conditions such as a minimum level of investment, listing on the local stock exchange, ceiling on turnover and minimum expenditure, local residents on company board, number of board meetings for carrying out operations in one of the contracting states, etc. to ensure that genuine investors avail benefits of a tax pact.