Mauritius May Tighten Rules For Firms Seeking Tax Treaty Benefits

Mauritius may tighten rules for companies claiming benefits under tax treaties that will make it difficult for those that unduly use the India-Mauritius double tax-avoidance agreement to their advantage.

In a draft circulated by the Financial Services Commission, which regulates financial services except banking and global business, the island nation has proposed stricter regulations, including guidelines governing company directors and conditions such as minimum expenditure requirements and assets held in Mauritius. The draft also proposes that listing in stock exchanges could be one of the ways of meeting so-called economic substance requirements.

Companies may have to comply with these norms to obtain a tax residency certificate (TRC), a precondition for availing the benefits under the India-Mauritius pact.

Mauritius is trying to address India’s concerns and ensure that taxpayers benefiting from the treaty are not affected by the strict provisions of Indian tax authorities, according to Mukesh Butani, chairman of BMR Advisors.

“They are in a way preparing for GAAR (general anti-avoidance rules that will be implemented from April 2015),” Butani said.

Under the bilateral agreement between the two countries, capital gains from sale of securities can be taxed only in Mauritius. Capital gains tax is close to zero in Mauritius and almost 40% of investments into India come through that country.

India has been trying to renegotiate the tax pact with Mauritius for the past few years to check so-called round tripping and other treaty abuses but Mauritius has been reluctant to make any changes.

Round tripping entails moving money out of one country to another, and getting it back under the garb of foreign capital.

Also, with introduction of GAAR, foreign institutional investors who avail the benefits under the treaty will come under the tax department’s scrutiny.

According to the draft norms, global business companies in Mauritius will have to satisfy at least one of the criteria—assets of at least $100,000 in Mauritius, company’s shares listed in an exchange licensed by the the regulator; and a yearly expenditure on lines of a similar company controlled and managed from Mauritius or having an office in Mauritius.

The commission also wants directors to provide sufficient time to the affairs of each board and be actively involved in the control and management of a company.

The proposed norms suggest that if a company is licensed as a collective investment scheme, closed end fund or external pension scheme, it would have to be administered from Mauritius.

The additional requirements may have to be complied by 1 January 2015, by the companies who want to seek renewal of their TRC, according to a note by BMR Advisors.