Mauritius: New Chapter On Economic Substance

Global investors route their investments in India through Mauritius to avail substantial tax benefits on exit under the India-Mauritius Treaty. According to the treaty, capital gains arising to a ‘resident’ of Mauritius are not taxed in India. Further, capital gains tax is exempt in Mauritius as well. In fact, post-liberalisation, the foreign direct investment inflow from Mauritius (August 1991 to March 2013) stands at $77,274 million, accounting for nearly 38 per cent of total foreign inflow.

Such arrangements of routing investments through favourable jurisdictions, referred to as ‘treaty shopping’, have been widely debated the world over. Closer home, the Supreme Court, in the much-celebrated decision of Azadi Bachao Andolan, held treaty shopping to be legitimate. The Court reiterated an important principle in the interpretation of an international treaty, including one for double-taxation relief: Treaties are negotiated and entered at a political level, with several underlying considerations — thereby implying that tax benefits should not be looked at in isolation.

However, revenue authorities continued to agitate on the doctrine of “form vs. substance”, contending that only genuine companies should be entitled to treaty benefits, and not ‘paper’ companies. Discussions are underway for re-negotiation of the treaty, with a push from India to insert suitable ‘Limitation of Benefits’ clauses to check abuse. Furthermore, the introduction of General Anti-Avoidance Rules (GAAR), which empowers revenue authorities to pierce the corporate veil, has added to investors’ fears.

Mauritius-based entities involved in investment activities generally opt for ‘GBC1 Company’ (Category 1 Global Business Company), entitled to treaty benefits. Recently, the Financial Services Commission in Mauritius strengthened the criteria for determining whether an entity is ‘managed and controlled’ in that country — applicable from January 1, 2015. Noteworthy features include the requirement that the resident director of the Mauritian entity is appropriately qualified, and the entity fulfils at least one of the following criteria:

Have office premises in Mauritius;

employ at least one person who is resident in Mauritius at an administrative/ technical level on a full-time basis;

provision in the constitution that all disputes arising out of the constitution shall be resolved through arbitration in Mauritius;

holds, or is expected to hold, over the next 12 months, assets of at least $100,000 in Mauritius (excluding cash held in bank account, or shares/ interests in another GBC1 company);

shares are listed on a securities exchange licensed by the FSC;

has, or is expected to have, a yearly expenditure in Mauritius that can be reasonably expected from any similar company controlled and managed from Mauritius.

Compliance with additional requirements would be imperative for GBC1 companies seeking renewal of Tax Residency Certificate, which is critical to access treaty benefits.

These efforts may act as a check on entities that are formed in Mauritius to obtain undue tax advantages. Companies that are required to hold assets would now look at real estate and purchase of financial assets as an option.

Although the guidelines are not as stringent as they are in Singapore, the condition of benchmarking for reasonableness of expenditure is very subjective. Also, the onus of proof is on the GBC1 company, and global investors may not be keen to submit to an arbitration in Mauritius.

Interestingly, the changes are in a communiqué from the FSC and have not been introduced in the India-Mauritius Treaty. Accordingly, the exclusion from GAAR recommended by the Shome panel for treaties containing anti-abuse provisions may not apply here.