Memorandum of Understanding on Tax Relief

Foreign investors entering India through Mauritius will face heightened scrutiny of their investments as the two countries prepare to sign a protocol amending their double taxation agreement.

Experts express concerns that the amendment to the double taxation agreement between India and Mauritius may raise questions about the exit of previous investments, as there are no grandfathering provisions to shield them from the revised regulations. The amendment explicitly prohibits treaty benefits from indirectly benefiting residents of another country, which poses a challenge as many shareholders or investors in Mauritian companies investing in India are from third countries.

The new requirement to demonstrate that tax relief is not a primary objective of the investment is also raising concerns among experts. Tax authorities in both India and Mauritius are now scrutinizing the exemptions available under the treaty based on the « principal purpose test » outlined in the protocol.

Mauritius-based foreign portfolio investors are currently claiming tax exemption on capital gains realized on derivatives transactions. It would be imperative for these investors to prove that there is sufficient non-tax and commercial justification for them to be based in Mauritius in order to claim the benefits of the convention.

The Protocol was amended in line with the provisions of the Multilateral Convention. At that time, Mauritius had not included India as a treaty partner to which the anti-avoidance provision would apply. The two countries have now agreed to amend the bilateral treaty.