Review advised for multinationals with Indian or Singapore investments
TAX BLOG |
India and Mauritius recently announced a protocol to amend their tax treaty to restore India’s right to tax capital gains. Many multinational entities have traditionally chosen to invest through a Mauritius intermediary in order to obtain the favorable capital gains treatment available under the treaty.
Other jurisdictions, such as Singapore, Cyprus, Luxembourg and the Netherlands, have also served as tax-friendly jurisdictions for investments into India. However, the protocol ends this favorable treatment, and capital gains arising from the sale of shares of an Indian resident company acquired after April 1, 2017, will be taxed by India.
Investors who acquired shares before April 1, 2017, will not be taxed by the Indian authorities, and capital gains will be taxed at a concessional tax rate during a two-year transitional phase.
The protocol also introduced a limitation on benefits clause, requiring substance in Mauritius in order to take advantage of the treaty benefits, and a new 7.5 percent withholding tax on interest income arising from India.
Pursuant to the Indian government’s focus on anti-avoidance and the worldwide focus on base erosion and profit shifting, the Indian government has already commenced negotiations with Cyprus and the Netherlands to amend the existing tax treaties and protect its tax base. Amendments to these treaties are expected to be consistent with the amendments to the India-Mauritius treaty.
The protocol will affect investments made through Singapore because the favorable capital gains treatment available under the India-Singapore tax treaty is available only while such benefits are available under the India-Mauritius treaty. Multinationals with Indian or Singapore investments should evaluate whether to change their investment structures.