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Many overseas portfolio traders (FPIs), offshore enterprise capital funds and firms from Mauritius, Singapore and the Netherlands are more likely to be on firmer floor to keep away from capital positive factors tax on earlier investments in Indian shares, so long as they’ve tax residence certificates (TRC) from these jurisdictions.

The suitability of TRC has usually been questioned by the revenue tax (IT) division on the grounds that funding entities have been mere dolls created to purchase treaties and acquire tax advantages, whereas precise management rested with funding firms. portfolio and traders elsewhere who don’t qualify. for tax exemption.

Nonetheless, current occasions point out that tax officers, in addition to quasi-judicial authorities, are prepared to permit these overseas entities to assert tax advantages regardless that they’re owned by holding firms in different international locations.

A couple of weeks in the past, the Earnings Tax Enchantment Tribunal (ITAT) dismissed the IT division’s argument that MH India (Mauritius), a Mauritian firm, was merely a conduit for the Dutch mum or dad from which it had borrowed to purchase shares in India. Difficult capital positive factors tax on the sale of shares by the Mauritian firm, the tax official additionally famous India’s acceptance of the provisions of the Multilateral Instrument (MLI), a world framework that makes it troublesome for multinational firms keep away from taxes. On the core of MLI (which Mauritius has but to just accept) is an try to stop firms from artificially shifting earnings to low- or no-tax jurisdictions.

FPIs and foreign venture capitalists pin hope on proof of tax residency to avoid a shock

“The Court docket has rigorously reviewed the underlying details and has held that the Mauritian firm isn’t a belief firm. Just because it had taken benefit of its holding firm’s loans to spend money on India, it can’t be denied the good thing about the India-Mauritius tax treaty. The Court docket additionally referred to CBDT Round No. 789 of April 13, 2000 and the Supreme Court docket ruling within the case of Azadi Bachao Andolan. For the sake of completeness, the Court docket additionally confirmed that within the occasion that Mauritius’ treaty advantages weren’t granted, the

The India-Netherlands tax treaty could be utilized as a backup. This can be a welcome ruling and will assist FPIs and personal fairness funds investing from Mauritius because it reaffirms that not all entities investing from jurisdictions like Mauritius are conduits,” stated Shefali Goradia, Enterprise Tax Associate, Deloitte Touche Tohmatsu India LLP.

Within the historic ‘Azadi’ ruling, the Supreme Court docket had held that the supply of the Settlement to Keep away from Double Taxation would prevail over the final provisions contained within the IR Legislation.

“Whereas the courts are accommodating to permit TRC to waive tax exemptions on the sale of protected investments, the tax authorities refuse to budge. The difficulty will grow to be extra outstanding in 2023 as many funds have bought their pre-2017 investments this yr,” stated Saurrav Sood, apply chief, worldwide tax and switch pricing at SW India. The Evaluation Officer, ITAT financial institution stated, has made a determined try to exceed the ratio set within the Azadi case by “anticipating a futuristic MLI ratification occasion by offering an modification to the India-Mauritius Tax Treaty preamble by the Authorities of Mauritius, which is but to occur”.

“That is one more ruling that upholds the sufficiency and sanctity of a CVR issued by the Mauritian authorities.

Sure essential elements just like the interval of existence, the loans, the intention to make extra investments in India have been raised and mentioned within the ruling. Arguments that the entity was a conduit, merely transposed to assert advantages

beneath the India-Mauritius tax treaty they weren’t thought of ample to disclaim the TRC in addition to the binding worth of the Azaadi Bachao ruling in addition to the a number of circulars issued subsequently by the Tax Division,” stated Ashish Mehta, associate at Khaitan & Co. .

Though the ruling went in opposition to the tax workplace, a number of the tax officers see ITAT’s recognition of the Dutch holding entity as a silver lining: if the Mauritian firm’s holding firm have been a US entity, somewhat than be situated within the Netherlands or Singapore. , the tax division could discover itself in a extra advantageous place.

“Explanations have been sought from many Mauritian firms to clarify their construction, administrators, firm particulars and investigation is underway to elevate the company veil. As soon as that’s completed and the investigation concludes that the helpful proprietor is another person, the lawsuit in opposition to him can be escalated accordingly,” stated a senior tax official conversant in the event.

Underneath India’s revised treaties with Mauritius and Singapore, there is no such thing as a capital positive factors tax on the sale of shares acquired earlier than 2017. However, if the IT division searches by means of the entity in Mauritius and Singapore to deal with US parent—or every other nation that doesn’t have a comparable tax profit provision in its treaty with India—-the tax collector could have a greater case in court docket and cuts.

Nonetheless, within the case of one other overseas enterprise capital fund, the tax division didn’t go additional than Mauritius to argue that the legislation ought to contemplate ‘substance’ over ‘type’ and settle for the reason given by the overseas investor. . Whereas the fund trade and its tax advisers are conserving their fingers crossed that the division hardly ever sees favorable rulings, they imagine that these developments reaffirm the significance of TRC.


  • TI argues that the Mauritian/S’pore entities are managed by others
  • Tax officers need to transcend these entities
  • The court docket dominated that the TRC of the Mauritian entity is ample to assert the tax profit
  • Nonetheless, the court docket has acknowledged Holdcos/Mauritius mum or dad cos

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FPIs, foreign VCs pin hopes on tax residency proof to avoid hit