The protocol to amend the Double Taxation Avoidance Agreement between Mauritius and India (“the tax treaty”) was signed on 07 March 2024. However, it should be noted that the protocol has yet to be ratified and some aspects remain unclear. We can expect that the authorities from the respective countries will release further guidelines in due course.
The following changes will be brought to the tax treaty:
The replacement of the existing preamble with a new preamble;
The introduction of an anti-abuse provision in the form of a Principal Purpose Test (“PPT”).
The new preamble
This relates to an express statement that the common intention of the parties to the treaty is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements.
The anti-abuse provision
The PPT provides that a benefit under a tax treaty will not be granted if it’s reasonable to conclude that one of the principal purposes of the arrangement or transaction is to directly or indirectly take benefit of the treaty.
Rationale for the changes
These changes relate to the prevention of treaty abuse under Action 6 of the Base Erosion and Profit Shifting project (“BEPS”). Both Mauritius and India are members of the BEPS Inclusive Framework and have committed to implement Action 6 which is a minimum standard under the BEPS project.
In 2017, when Mauritius signed the Multilateral Convention to implement Tax Treaty Related Measures to Prevent treaty Abuse (“MLI”), the Mauritius-India treaty was not listed as a Covered tax Agreement. Instead, Mauritius opted for bilateral negotiations with India with a view to incorporate the Action 6 provisions in the treaty through an amending protocol.
Compliance with Action 6 is closely monitored by BEPS Inclusive Framework members through a peer review process.
Effect of the changes to the tax treaty
Currently, where a Mauritius resident company sells shares in an Indian company and those shares were acquired prior to 01 April 2017, no capital gains tax is applicable in accordance with the grandfathering provisions available under the tax treaty.
In addition, preferential treaty rates are applicable on interest and dividend paid from India where the beneficial owner is a Mauritius tax resident.
The above provisions will continue to apply for companies having substance and with bona fide commercial transactions. These companies should be able to satisfy the tax residency and beneficial owner tests. The PPT is only meant to tackle abusive practices with no real substance.
