Global businesses in Mauritius opt for arbitration to comply with tax treaty norms
The FSC has directed its attention towards several foreign companies routing investments to India through Mauritius that have opted for arbitration in the island country to satisfy the “substance” requirement and obtain Tax Residency Certificates (TRC). (Image: US Legal)
The Financial Services Commission, Mauritius’ integrated regulator for non-banking financial services, has recently laid emphasis on arbitration in Mauritius, among other regulatory procedures for determining whether an entity properly managed and controlled in the island country is eligible to receive a Tax Residency Certificate (TRC).
The FSC has directed its attention towards several foreign companies routing investments to India through Mauritius that have opted for arbitration in the island country to satisfy the “substance” requirement and subsequently, in order to avail tax benefits under the India-Mauritius treaty, have obtained the Tax Residency Certificate (TRC).
Registered companies in Mauritius have to comply with additional requirements if they wish to benefit under the tax treaty.
Companies must abide by six additional rules including, among others, setting up an office, or employing at least one person who is a resident of Mauritius on a full-time basis, or resolving disputes arising out of investments in India through arbitration in Mauritius, in order to be eligible for the Tax Residency Certificates.
Industry trackers say most GBC1 companies have preferred inserting an arbitration clause in their constitution documents.
“We have seen that most of the foreign investors coming through the Mauritius route are amending the articles of association and including the clause relating to arbitration in Mauritius if they are not fulfilling any of the other tests. New constitutions are drawn up by the investors to satisfy the test, which appear to be undertaken in a majority of the cases,” said Pranay B, tax expert.
Mauritius-based entities involved in investment activities generally prefer structuring their business as Category 1 Global Business Companies (GBC1) that are entitled to treaty benefits.
A few companies already have an office in Mauritius and some have decided to include one full-time employee. However, questions came out on whether the arbitration clause would cover commercial disputes as well but it appears for now that it will only cover shareholders disputes.
According to Shefali Goradodia, partner, BMR Advisors, companies based in Mauritius are opting for arbitration, as it is easy to implement in order to satisfy the substance requirements, especially in the case of strategic investment and or master-feeder structures where they do not need the approval of their investors.
Moreover, no additional investment or expenditure in Mauritius is required for the time being.
However, private entity fund prefer to resolve arbitration in their home nations, like London, or in markets like Singapore. It has to be noted, however, that many players have added the arbitration clause for future disputes and there is a worry that this could land them in trouble as the framework of arbitration in Mauritius is still not tried and tested like in Singapore or other developed markets.
To provide a context on why stringent clauses have been included in the tax treaty between India and Mauritius, foreign investors route their investments to India through Mauritius to avail of tax benefits that exit under the treaty between the two countries.
According to the treaty, capital gains of a resident of Mauritius are not taxed in India and exempt from tax in Mauritius as well.
Source: The Economic Times