Investing in India: The tax-effective way
For more Details: www.bangaloreadvocates.com
For more Details: www.bangaloreadvocates.com
The recent restructuring of the UAE-India DTA has once again brought into focus the issue of tax planning with regard to investments made in India. Under the amended DTA, capital gains earned from the sale of investments in shares of Indian companies in India, will be taxed (except where
exemptions are provided under the domestic tax laws in India). This
amendment will directly affect individual investors and companies
investing in India through companies in UAE. Besides, there has not
been any grandfathering for UAE investments already made in India. In
short, you need to restructure and restructure fast as the amendments
are already enforced.
India is a hot
destination at present, and is attracting an increasing inflow of
capital and investment. In an earlier article (Morison Menon Newsletter:
Jan-Mar 2007) I had explained the policies and procedures concerned
with investing in India, and the extent to which foreign participation
is allowed in vanous sectors. This piece shall touch upon one of the
most effective routes for investing into India, the Mauritius route.
Did you know who leads the pack of FDI investors into India? It's none other than the tiny island of Mauritius at around 40%, with the mighty United States corning a distant second. While my intention is not to undermine the economy of Mauritius,
it is obvious that the funds are being channeled from elsewhere. Why is
Mauritius the preferred destination? The answer lies in the existing
DTA between India and Mauritius.
Presently, in India there is no capital gains tax (CGT) on the sales of shares of an Indian company held
over a year and sold through a stock exchange. Neither is there a 10%
capital gains tax on such sales if the shares in an Indian company are
held for less than a year. Sales of shares in a private company are
taxed at a 20% rate on shares held for more than a year and at 40% on
shares held for less than a year.
Under
the DTA, India shall not charge CGT assuming that the same shall be
charged in Mauritius. Mauritius, on the other hand, has no CGT and hence
the gains are realized to the investor without any sort of withholding.
Do note that the Mauritius entity should not a Permanent Establishment
(PE) in India, else the income attribu5table to the PE shall be subject
to taxation in India.
The viable alternative would be that
the Mauritius Company holds the shares in an Indian company, which in
turn holds the property has to be disposed, the Mauritius company can
sell the shares of the Indian company and claim relief from CGT under
the DTA. As mentioned before, the realized gains are not subject to CGT
in Mauritius.
Funds can operate in a
similar way. The main fund domiciled in Cayman Islands, Bermuda or any
other competent jurisdiction, can have feeder funds located in
Mauritius, so as to invest in Indian entities and take advantage of the
DTA. So what's the catch? For a Mauritius company (Global Business
Company 1 or GBCl) to claim advantages under the DTA, it has to be
tax-resident in Mauritius. This means that in effect, the GBCl shall
have to demonstrate that it is managed and controlled in Mauritius. This
is achieved by:
• Having the registered office in Mauritius
• Having resident directors in Mauritius.
• Owning a local bank account with all funds actually routed through Mauritius
•
Producing annual audited financial statements and filing the same with
the Financial Services Commission or FSC The GBC 1 shall then be
eligible to obtain a tax- residency certificate that can be produced to
Indian tax authorities to claim relief under the DTA.
For more Details: www.bangaloreadvocates.com
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