FPIs nervous on doubts over Dutch tax pact

The uncertainty over the government's tax treaty with Netherlands has unnerved investors who want to shift base to the latter region, following the amendment of earlier treaties with Mauritius, Cyprus and Singapore.
 
According to sources in the know, the government wrote to its Dutch counterpart two months earlier on amending the treaty. There has been sporadic discussion since but no clear headway, they said.
 

Foreign portfolio investors (FPIs), who do not want to see their returns get impacted as a result of the amended Mauritius, Cyprus and Singapore tax treaties, are looking to shift their base to European jurisdictions like France, Spain and Netherlands.
 
“Investors are cautious about moving to European countries and restructuring their operations, as it is unclear whether the treaties with these countries will remain untouched. Some of the aggressive FPIs, however, are keen on shifting base to Netherlands, the best option right now,” said a person familiar with the matter.
 

FPIs were taking the Mauritius, Singapore, and Cyprus route to pool money from investors across the globe and invest in this country. The earlier treaties allowed for taxation of capital gains either in India or these jurisdictions. Since these countries did not charge tax on capital gains, FPIs remained out of the net.
 
Short-term capital gains in India are taxed at 15 per cent; long-term gains are exempted.
 
“Many foreign investors have been exploring other favourable jurisdictions for India investments,” said Suresh Swamy, partner at consultancy PwC India. “However, with the General Anti Avoidance Rules to kick in from April 1, investors will have to keep in mind that tax should not be the main reason for setting up such entities in those countries, and there should be solid commercial reasons. Else, they will risk treaty denial by Indian tax authorities.”
 
France, Netherlands and Sweden offer capital gains exemption on sale of equity shares. With Netherlands, if the shareholding is less than 10 per cent in the Indian company, capital gains exemption is available. If more than 10 per cent, the exemption is available only if the shares are sold to non-residents. If shares are sold to a resident, then the capital gains are taxable in India.
 
“Investors need to be aware of the GAAR provisions while shifting jurisdiction and the fact that the Netherlands treaty does not have a Limitation of Benefits clause,” said the person quoted above.
 
India and Netherlands had begun talks on amending the treaty in 2013 itself but there hasn't been much progress.
 

• Uncertainty over India’s tax treaty with the Netherlands has unnerved investors who want to shift base to the region
• India recently wrote to the European nation about amending the tax treaty, sources say; talks have not made much headway so far 
• Foreign investors have been exploring favourable jurisdictions such as France and Netherlands for India investments. Investors are jittery as it’s not clear if treaties with these nations will remain untouched 
• Countries such as France, Netherlands and Sweden offer capital gains exemption on sale of equity shares. 
• If shareholding is more than 10 per cent, Netherlands offers exemption only if the shares are sold to non-residents