Mncs Amend Mauritius Arms Articles To Avoid Tax Tangle

Foreign companies which are making fresh investments in the country through Mauritius-based subsidiaries are amending their articles of association to specify that they will not just invest in India, but in other Asian countries as well. This move follows the advance tax ruling authoritys recent decision on the proposed investments by AIG Insurance.

The authority had upheld the validity of Indias double taxation treaty with Mauritius, pointing out that AIGs investment decision was based on genuine commercial reasons. AIG had filed an application seeking an opinion on the taxability of its income from an offshore fund, which it proposes to float jointly with Infrastructure Leasing and Financial Services.

The ruling has come as a shot in the arm for several foreign companies specially those which plan to invest in power projects which had put their plans for India on hold following the ruling in the Natwest-HDFC Bank case.

In the case of Natwests investment, two paper subsidiary companies Natwest Markets (Mauritius) Ltd (No 1 and No 2) had been floated in Mauritius to route investment in HDFC Banks equity. Natwest of UK was the sole shareholder of these two companies.

Based on this factor and the other particulars of the case, the authority had observed that the transaction was routed through Mauritius only to avoid paying tax by exploiting the tax treaty. This implied that the income-tax department would not extend the advantages of the tax treaty to Natwest.

Acting on the basis of these two rulings, foreign companies have begun to adopt a fresh structure for their Mauritius subsidiaries. Incorporating this statement of intent (about investing in other Asian countries) is sufficient to claim the benefits of the double taxation treaty with Mauritius. As a result, virtually all the new structures have incorporated this change, a tax consultant said.

The new articles have been drafted to reflect a larger business purpose for setting up a company in

Mauritius and the fact that the company is not a 100 per cent subsidiary of a single foreign player, but is owned by a clutch of investors. The new articles also seek to structure the vehicles as holding companies focusing on investment in the Asian region.

Consultants feel that once this structure is achieved, the revenue authorities cannot possibly describe the Mauritius venture as a special purpose vehicle (SPV) designed to evade tax. This is because the umbrella investment company could already have made many investments outside India or can do so in future. Therefore, it could conceivably have a larger commercial purpose and still meet the business activity test.

Mauritius and the fact that the company is not a 100 per cent subsidiary of a single foreign player, but is owned by a clutch of investors.

The new articles also seek to structure the vehicles as holding companies focusing on investment in the Asian region.

Consultants feel that once this structure is achieved, the revenue authorities cannot possibly describe the Mauritius venture as a special purpose vehicle (SPV) designed to evade tax.

This is because the umbrella investment company could already have made many investments outside India or can do so in future.

Therefore, it could conceivably have a larger commercial purpose and still meet the business activity test.