India and Nepal have signed an amended double tax agreement on the request of the former. The revised treaty will offer the same benefits to both countries but will refine legislation to eliminate ‘treaty shopping’.
Treaty shopping arises when a national or resident of a third country seeks to obtain the benefit of a double tax agreement between two other countries by interposing a company or other entity in one or the other of them, effectively abusing the original purpose of the treaty and paying substantially less tax.
The agreement signed earlier this week will extend the pre-existing beneficial clauses between India and Nepal, removing double taxation on investment and trade, albeit with legislation which will prevent third parties from also benefiting. Sri Lanka has also asked for a revision of a pre-existing tax treaty between it and Nepal for similar reasons.
India's fight against treaty shopping has been ongoing for several years, but has yet to be successful in the case of Mauritius. Under their treaty, capital gains tax on investments in Indian securities is payable in Mauritius, which currently operates a 0% capital gains tax rate, effectively allowing companies that have residence in Mauritius exemption from tax on capital gains from trading in India.
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