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Indian Ruling Backs Mauritius Tax Treaty

by Mary Swire,, Hong Kong

25 March 2010

After a long running dispute on the incidence of capital gains tax, the Indian Authority for Advance Ruling (AAR) has issued a ruling which maintains the validity of Article 13 (4) of the India Mauritius double taxation treaty on exemption from capital gains tax (CGT) normally payable in India.

In April 2009 E*Trade Mauritius, an indirectly owned subsidiary of E*Trade Financial Corporation (E*Trade US), had been required to pay INR245m (USD50m) CGT on the sale of shares in IL&FS Investmart Limited (IL&FS) to HSBC Violet Investments (Mauritius) Limited (HSBC Mauritius) after a tax adjudication by the High Court Mumbai.

The Indian Income Tax Department had argued that E*Trade Mauritius should not profit from the tax treaty benefits, because the deal was really on behalf of E*Trade US and that E*Trade Mauritius was merely a shell company as it had received money from its US holding company to purchase its IL&FS shareholdings.

E*Trade Mauritius succeeded in having the case heard by the AAR in August 2009 which led to this ruling in its favour. AAR is a judicial body able to adjudicate on tax disputes involving overseas entities and is known to be influential on matters of principle.

The judgement will be welcomed by foreign investors who rely on the Mauritius tax treaty. However tax advisers are waiting to receive the full wording of the judgement, so that they can study it carefully.

Tax Advocate Porus Kaka said in a CNBC-TV18 interview on the subject: "One of the important things that we need to look out for in this judgement is the concept of beneficial owner qua capital gains. This issue arises in a significant amount of treaties with India and also outside the treaties under Section 9, like in the Vodafone decision."

Other recent unresolved tax disputes involving capital gains tax include the sale by Foster's Australia of its Indian subsidiary, Foster’s India, to British brewer SABMiller, and the Idea-Cellular AT&T acquisition.

TAGS: capital gains tax (CGT) | tax | holding company | double tax agreement (DTA) | India | Mauritius | tax avoidance | multinationals | triangulation

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