It’s official: A Double Tax Avoidance Agreement, commonly known as a tax treaty, was signed by Mauritius and Hong Kong in early November 2022.
Hong Kong-based funds investing in India do not enjoy any tax concessions on the source income generated in India (for example, interests and dividends). On the contrary, the treaty with Mauritius provides a concessional tax rate for interest income from India at the rate of 7.5% and Dividends at the rate of 5%. Hence, a fund set up through the Mauritius route is an attractive means to invest in India.
Furthermore, a transfer pricing firm can assist in structuring the investments through Mauritius to ensure that the tax treaty benefits are maximized, and any potential transfer pricing issues are mitigated.
It is said that the Mauritius -Hong Kong DTAA complies with the minimum standards set by the Base Erosion and Profit Shifting Project (BEPS) of the OECD as mandated by the G20. Simplistically, the Hong Kong-based funds would need to fulfil the criteria of the Principal Purpose Test and Limitation of Benefit test as per the agreed standards in the BEPS project. The comprehensive double taxation avoidance agreement provides favourable tax treatment for HK residents by way of exemption for dividends and interest, and royalties, subject to reasonable conditions.
For investments coming into India from Mauritius, in addition to the minimum standards set by the BEPS project, the investment and the structure should also pass the General Anti-Avoidance Regulations (GAAR) as introduced by the Indian Government. If funds are set up in Mauritius with the sole purpose of taking advantage of taxation, the same could be challenged from a GAAR perspective.
Further, considering the additional scrutiny and sanctions on the Chinese investments, the Indian regulators may build in an additional level of checks to ensure that such structures emerging out of Mauritius- Hong is not acting as a routing mechanism for Chinese investors.
With the discussion around anti-tax avoidance, the last thing that India currently needs is another Mauritius loophole that foreign investors exploit. To ensure the appropriate use of tax treaty is undertaken, taxpayer and investors should structure their global operations to meet the regulatory and taxation framework of India and follows global best practices.