Offshore Investment Gateways to Land of Ganges

Since ancient times India, also known historically as Land of Ganges , has been a star attraction for the outside world. This Land of Ganges  has witnessed a lot of foreigners since ancient times visiting here either for trade or for conquests and all of them who came to India had heard a lot of its resources and richness and were mesmerized by its beauty and resourcefulness.
 
Things may have become modernized now , supported by industrial and technological developments, but the  glory and attraction of this Land of Ganges remains the same. Ancient traders have taken shape of  Multi National Companies, Kings have been taken over by the Governments, Bows and Arrows  have been replaced by most sophisticated weapons and Information Technology has made the things faster beyond imagination but the story of India's resources remain the same. Every top Multi National Company intends to invest in India to grow and prosper.
 
With the advent of stringent laws ,to take care of  our  national interests, there are number of important considerations for Foreign Direct Investors. Aside from foreign exchange management regulations, taxation is the most important one. Tax regulations and any agreements between the country where the investment is made and the country of origin are relevant in determining tax efficiency.
 
Companies investing in India normally invest through entities in intermediate countries to obtain tax benefits. These intermediate countries are called International Offshore Financial Centers. Choosing the best offshore center for India-bound investment requires careful consideration of the risks and financial rewards.
 
The Capital Gains from sale of shares in India Companies, Interest and Dividends are the principal means for overseas investors to realize return from their investments. So while investing in India these three are the key considerations for any foreign investor in  India i.e. applicable tax on capital gains, dividends and interest in India. Taking these into mind offshore jurisdiction is chosen to route investment in India. 
 
Though there are many offshore jurisdictions which might be levying no taxes within its jurisdictions but for long term benefits and actual business processed only those jurisdictions need to be considered which have Double Tax Avoidance Agreement (DTAA) with India. Further International Financial Centers should also possess certain non tax advantages like political stability, freedom from exchange controls and safe business infrastructure.    
    
Three attractive offshore centers for India bound investment , taking into account the above discussed key considerations , are Mauritius, Cyprus and Singapore. All three jurisdictions enjoy double tax avoidance agreements (DTAA) with India, but it is worth examining these agreements carefully and also considering several other key factors before choosing the best investment route. The provisions of any existing DTAAs are important because they typically modify or determine how the country of investment will tax capital gains, dividends, interest or other applicable proceeds payable to a foreign investor. To benefit from a DTAA, it is critical that the investor is a tax resident of the country from which the investment is made and does not have a "Permanent Establishment" in the country of investment.

Foreign direct investment into India from the tiny island nation of Mauritius exceeds the inflows from any other country of the world and the  reason of the same is not the Mauritius is an over powering economy in itself but  rather because the island is an ideal route for investments into India.

In addition to Mauritius, the Republic of Cyprus and Singapore have also emerged as popular routes for India-bound direct investment.
It would be now worthwhile to discuss the key tax considerations of Capital Gains, Dividend and Interest vis a vis Offshore Financial Centers of Mauritius , Singapore & Cyprus.
 
MAURITIUS
 
Whenever there is talk of revising Indo-Mauritius tax treaty , Indian equity benchmarks takes huge beating. Reason for the same is that  1983 Indo Mauritius Double Taxation Avoidance Treaty  states that companies originating in Mauritius won't face capital gains tax in India i.e. Mauritius tax residents are exempt from Indian tax payable on Capital Gains from sale of shares in Indian Companies. Further Mauritius does not levy tax on Capital Gains under its domestic laws. This has led to formation of many companies in Mauritius which do not have any root in island nation thus exploiting this loophole for tax benefits. Furthur Hon'ble Supreme Court has authenticated this tax planning in the case of Azadi Bachao Andolan wherein it has held that companies can establish Mauritian tax residency under the DTAA simply by obtaining a tax residence certificate from the government of Mauritius. In order to obtain a tax residence certificate, Mauritius requires, among other conditions, that at least two directors are resident in Mauritius, a bank account is maintained in Mauritius and a Mauritius auditor is appointed..

Mauritian tax residents cannot be taxed on sale and purchase of shares in Indian Companies under the head  Income from Business also until and unless they have permanent establishment  in India. This allows Mauritian tax residents to avoid tax on capital gains from the sale of shares under domestic Indian tax laws.

Investors through Mauritius enjoy the benefits of Mauritius' status as India's primary investment hub with a reasonably stable government, a well-developed legal system and flexible corporate laws. The administrative infrastructure for establishing and operating special-purpose entities in Mauritius is well established. Furthermore, given the considerable business interests already exercising their rights under the treaty, the potential for a major disruption in the flow of foreign investments into India is likely to act as a brake on any steps by India to take away the benefits under the DTAA.

The India-Mauritius DTAA does not provide any concession with respect to Indian tax on interest payments, so Mauritian tax residents will pay an approximate rate of 42 percent on interest income received from Indian companies.

Mauritius does not tax capital gains from the sale of shares in an Indian company. nor does it tax dividends received from an Indian company if the Mauritian entity owns more than five percent of that company. Where the ownership is less than five percent, it is generally possible to reduce the three percent Mauritius income tax to effectively zero. These favorable local tax features have been noticed by international investors.

Companies registered in Mauritius and holding GBC1 license are subject to tax @ 15% in Mauritius. However it introduced elaborate  provisions on the calculation of net foreign source income and foreign tax credits (with or without evidence), which may reduce considerably the effective tax burden to either zero or 3%.
Due to the benefits enlisted above global investors converge at Mauritius to enter India as FII. For eg. Investors/Promoters from USA, UK, Germany etc. would form GBC1 in Mauritius and then through GBC1 they would invest in Indian Stock Exchanges or bring FDI in Indian Company.

Even Overseas Direct Investment from India by Indian Companies is also routed through Mauritius wherein Indian promoters take advantage of Indo-Mauritius DTAA and invest in target country through Mauritius GBC1. Dividends received from target country may be parked in Mauritius and reinvested globally resulting in huge tax savings. Even Capital Gains at time of disinvestment in target country may lead to zero/low taxation.

SINGAPORE 
A small island state located in the heart of South east Asia , Singapore has an area of about of 685.4 Sq. km. However, its small physical size belies its great economic strength and resilience. Singapore's strategic location and political stability have made it an attractive oasis for many foreign corporations seeking to target Asian Markets.

Under Singapore Tax Treaty, a Singapore resident is not subject to Capital Gains Tax under Income Tax Act on sale of shares in India Company and Singapore generally does not tax Capital Gains.
Singapore does not levy tax on income earned outside Singapore and not remitted to Singapore. There are exemptions of certain foreign remitted income like dividends, service income , branch profits subject to certain conditions. Conditions that have to be met are : (i) The highest corporate tax rate (headline tax rate) of the foreign country from which income was received is atleast 15% ; and (ii) The foreign income had been subjected to tax in the foreign country from which they are received. The rate at which the foreign income was taxed can be different from headline tax rate.

Further there is no withholding tax on dividends in Singapore. Under Singapore law, interest payments received in Singapore by a Singapore tax resident company would generally be taxed at 18 percent, subject to a potential foreign tax credit for any Indian tax paid .
Changes introduced in 2005 put the Singapore DTAA on par with the India-Mauritius DTAA with respect to tax exemption on capital gains but include two important limitations on beneficial treatment for capital gains.
First, investors from Singapore do not receive an exemption from Indian capital gains tax if the affairs of the company were arranged with the "primary purpose" of taking advantage of the capital gains exemption (the so-called "limitation on benefits"). Specifically, a "shell/conduit" company cannot avail itself of the capital gains exemption, but provides a safe harbour for companies listed in India or Singapore or a company with more than S$200,000 or Rs. 5 million of total annual expenditures on operations in Singapore in the preceding 24-month period.
A second important limitation ties the fate of the capital gains exemption under the Singapore DTAA to the India-Mauritius DTAA. Investors from Singapore will lose their capital gains exemption if India and Mauritius amend their DTAA to take away the corresponding exemption.
The tax residency requirements under the India-Singapore DTAA are more stringent than those of Mauritius and arguably more so than Cyprus. However, they do offer two major advantages over the Cyprus requirements.
First, Singapore's bright-line requirements reduce the risk of misinterpretation and avoid the ambiguity of the malleable "management and control" standard used in Cyprus. Second, as an established hub of international finance, Singapore is already the home to many investors and more likely than Cyprus to house established subsidiaries to international companies interested in investing into India with the expenditures in excess of the safe harbour thresholds.
 
CYPRUS 
A popular alternative to Mauritius as an investment gateway to India is the Mediterranean island of Cyprus.

As with the India-Mauritius DTAA, the agreement between India and Cyprus provides exemptions from Indian capital gains tax from the sale of shares in an Indian company by a Cyprus tax resident. Further without a PE in India sale & purchase of shares is not even taxed as Income from Business in India..

Unlike the India-Mauritius agreement, the India-Cyprus DTAA caps the withholding tax on interest income paid to a Cyprus tax resident at 10 percent (as opposed to approximately 42 percent to which a Mauritius resident would be subject).

Under Cyprus law, tax on interest could be as low as 10 percent, the effect of which could be further limited to the net interest margin ultimately retained by the Cyprus resident company. Cyprus does not impose any taxes on dividends received by a Cyprus tax resident from an Indian operating company in which it owns more than one percent of the share capital if certain conditions are met. Capital gains are not subject to any tax in Cyprus.

In order to enjoy the benefits of the India-Cyprus DTAA, the Cyprus company must be the beneficial owner of the relevant asset from which the revenue is derived and must be a tax resident of Cyprus, which under the India-Cyprus DTAA means a person who is liable to pay tax in Cyprus by reason of domicile, residence, place of management or other similar criterion.
Without a clear-cut definition of residence, some advisers have taken the stance that the standard will be satisfied if: (i) either the affairs of the company are managed by the board members, the majority of whom are tax residents of Cyprus and board meetings take place in Cyprus or (ii) any other body manages and controls the company, such as the shareholders or an investment committee and such shareholders or investment committee are tax residents.
This ambiguous standard of "management and control" creates uncertainties alleviated by the clear-cut requirements for Mauritius residency.
Since its accession to the European Union, Cyprus has slowly but steadily developed a combination of favorable features, from an investor-friendly tax regime to better enforcement of money laundering laws, which have increased its attractiveness to India-bound investors. However, as with Mauritius, in practice Cyprus proves slow-going for those looking to establish business entities quickly. Coordinating the necessary approvals takes up to six weeks or more yet, investors can reduce their wait time by using off-the-shelf companies already created.
 
There are many more routes through which the foreign investors might be routing their investments into India to take advantage of growing Indian Economy and at the same time pay minimal taxes in India. The truth in reality is that government itself has paved way for these Investment routes to attract FDI in the country. Hon'ble Supreme Cout Judgement in the case of Azadi Bachao Andolan is the proof of this wherein Government of India itself  defended the tax planning route through Indo-Mauritius Tax Treaty.

However the fact remains , that this Land of Ganges had been the largest economy of the world in ancient and medieval times and we are on the way to achieve our lost glory .The Golden Age of Indian Economy might be just be around the corner. These Investment routes may have been used to save taxes by the FII's but in actual it is the opportunities which our country offers that attracts them here.

However among all these things taxation is a one  issue, foremost we must take care that our sovereignty is not put to risk this time and we prosper as United India and do not let those who are jealous of this Rising Land of Ganges ,crush our national interests for their ulterior motives.