Mauritius-Based Investors Are Likely To Keep The Taxman At Bay!!
Foreign investors from Mauritius are frequently denied capital gains tax reduction since the tax haven companies’ owners are situated in other countries. This could change right now.
Foreign Investors From Mauritius Likely To Keep The Taxman At Bay!!
The Income Tax (I-T) department’s attempt to break the ‘corporate veil’ was thrown down by a court this week, which decided that the delicate subject of ‘beneficial ownership’ (BO) of the Mauritian corporation cannot be linked to capital gains.
The judgment by the Income Tax Appellate Tribunal (ITAT), a quasi-judicial body, relates to the financial year 2015-16 when Blackstone FP Capital Partners Mauritius V Ltd claimed capital gains of nearly 900 crores after selling stocks of CMS Info-Systems.
The tax officer’s competition was that the most effective corporate management in Mauritius was found in the Caribbean tax haven of the Cayman Islands. As a result, Blackstone will be unable to benefit from the modified India-Mauritius treaty’s capital gains tax benefits, which include no tax on the sale of shares purchased prior to 2017. The tax officer thought it was a joke to wear the proverbial company veil and point fingers at the real bosses.
Further, In ruling on Blackstone’s appeal, the Tribunal’s Mumbai bench, which included judicial member Pavan Kumar Gadale and vice-chairman Pramod Kumar, stated that the “concept of BO of capital gains” cannot be incorporated into the scheme of Article 13 (dealing with capital positive factors) of the treaty.
“The Tribunal has determined that the BO test is not required for capital gains tax exemption under the Treaty.” In 2000, the CBDT (apex tax body) released Circular No. 789, indicating that where the Mauritian authorities give a Certificate of Resident, such a Certificate will be sufficient proof for acknowledging the status of residence as well as BO for applying the Treaty.
The Supreme Court supported this circular in both the Azadi Bachao Andolan and the Vodafone cases. Shefali Goradia, Partner (BusinessTax) at DeloitteToucheTohmatsu India, said, “This circular does not appear to be dealt with in the judgment.”
While the judgment has been well received, ITAT’s decision to return the case to the assessing officer (AO) has resulted in combined emotions.
According to Parul Jain, who heads Nishith Desai Associates’ international tax practice, tax jurisprudence has already stated categorically that the corporate veil of a corporation can only be pierced when the transaction seems to be a sham.
In the framework of treaties, there is a hot discussion about BO. In light of this, ITAT believes that determining what constitutes BO should not be left to the discretion of a tax authority.
Accepting the Tribunal’s conclusion that the criterion of being a BO is absent from Article 13(4) of the Treaty, According to Sanjay Sanghvi, a partner at Khaitan & Co, it would be fascinating to see what factors or principles the tax officer uses to determine whether the demand for BO is indeed incorporated under Article-13 of the Treaty.
According to Goradia, the tax officer will now have to demonstrate, based on facts, why the Mauritius entity should not be treated as the BO of the shares and the corporate veil should not be lifted.