Mauritius-based SPVs eligible to claim tax benefits under DTAA: AAR
MUMBAI: Even as the industry trackers plan for place of effective management (PoEM) guidelines, Authority for Advance Ruling ("AAR") in a recent case has ruled that Mauritius-based SPVs are eligible to claim tax benefits under DTAA.
The case involved Mahindra - BT Investment ("Applicant"), a company incorporated in Mauritius that transferred shares of an Indian company to a US company is not liable to get taxed in India under the beneficial provisions of India-Mauritius Treaty, the AAR ruled.
In this ruling, the AAR has dealt with the issue of residential status of the applicant which is guided by the place where the control and management of affairs of the applicant exists. Treaty benefit is only available to a tax resident of the contracting states, Nangia and Co, a tax consultant said in a concept note.
In the present case, the revenue authorities argued that the control and management of the applicant was situated in India since the sole purpose of existence of the applicant was "transferring the shares of TML (i.e. the Indian company) to AT&T (the US company). The real transaction is between TML and AT&T and control and management lies in India, according to the concept note.
The applicant argued that the board meetings wherein the business decisions were taken were held in Mauritius and hence the place of control and management of affairs of the applicant is situated in Mauritius.
"Though an AAR is only binding on the applicant, persuasive value can be drawn from the same. Where a foreign company is able to establish that major business transactions such as decisions on financial matters; approving of financial budgets and statements; decisions on declaration of dividends and decision on buyback of shares among other decisions are taken outside India, its residential status shall remain outside India," said Rakesh Nangia, managing partner, Nangia & Co.
The AAR ruling can have some bearing on future disputes under PoeM, say industry trackers.
Place of Effective Management or PoEM is a framework to determine the tax payable by a foreign company that for all purposes is managed from India and yet does not pay tax domestically. Many Indian companies that have traditionally used holding companies and subsidiaries overseas for various reasons are assessing how they may be affected and are racing to put new structures in place before they come under scrutiny from next year.
While the government has said that operational subsidiaries of Indian multinationals won't be targeted, many such units are held via pass through companies registered in tax-friendly countries.
"As per this ruling even an SPV merely earning dividend and interest income shall be construed as an entity having commercial purpose. Revenue authorities in this case argued that the incorporation of the applicant was solely to hold the shares of TML to facilitate a tax neutral transfer. This ruling of AAR has laid a striking principal that an SPV which is established without any economic substance, shall be construed as having commercial purpose where the future transfer of shares by the SPV is linked to the happening of a future event," said Nangia.
The case involved Mahindra - BT Investment ("Applicant"), a company incorporated in Mauritius that transferred shares of an Indian company to a US company is not liable to get taxed in India under the beneficial provisions of India-Mauritius Treaty, the AAR ruled.
In this ruling, the AAR has dealt with the issue of residential status of the applicant which is guided by the place where the control and management of affairs of the applicant exists. Treaty benefit is only available to a tax resident of the contracting states, Nangia and Co, a tax consultant said in a concept note.
In the present case, the revenue authorities argued that the control and management of the applicant was situated in India since the sole purpose of existence of the applicant was "transferring the shares of TML (i.e. the Indian company) to AT&T (the US company). The real transaction is between TML and AT&T and control and management lies in India, according to the concept note.
The applicant argued that the board meetings wherein the business decisions were taken were held in Mauritius and hence the place of control and management of affairs of the applicant is situated in Mauritius.
"Though an AAR is only binding on the applicant, persuasive value can be drawn from the same. Where a foreign company is able to establish that major business transactions such as decisions on financial matters; approving of financial budgets and statements; decisions on declaration of dividends and decision on buyback of shares among other decisions are taken outside India, its residential status shall remain outside India," said Rakesh Nangia, managing partner, Nangia & Co.
The AAR ruling can have some bearing on future disputes under PoeM, say industry trackers.
Place of Effective Management or PoEM is a framework to determine the tax payable by a foreign company that for all purposes is managed from India and yet does not pay tax domestically. Many Indian companies that have traditionally used holding companies and subsidiaries overseas for various reasons are assessing how they may be affected and are racing to put new structures in place before they come under scrutiny from next year.
While the government has said that operational subsidiaries of Indian multinationals won't be targeted, many such units are held via pass through companies registered in tax-friendly countries.
"As per this ruling even an SPV merely earning dividend and interest income shall be construed as an entity having commercial purpose. Revenue authorities in this case argued that the incorporation of the applicant was solely to hold the shares of TML to facilitate a tax neutral transfer. This ruling of AAR has laid a striking principal that an SPV which is established without any economic substance, shall be construed as having commercial purpose where the future transfer of shares by the SPV is linked to the happening of a future event," said Nangia.
