Want To set up a company in India — Overview
Comparison of India’s Position with Other Major DTAA Treaties after Tiger global Supremecourt Judgement
By Nagavarapu Sudheer, M.Com, F.C.S, L.L.B Partner, A2 Consultants
India–Mauritius DTAA
- Historically zero capital gains tax on share sales routed via Mauritius because Mauritius did not tax capital gains, making it a popular conduit for FDI into India.
- 2016/17 amendments gave India the right to tax capital gains on investments made after 01/04/2017.
- Following the Tiger Global ruling, India can deny treaty benefits where the structure is abusive or lacks substance, even if a Tax Residency Certificate (TRC) exists.
- The Principal Purpose Test (PPT) has been introduced to deny benefits where tax advantage is a main purpose.
Key India Mauritius Notes:
Treaty benefits not automatic
Substance requiredf
GAAR can override DTAA benefits.
India–Singapore DTAA
Like Mauritius, Singapore was also used as a treaty conduit for FDI due to favorable capital gains treatment.
- After treaty changes, India can tax capital gains arising from share transfers post 01/04/2017.
Similarities to Mauritius:
PPT applies
Substance standards increasingly required
No automatic relief based solely on TRC
India–Netherlands DTAA
- Traditionally standard OECD model based — India retains the right to tax capital gains on shares of Indian companies if substantial value is from India.
- Unlike the older Mauritius regime, Netherlands treaty never provided blanket capital gains exemption for investors.
Key Differences:
Less “conduit/misuse” advantage
Capital gains rights more source based
LOB clauses common to curb treaty shopping
India–France (Revised)
- Recent revision reduced dividend tax but expanded India’s capital gains taxing rights, making all share sales in India taxable regardless of threshold.
- Highlights a global trend: treaties being updated to balance investor relief with sovereign taxing rights.
Takeaway:
While treaties vary, a common global norm post BEPS/MLI is:
Capital gains rights tend to reside with source country,
Treaty benefits conditioned on substance and commercial rationale.
India–UAE (Dubai/Abu Dhabi) DTAA
- The UAE (including Dubai) is a popular holding jurisdiction due to zero capital gains tax and a flexible corporate environment.
- Treaty allows reduced withholding taxes on dividends, interest, and royalties, but capital gains from shares are taxable in India if the UAE entity lacks commercial substance.
- India now requires substance and economic reality, consistent with PPT and GAAR principles, to grant treaty benefits.
Key Notes:
TRC is necessary but not sufficient
Substance includes employees, office, and decision-making in UAE
Popular for PE/VC structuring, but must comply with BEPS/MLI norms
India–Switzerland DTAA
- Switzerland used for holding structures and family offices.
- Provides reduced withholding taxes but capital gains from Indian shares remain taxable if Swiss entity is a shell.
- Substance requirements include local employees, real office, and decision-making, similar to Mauritius and Singapore.
2) Checklist for Foreign Investors Building Treaty Based Holding Structures
To ensure DTAA benefits hold up under scrutiny — especially in India — investors should follow this checklist:
Legal and Structural Requirements
- Valid Tax Residency Certificate (TRC) from the holding jurisdiction.
- Proper incorporation and compliance with local company law (e.g., actual registered office).
- Limitation on Benefits (LOB) clause compliance if the treaty includes it (to avoid treaty shopping).
Substance & Operational Requirements
- Genuine board meetings with majority of directors physically participating in the treaty jurisdiction.
- Local decision making authority – strategic, financial, and investment decisions documented and taken locally.
- Real employees and payroll in the treaty jurisdiction.
- Local bank accounts and operational costs commensurate with economic activity.
- Commercial rationale beyond tax savings (e.g., business purpose for holding entity).
Why substance matters:
India now examines substance and rejects reliance on TRC alone where arrangements are primarily tax motivated.
Documentation & Record Keeping
- Minutes of meetings, evidence of decision making, strategic planning.
- Audit trails showing cash flows in and out of the entity.
- Evidence of commercial interactions (contracts, employee timesheets, office leases).
Tax & Treaty Compliance
- Advance Pricing Agreements (APAs) or Advance Rulings where appropriate.
- Regular legal audits to assess treaty eligibility under evolving BEPS/GAAR norms.
- Tax opinion letters supporting the structure’s commercial purpose.
- Review of treaty updates and MLI impacts regularly.
3) Practical Case Studies: Compliant vs Non Compliant Structures
Case A: Compliant Treaty Structure
Scenario:
A Singapore holding company legitimately runs its investment operations from Singapore and holds Indian portfolio investments.
Features:
Local Singapore employees and office space
Board meetings conducted in Singapore
Decisions on acquisitions, capital allocation, exits made by Singapore directors
Documented commercial strategy beyond tax
Outcome:
Strong defense against GAAR/PPT tests because substance, economic activity, and commercial rationale exist — not just a superficial shell.
Result:
Investor likely retains treaty benefits under India–Singapore DTAA (e.g., reduced withholding tax).
Key point: Token residency isn’t enough — actual business presence is required.
Case B: Non Compliant “Shell” Treaty Structure
Scenario:
A Mauritius entity incorporated solely as a conduit for tax benefit, with no real local operations, few or no employees, and strategic decisions taken abroad.
Features:
TRC obtained but no real substance
Board meetings held virtually from another jurisdiction
No local office, no payroll
Investment decisions documented elsewhere
Outcome:
Under India’s Tiger Global decision and GAAR/PPT doctrine, benefits denied because entity lacks commercial substance.
Result:
Capital gains taxed in India despite the treaty; investor faces tax plus interest/penalties.
Key point: Substance > documentation — legal form cannot replace economic reality.
Case C: Partial Compliance with Weak Documentation
Scenario:
A Cyprus holding company has an office lease and a couple of employees but major decisions are made by parent company executives overseas; limited evidence of local decision making.
Risk Factors:
• Weak evidence of board deliberations locally
• Major financial decisions by non resident managers
Outcome:
Tax authority may argue entity lacks effective management in treaty jurisdiction and deny treaty benefits.
Lesson:
Substance is not just paperwork — it must reflect real economic control locally.
Key Takeaways for Investors
Treaty reliance must be backed by substance — not just TRC or incorporation.
India and other countries now apply PPT/GAAR standards that allow denial of benefits if primary purpose is tax advantage.
Documentation/operations must demonstrate real business activities and decision making in the treaty jurisdiction.
Regular review of treaties, BEPS measures, and local case law is essential — treaty norms are evolving globally.
For detailed insights and practical guidance, visit our Knowledge Center and access our curated guides on India market entry: https://www.a2consultants.in/guides/international-taxation-in-india-for-foreign-companies
Nagavarapu Sudheer is a veteran tax and regulatory consultant at A2 Consultants with over 24 years of experience. A fellow member of the Institute of Company Secretaries of India (F.C.S) with a background in Law (L.L.B) and Commerce (M.Com), he has specialized in FDI structuring and group corporate restructuring for Fortune 500 companies and global startups alike. https://in.linkedin.com/in/sudheer-nagavarapu-4225334b
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