For the past decades both Mauritius and Singapore were used as the tax efficient jurisdictions for structuring investments into India, both by multinationals and (private equity) funds. Today, approximately a third of all foreign investments into India has been structured through Mauritius. However, it is now expected that this will change going forward due to recent development.
On May 10, 2016 the Government of India has published a note to inform that Mauritius and India have agreed and signed a protocol to amend the existing India-Mauritius tax treaty (the I-M Treaty). This announcement also discloses the main amendments to the I-M Treaty.
These amendments will have an impact on the tax treatment of investments into and from India. In this article, we will describe the most important amendments to the I-M Treaty (section II. below). Thereafter we will describe the main aspects of the tax efficient alternative for investments into India; the Netherlands. We will discuss the treaty between India and the Netherlands (section III) and the main domestic Dutch tax aspects thereof (section IV).
Main amendments to I-M Treaty
1. Amendment of capital gains article I-M Treaty:
- Capital gains made by a Mauritian tax resident upon alienation of the shares in an Indian tax resident were taxable in Mauritius only. The new protocol now provides India, with respect to capital gains arising on or after April 1, 2017, with a source based taxation right in relation to such capital gains made by a Mauritian tax resident.
- The protocol specifically states that the India sourced based taxation on capital gains does not apply with respect to all shares of Indian tax residents acquired prior to April 1, 2017.
- Provided the limitation on benefits test (see below) is met, India shall only apply 50% (Reduced Rate) of its domestic tax rate with respect to capital gains to the extent the relevant shares in the Indian tax resident are both acquired and alienated within the period April 1, 2017 up to and including March 31, 2019 (Transition Period).
2. Limitation of Benefits (LOB):
- The Reduced Rate during the Transition Period is subject to an LOB clause. Consequently the Reduced Rate shall only apply in case the Mauritian tax resident is (a) not considered to be a shell/conduit company and (b) fulfils the main purpose and bonafide business test.
- In that respect a Mauritian resident is deemed to be a shell/conduit company in case, in the immediately preceding 12 months, its total expenditure on operations in Mauritius is less than Rs. 2,700,000 (approx. EUR 36,000).
3. Source taxation of interest paid to banks:
- Interest paid from India to Mauritian resident banks will become subject to an Indian interest withholding tax of 7.5%. This withholding tax only applies with respect to debt claims or loans made on or after April 1, 2017.
The Netherlands remains an alternative for tax efficient investments into India.
The amendment of the I-M Treaty will have an impact with respect to the tax efficient structuring of investments into India going forward. In that respect the Netherlands can be considered as a good alternative for investors. For many centuries the Netherlands and Indian have a flourishing trade and mutual investment relation. The Netherlands is one of the important investors in India. Dutch companies invest in e.g. the financial sector, IT and telecom, oil & gas, waterworks and trade companies.
The Netherlands functions as a Gateway to Europe for India. Below we will first describe the main elements of the India-Netherlands tax treaty (NL Treaty) and thereafter the domestic Dutch rules for making investments abroad.
In addition to a bilateral investment treaty (BIT) between the Netherlands and India, also the NL Treaty protects the interests of investors and avoids double taxation. The NL Treaty provides for:
- Reduction to (at maximum) 5% Indian dividend withholding tax on qualifying dividends due to favoured nation clause included in NL Treaty. This is the same as under the I-M Treaty, however there is no limitation on benefits test included in the NL Treaty.
- The right to levy tax with respect to capital gains derived by a Dutch resident from alienation of shares of a company resident in India is allocated to the Netherlands only. The aforementioned is based on the assumption that the relevant Indian company is (i) not sold to an Indian resident buyer and/or (ii) not considered a real estate company.
The Netherlands is already often used as the proven jurisdiction for investments in other countries and thus now also seems to be the alternative for tax efficient investments into India going forward. Under Dutch law, it is relatively easy to migrate the effective place of business of foreign companies to the Netherlands, and become tax resident of the Netherlands (and benefit from the treaty network).
Below we will describe the most important tax aspects for companies that are using the Netherlands for making investments into India. These items al contribute to the reasons why the Netherlands have been called 'the gateway to Europe for Indian groups' but also 'the gateway to India for multinationals.'
The tax climate in the Netherlands
The Netherlands are generally viewed as a competitive and open jurisdiction in terms of tax and corporate legislation, and is thus a popular location for both inbound and outbound investments. The Netherlands always had a very open economy and Dutch companies highly depend on international trade. Several studies show that the Netherlands has the right blend of characteristics to be a top location for doing business. For more information, or specific information on industries or sectors please contact the authors of this article.
Dutch tax law comprises of a wide range of facilities and incentives relating to investments into the country, but also for having a coordinating role in international groups. These facilities are discussed in further detail below.
Bird's-eye view of Dutch tax incentives
- Competitive corporate income tax climate.
- Dutch tax ruling practice to obtain advance certainty on taxation issues (APA/ATR).
- Dutch participation exemption and exemption for foreign permanent establishments.
- Attractive Dutch tax regime for Dutch cooperative entity (coöperatie).
- Wide spread tax treaty network (over 95) and bilateral investment treaty network.
- Attractive tax incentives for innovative/R&D activities.
- Attractive 30% allowance rule for foreign employees.
- Bird & Bird has extensive experience in optimal international structuring, including the use of wide spread tax treaty network
Corporate Income Tax (CIT)
- CIT is imposed at a rate of 20% on the first € 200,000 and 25% for any profits exceeding this threshold. CIT is imposed from Dutch resident entities and foreign entities with certain specific Dutch sources of income. There, it is a great hub for local activities. Profit from qualifying innovative activities are taxed at a rate of 5% (see below).
- The taxable income base is calculated on the basis of net income without a distinction between ordinary income and capital gains. Taxable income may differ from accepted accounting principles. An important principle is that unrealized losses are deductible while unrealized profits may be deferred. Interest is deductible except for certain statutory limitations on interest deduction (if applicable).
- The Dutch participation exemption exempts dividends from CIT when distributed by a qualifying participation to its parent entity. Capital gains and losses (except for certain liquidation losses) made on the disposal of shares in such participation are also exempt from CIT. Also, foreign permanent establishments will give rise to a full exemption in the Netherlands. Therefore, any activities deployed outside of the Netherlands are not going to be subject to double tax. This is an important element to take into account when making investments in Indian corporate entities.
- Dutch Dividend withholding tax is imposed at a statutory rate of 15%. A full credit or exemption is available in most domestic situations. 10%, 5% or 0% rates are available under tax treaties and EU legislation. Netherlands cooperatives can, if needed, be used to prevent Dutch dividend withholding tax.
- No interest/royalty withholding tax is imposed in the Netherlands.
- No branch remittance tax is imposed in the Netherlands.
Other tax Incentives
- Payroll tax credits (WBSO) are available for technological companies. The benefit is a reduction in the wage tax and social security contributions paid for qualifying R&D employees. The reduction can be very high.
- Production costs resulting in intangible assets are deductible in the year of expense (free amortization).
- R&D investment deduction (RDA) is an additional tax deduction on top of actual R&D costs (excluding wage costs). The maximum rate is 60% of qualifying R&D costs and will reduce wage tax costs.
- The innovation box rate is 5% for qualifying net income (after recapture of R&D costs) generated through patents and qualifying R&D assets.
- Dutch expatriate regime is available for highly qualified and skilled employees from abroad allowing certain lump-sum tax free imbursements of costs and/or a fixed 30% tax free allowance (tax free wages).
As mentioned in the introduction, we are of the view that - due to recent development in the tax treaty between India and Mauritius - the Netherlands will become increasingly more popular for multinationals and funds that consider making investment from or to India. The tax treaty between India and the Netherlands provides for good protection and the domestic elements in Dutch tax law provide for an efficient structure. The Netherlands is an ideal location to expand to for international related businesses.