Many companies opt for arbitration in Mauritius to meet norms

MUMBAI: Several foreign companies routing their investments to India through Mauritius have opted for arbitration in the island country to satisfy the “substance” requirement. The Financial Services Commission in Mauritius recently tightened the criteria for determining whether an entity is properly managed and controlled in the island country to receive a Tax Residency Certificate (TRC). The certificate is an important legal pre-condition for a company to enjoy tax benefits under the India-Mauritius treaty.

The government has asked companies registered in Mauritius to comply with the additional requirements if they want to avail of the tax treaty benefits. Companies have the option of following any of the six rules, such as setting up an office, or employing at least one person who is a resident of Mauritius on a fulltime basis, or resolving disputes arising out of investments in India through arbitration in Mauritius, among other things. These additional requirements have come into effect from January 1, and companies seeking renewal of TRC would have to satisfy them.

According to tax experts, most companies are changing their articles of association to incorporate the arbitration clause. "We have seen that most of the foreign investors coming through the Mauritius route are amending the articles of association and including the clause relating to arbitration in Mauritius if they are not fulfilling any of the other tests. New constitutions are drawn up by the investors to satisfy the test, which appear to be undertaken in majority of the cases," said Pranay Bhatia, partner, direct tax and business advisory at BDO India. "In some cases, we have seen some companies are opening offices in Mauritius, but that's very rare."
Mauritius-based entities involved in investment activities generally prefer Category 1 Global Business Companies (GBC1) that are entitled to treaty benefits. Industry trackers say most GBC1 companies have preferred inserting an arbitration clause in their constitution documents. Few companies already have an office in Mauritius and some have decided to include one full-time employee. There have been questions on whether the arbitration clause would cover commercial disputes as well, but the better view is that the arbitration clause would only need to cover shareholder disputes.

"Many Mauritius companies are opting for arbitration in Mauritius as it is easy to implement an order to satisfy the substance requirement, especially in case of strategic investments or master-feeder structures where they do not need the approval of their investors. Also, it does not entail any additional investment or expenditure in Mauritius for the time being," Shefali Goradia, partner, BMR Advisors, said. Besides, if a group has more than one entity registered as GBC 1 company in Mauritius, then if one company satisfies any such condition all the companies would be deemed to have satisfied it.

However, this is not as simple as it looks due to difficulties faced by private equity funds and foreign institutional investors. "The problem is private equity funds prefer to resolve arbitration in their home country, like London, or in a market like Singapore. While many players have added the arbitration clause for future disputes, there is a worry that this could land them in trouble as the framework of arbitration in Mauritius is still not tested like in Singapore or other developed markets, though Mauritius seems to have a good arbitration system which is based on the Supreme Court," said Rajesh H Gandhi, partner, tax, Deloitte Haskins & Sells.

Foreign portfolio investors and private equity funds have approached tax consultants to advise them on one of the requirements, which says the entity "has, or is expected to have, a yearly expenditure in Mauritius that can be reasonably expected from any similar company controlled and managed from Mauritius". "The definition of 'reasonable yearly expenditure' is ambiguous. Hence, most GBC1 companies have not used this option," Gandhi said. Also, for bigger players holding assets worth $1,00,000, that may not be a problem and they are contemplating that, but this is a concern for many smaller investors."

The challenge from the Indian perspective is that once GAAR (General Anti-Avoidance Rule) is implemented in India, merely having an arbitration clause in the constitution documents might not protect these GBC1 companies. However, having a full-time employee or an office in Mauritius, or incurring expenditure within Mauritius might provide them better protection against GAAR.

Foreign investors route their investments to India through Mauritius to avail of tax benefits or exit under the treaty between the two countries. According to the treaty, capital gains of a resident of Mauritius are not taxed in India and exempt from tax in Mauritius as well.