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Leveraging Tax Opportunities with India: W hat you need to know !. June 2010. Agenda. 1. India Tax update . Salient features: India – Luxembourg treaty. a. Update on India’s treaty with Mauritius. b. Treaty benefits. c. Draft Direct Tax Code. d. FDI policy and recent amendments.

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India Tax update

Salient features: India – Luxembourg treaty


Update on India’s treaty with Mauritius


Treaty benefits


Draft Direct Tax Code


FDI policy and recent amendments



Opportunities for investment funds


Cash Tax Savings ideas and opportunities generated by the recent Double Tax Treaty


Opportunities for Indian inbound investments


Opportunities for Indian outbound investments

part 1 indian tax update
Part 1: Indian Tax Update


Salient features: India – Luxembourg treaty


Update on India’s treaty with Mauritius


Treaty benefits


Draft Direct Tax Code


FDI policy and recent amendments

treaty benefits under india luxembourg treaty
Treaty benefits under India - Luxembourg treaty

Effective Date

  • The Double Taxation Avoidance Agreement (“DTAA”) between India and Luxembourg is effective from 1 April 2010

Interest, Fees for Technical Services and Royalties

  • The DTAA provides for taxation of interest, royalties and fees for technical services, both in the country of residence as well as the country of source
  • However, the rate of tax in the source country shall not exceed 10% of the gross amount of payment in case the beneficial owner of the payments is a resident of the other Contracting State
  • Under the DTAA the scope of income taxable as fees for technical services is very wide as it has been defined to mean consideration for managerial or technical or consultancy services including provision of services of technical or other personnel
  • Capital Gains
  • The DTAA provides that capital gains from alienation of shares of a company shall be taxable in the country where the company(whose shares are sold) is a resident
treaty benefits under indo luxembourg treaty
Treaty benefits under Indo - Luxembourg treaty
  • Business Profits
  • The DTAA provides that business profits of an entity will be taxed in the country of its residence unless such entity carries on its business in the other country through a Permanent Establishment.
  • PE includes service PE, warehouse PE, construction PE
  • Tax Credit
  • In case of a Luxembourg resident, the credit method would be available only where the income has been taxed in India as dividend, interest, royalty or fees for technical services and of Artistes and Sportsperson. Such credit shall be available to the extent of Luxembourg tax on such income.
  • In all other cases double taxation shall be eliminated by the exemption method whereby the income taxed in India shall be excluded from the taxable income in Luxembourg. It is provided that such income can be included for rate purposes.
  • Limitation of benefit Clause
  • ‘Limitation of Benefits’ under the DTAA is intended to prevent misuse of the provisions of the DTAA. No specific limits has been prescribed.
india re negotiating the mauritius treaty
India re-negotiating the Mauritius treaty
  • India has been attempting to negotiate changes to the 28-year-old tax treaty, to restrict its benefits to genuine residents of Mauritius
  • Presently, there is no limitation of benefit clause in the Indo-Mauritius treaty
  • India is keen on inserting a clause similar to the limitation of benefit clause in the India-Singapore treaty, which provides for an expenditure test as a rule for demonstrating commercial substance
  • The cumulative foreign fund flow of $81 bn came into India between April 2000 and May 2009 from Mauritius
  • Circular Nos. 682 dated 30-3-1994 and 789 dated 13-4-2000 issued by the Central Board of Direct Tax, India have clarified that based on tax residency certificate issued by the Mauritius tax authorities one could claim treaty benefits
  • Further, the Supreme Court in India in the case of AzadiBachaoAndolan has also affirmed the above and clarifies that in the absence of the limitation of benefit clause, tax planning through the Mauritius route is permissible
  • A recent ruling in the case of E*Trade Mauritius Limited by the Authority for Advanced Rulings has also confirmed that the capital gains on sale of shares of Mauritius company is not taxable in India
e trade mauritius limited aar
E*Trade Mauritius Limited - AAR


  • Facts
  • E*Trade is incorporated in Mauritius and holds a Tax Residency Certificate issued by the Mauritius Tax Authorities
  • E*Trade sold shares held in IISL, an Indian company, to HSBC Mauritius and realised long term capital gains on the same
  • E*Trade thereafter approached the Authority for Advance Rulings to seek a ruling on the taxability of the said transaction
  • The AAR observed that :
    • Outcome of AzadiBachaoAndolan case is that there is no legal prohibition against “treaty shopping”
    • If a resident of a third country, in order to take advantage of a tax treaty sets up a conduit entity; the legal transactions entered into by that conduit entity cannot be declared invalid and therefore tax avoidance is not objectionable if it is within the framework of law and not prohibited by law
  • AAR held that the fact that E*Trade USA provided the funds and played a role in negotiating the transaction of sale did not lead to the legal inference that the shares were in reality owned by E*Trade USA

E*Trade USA

Converging USA



Sale of shares







Not Liable for tax In India

india looking from a different angle now
India looking from a different angle now
  • Presently, the foreign investments into India through Mauritius stands at
  • The tax authorities at lower levels are questioning the treaty benefits – are mostly concerned about treaty shopping, the practice of routing third country investment through tax havens to avoid paying taxes
  • The urgency to amend the rules came after Vodafone’s acquisition of Hutch a couple of years ago
  • Income tax officials are being posted at Port Louis, Mauritius to facilitate greater exchange of information between the two countries
  • The Indian Government has also expressed its intentions to curb treaty shopping in the recently proposed draft Direct Tax Code

   “A team is going to Mauritius... we are on the job” finance minister

finance bill 2010 11
Finance bill 2010-11
  • The Finance Minister while presenting the Finance Bill 2010-11, has commented about the reforms in the form of Direct Tax Code (DTC)
  • The Finance Minister has indicated that the DTC is likely to be implemented with effect from 1st April 2011
  • Certain important provisions proposed in the DTC relevant to international taxation have been discussed in the ensuing slides
relief under the tax treaties16
Relief under the tax treaties
  • Concept of “domestic tax law or treaty, whichever is more beneficial” done away with. After the introduction of the code, the domestic tax law or treaty, whichever is later in time, shall prevail.
  • Treaty benefits claimed hitherto, will not be available post introduction of the DTC – E.g.
    • Exemption from Capital Gains, Interest etc
  • Benefit of restricted scope of definition of royalty and FTS
  • Narrow scope for business presence - permanent establishment
  • Lower rates for Royalty and FTS
definition of resident changed
Definition of “Resident” changed
  • Residence concept for companies changed:


      • The proposal may impact the Indian MNCs who have subsidiaries abroad or Global organisations having corporate head quarters in India or MNCs having regional hub in India
      • Global income of such companies likely to be brought within the tax net
      • Even a single director (participating in decision making) resident in India could result in part management of the foreign company to be construed in India
direct and indirect transfer of indian assets
Direct and indirect transfer of Indian assets

Proposed provision

Indian Assets

  • Any transfer of Indian assets, whether directly or indirectly, shall be taxable in India
  • Impact
  • Global reorganisation leading to transfer of ownership of Indian assets even indirectly is brought into the tax net
  • Post 1 April 2011, irrespective of the jurisdiction of the holding company, any buyback would result in capital gains taxable in India
  • Capital gains are taxable @ 30% in case of non-residents
general anti avoidance rule gaar
General Anti-Avoidance Rule (GAAR)
  • Introduction of Anti-Avoidance Rules
    • GAAR introduced to curtail tax avoidance and to be invoked on satisfaction of prescribed conditions
    • Commissioner of Income-tax (CIT) empowered to declare a transaction as impermissible if the same has been entered into
      • with the objective of obtaining tax benefit; or
      • without any commercial substance; or
      • creates any rights or obligations not normally created in the arm’s length transactions; or
      • results into direct or indirect misuse of the provisions of the Code
    • GAAR empowers CIT to alter, nullify or re-characterise the transaction
    • GAAR to override the tax treaty
    • GAAR to be further supported by specific anti-abuse rules in circumstances such as
      • payment to associated persons in respect of expenditure,
      • international transaction not at arm’s length,
      • transactions resulting in transfer of income to non-residents and avoidance of tax in certain transactions in securities
    • Provisions aimed to prevent misuse of tax status of investor or financier
general anti avoidance rule gaar21
General Anti-Avoidance Rule (GAAR)
  • Commercial substance
    • Lacking commercial substance defined to include situations where there is a
      • significant tax benefits without a significant effect upon business risk or net cash flows
      • legal substance or effect differs from legal form
      • it involves or includes
      • round trip financing
      • an accommodating or tax indifferent party
      • any element that has the effect of offsetting or cancelling each other
      • a transaction which is conducted through one or more persons and disguises the nature, location, source, ownership or control of funds
    • Onus on the tax payer to prove that the transaction is not an impermissible transaction
foreign direct investment fdi regulatory framework
Foreign Direct Investment (FDI) regulatory framework
  • Certain specific sectors have now been explicitly indentified e.g.
    • Headend-In-The-Sky (HITS) Broadcasting Service, business services, health and medical services, securities agencies in private sector, etc.
  • For the first time the term wholesale cash and carry trading has been explained. It is also now provided that
    • Wholesale trading among group companies would be permitted only up to 25% of the total turnover of the wholesale venture and
    • The wholesale made to the group companies should be for their internal use only.
liberalisation of limits on royalty remittances
Liberalisation of limits on royalty remittances
  • FEMA regulations had certain restrictions as given below on remittance of royalty payments to non residents
    • If the technology transfer fee exceeds USD 2 million, it has to be approved by the RBI
    • For royalty, the limit is 5% of domestic sales and 8% of exports
    • If there is no transfer of technology, royalty (for brand name) limit is 1% of domestic sales and 2% of exports 
  • It is now proposed to allow all payments for royalty, know-how fee for transfer of technology, payments for use of trademark or brand name through the “automatic route” without any restrictions
how ucits currently invest in india
How UCITS currentlyinvest in India

Model of UCITS investing in Indian assets







… not an ideal situation





  • Tax efficient structure
  • Access to the Indian market
  • Luxembourg has build a specific knowledge in setting up such structure
  • Quite unique in the UCITS universe
  • No easy to implement
  • Cumbersome from administrative and organisation point of view
  • High set-up and running costs
  • Can cause uncertainties in the cross-border distribution
Manyopportunitiesarisingfrom a new potentialtaxregime
  • Vehicle Remain tax efficient
  • Direct investmentwillresult in a lesscostly structure
  • Easy to implementfrom an administration perspective
  • Reduceduncertaintiesfrom a cross-border perspective.
  • Custodyknowledge in Luxembourg to deal withforeignmarkets

Potential advantages of the new Luxembourg regime

  • New opportunities exist to set-up UCITS investment vehicle in Luxembourg
  • to gain exposure to the Indian Market from an Asset Management perspective
  • for fund promoter to propose investment products investing in India
part 2 cash tax savings ideas and opportunities generated by the recent double tax treaty
Part 2: Cash Tax Savings ideas and opportunities generated by the recent Double Tax Treaty


Opportunities for Indian inbound investments




Ideas for financing structures


Ideas for Intellectual Property structures


Opportunities for Indian outbound investments

a opportunities for indian inbound investments overview
A - Opportunities for Indian inbound investments Overview
  • Overview
  • A group is operating and has investments in India
  • The investment in India may be done though Luxembourg via Indian subsidiary or Indian branch office
  • Funding of the Indian operations can be done with Foreign Direct Investment and/or External Commercial Borrowing
  • Advantage:
  • No WHT on remittance of profits to Lux head-office
  • Disadvantage:
  • Limited scope of activities permitted
  • Advantage:
  • A larger scope of activities is permitted
  • Disadvantage:
  • Dividend distribution subject to 16,61% taxation
investing in india fdi ecb overview
Investing in India – FDI ECB overview
  • CONVERTIBLE DEBENTURES combine the advantages of both FDI and ECB
  • Treated as equity for FDI purposes
  • Debt for tax purposes in India  deductibility of the interest payment + reduced WHT
B - Opportunities for Indian inbound investments
  • Ideas for financing structures
  • Benefits
  • From Indian perspective:
  • The interest paid on the loan is fully deductible at India Co level
  • WHT tax of 10% on interest paid is due to the Lux-India Double Tax Treaty (instead of 20% plus surcharge and fees)
  • ECB guidelines to be complied with
  • From Luxembourg perspective:
      • The interest income received by the Finance branch will be fully exempt in Luxembourg as the finance branch qualifies as a permanent establishment under DTT provisions (can be Switzerland /US/ Ireland/ Hong Kong)
c opportunities for indian inbound investments ideas for ip structures
C - Opportunities for Indian inbound investmentsIdeas for IP structures
  • Benefits
  • From India perspective:
  • The royalties paid on IP licenses are fully deductible at the level of the Indian Branch/IndianCo
  • WHT tax of 10% on royalties paid due to the Lux-India Double Tax Treaty (instead of 20% plus surcharge and fees)
  • From Luxembourg perspective:
      • The IP licensing activity can benefit from the IP box regime available in Luxembourg (exemption of 80%)
      • Other alternative IP tax plannings may be implemented at the level of IPCo
b opportunities for indian inbound investments ideas for financing structures
B - Opportunities for Indian inbound investmentsIdeas for financing structures


      • Offset the Luxembourg Corporate Income Tax using the Indian withholding tax paid


      • Royalties deduction in India  Reduction of IndianCo’s taxable basis
      • Low global royalties taxation

Luxembourg Foreign Tax Credit System

  • Royalties received in Luxembourg from India: 90
  • Luxembourg operating expenses: 10
  • Net royalties income: 90 – 10 = 80
  • Application of the IP Box regime  80% royalties exemption
  • Taxable Indian royalties in Luxembourg: 16
  • Tax due in Luxembourg (prior to the use of tax credits):
      • Corporate Income Tax (21,84%): 3,49
      • Municipal Business Tax (6,75% in Lux city): 1,08
b opportunities for indian inbound investments ideas for financing structures37
B - Opportunities for Indian inbound investmentsIdeas for financing structures
  • Luxembourg Foreign Tax Credit System (ct’d)
    • Withholding tax paid in India: 10

 Indian WHT is creditable against Luxembourg CIT using the following formula:

        • Gross profit arising from India: 100
        • Net profit arising from India: 100 – 10 = 90
        • Maximum theoretical amount of WHT creditable against Lux CIT:

(90 * 0,2184) / (1 – 0,2184) = 25,19

        • All of Indian WHT (10) is creditable against Luxembourg CIT

Final Tax Liability

    • In Luxembourg (after use of tax credit)
        • Corporate Income Tax: 3,49 – 10 = 0

Indian WHT can only be used up to the Lux CIT tax liability

        • Municipal Business Tax (6,75% in Lux city): 1,08

Indian WHT cannot be credited against Lux MBT

    • In India
        • 10 % Withholding Tax: 10
    • Global ETR: (1,08 + 10) / 100 = 11,08%

(Mainly composed of Indian WHT, not subject to reduction)

Opportunities for Indian outbound investments
  • Benefits
  • Deductions in source countries
  • Income pick up reduced in Luxembourg based on exemptions and plannings
  • Repatriation is also possible in the following ways:
    • Royalty payments
    • Fees for technical services
    • Interest payments (lending by IndianCo to LuxHoldCo)
  • Considerations
  • Repatriation of profits and/or reengineering
  • India Luxembourg tax treaty has a “Limitation of Benefits” clause which need to be complied

Indian Co

  • Low ETR in Luxembourg:
  • Dividend, capital gains, liquidation proceeds exempt if conditions met
  • Planning for financing, IP, entrepreneur activities


No or reduced WHT based on EU Directives or DTTs