A recent Ruling delivered by the Authority for Advance Rulings in India with regard to the eligibility of a Mauritian offshore company for relief under the India-Mauritius double taxation avoidance treaty was based on a denial of the legal personality of a Mauritian Offshore Company.

National Westminster Bank Plc., a UK public company, established a wholly-owned subsidiary in Mauritius which invested in 10 per cent of the equity capital of a banking company in India.

The Mauritius company applied to the Authority seeking confirmation that in relation to the investment it had made in India, it would enjoy, inter alia, an Indian withholding tax reduction down to 5 per cent.

The Authority found that the transaction in relation to which the ruling was sought was prima facie designed for the avoidance of tax as the tax incidence would have been greater had the UK company invested directly in India instead of through its subsidiary, the Mauritian company.

It expressed doubts, based on the facts which were available to it, with regard to whether the Mauritian company be regarded as the beneficial owner of the dividends which it would receive from the Indian company, a requirement for it to be eligible for the dividend withholding tax reduction. The Authority found that the Mauritian company was a wholly-owned subsidiary of the UK company and the entire funds of the Mauritian company had been contributed by the UK company.

It also found that the shares in the Indian company and the income arising therefrom was held by the Mauritian company subject to the control and direction only of the sole shareholder, who could deal with the assets or the income therefrom in whatever manner it liked, by virtue of its sole shareholding in the Mauritian company.

Based on these observations the Authority concluded that the inevitable inference was that it was National Westminster Bank Plc and not the Mauritius company which was the real and beneficial owner of the shares held by the Mauritius company in the Indian company. The Authority did, however, acknowledge that more factual data should be obtained before a conclusion on beneficial ownership could be reached. Having rejected the application on the basis of tax avoidance the Authority did not feel it was necessary to give a ruling on the issue.

The denial of the legal personality of the Mauritian company, and its relegation to the status of a mere nominee or agent of the UK parent, has caused considerable concern among corporates using the Mauritian route to India. If the Indian tax authorities were to apply a substance over form test, and persistently lift the corporate veil to attribute beneficial ownership to a non-Mauritian parent, the majority of investment holding companies in Mauritius (and in other treaty jurisdictions) would be denied treaty relief. The importance therefore of being able to demonstrate that the non-Mauritian parent company does not so closely control and direct the activities of the Mauritian holding company, so that the Mauritian company is merely the agent or nominee of the parent, cannot be underestimated.

The content of this article is intended to provide general information on the subject matter. It is not, therefore, a substitute for specialist advice.