PE Funds Look to Shift From Cyprus to Mauritius

Funds with investments in Indian real estate and infrastructure plan to shift base to Mauritius to take advantage of lower tax after India renegotiated tax treaty with Cyprus
About a fortnight after India renegotiated its tax treaty with Cyprus many private equity funds with investments in In dian real estate and infrastructure are looking to realign investments and shift base to Mauritius mainly to avail of a 2.5% discount in tax on interest income.

These funds invested mainly in debt and are looking to set up new investment vehicles in a way that the income from Indian investments is taxed as per the India Mauritius treaty. This, say many industry trackers, could be the beginning of a flight towards Mauritius for the debt funds that have traditionally preferred Cyprus.

This is also a result of the India Mauritius treaty that was renegotiated recently. As the things stand, the shift from Cyprus to Mauritius could save these private equity funds at least 2.5% in taxes paid in India.

“As per the recent amendment to the Indian Mauritius treaty, Mauritius is expected to overtake Cyprus for structuring debt investments as the tax rate under the amended India Mauritius treaty is 7.5% compared to 10% with Cy prus,“ said Amit Maheshwari, Partner, Ashok Maheshwary & Associates LLP.

Many of these debt funds are consulting tax experts in India to restructure their investments. Industry experts say many funds would transfer of debentures from one investment arm to another.

As part of the restructuring, these funds would open a new investment arm in Mauritius and transfer debentures that they hold in Indian companies from their Cyprus investment arm. Since the ownership is transferred and not changed, this would not be taxed in India.And the interest income from Indi an investments would now go to Mauritius and get taxed as per India-Mauritius treaty and not India-Cyprus treaty.

Yet, some funds are still hoping that in the fine print of the IndiaCyprus treaty the Indian government bring taxation on interest component at par with Mauritius to 7.5% from 10%.

“If the renegotiated treaty between India and Cyprus doesn't change the taxability of interest, then Mauritius will become attractive because of 7.5% tax on withholding and debt funds may consider migrating to Mauritius for availing the benefit. However, we will have to wait and watch if the amended tax treaty will have a reduced tax rate,“ said Punit Shah, partner at a tax consultancy Dhruva Advisors.

All the funds that have invested in India through the Cyprus route have been subjected to a higher rate of taxation after India blacklisted Cyprus in November 2013 for refusing to share details of Indian tax evaders.

The renegotiated treaty reinstated the original rate of taxation around 10%. Once the earlier treaty elapsed, the investments were taxed at 30%, the domestic market rates by the tax authorities.

The Economic Times New Delhi, 12th July 2016