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| Patrick T F Schrievers |
Gert-Jan Hop |
According to estimates, more than 30% of all investments
into India have been structured through Mauritius or Singapore.
Following the amendments to the India-Mauritius double tax
treaty (DTA), the interaction thereof with the India-Singapore
DTA (via the Protocol), the amendments to the India-Cyprus DTA,
and the impact of the Multilateral Instrument (MLI) on
treaties, foreign investors, structured funds and MNEs may look
at exploring other jurisdictions such as the Netherlands for
hosting investments into India.
To start off the treaties between India and Mauritius,
Singapore and Cyprus had provided for residence-based taxation
of capital gains. With the revision of these treaties, capital
gains should (in principle) be taxed in India for entities
resident in these countries. In other words, India should have
the right to tax capital gains arising in India. Before foreign
investors, structured funds or MNEs start exploring
alternatives they should take note that the amendments to (for
instance) the India-Mauritius DTA may (at least) theoretically
have a limited scope and offer grandfathering provisions. In
addition, any alternatives selected require careful
consideration and possible revision of the upper-tier fund
structure including the loss of beneficiary corporate law
benefits.
Observing these conditions and taking notice of the recent
international tax climate, as well as the MLI, the
India-Netherlands DTA offers the following (beneficiary)
ingredients that are valued when setting up companies in the
Netherlands:
- The India-Netherlands DTA provides for an exemption from
Indian capital gains tax if a Dutch shareholder holds: a)
less than 10% in an Indian company; b) in case of the sale of
shares to a non-Indian resident purchaser; or,c) as a
corollary from a group restructuring;
- The India-Netherlands DTA includes a most favoured nation
(MFN) clause. The MFN clause binds India to apply to the
Netherlands any lower rate of withholding tax (WHT) or a
scope more restricted than the rate or scope provided for in
the India-Netherlands DTA on the said item of income. Hence,
the most limited definition of, for instance, fees for
technical services (FTS), in all treaties concluded by India
can be applied by Netherlands residents; and
- With respect to the definition of FTS, the language
contained in the India-Netherlands DTA is restricted in
comparison to other treaties. Further, the 10% rate mentioned
in the India-Netherlands DTA is also the lowest rate
applicable to FTS payments in Indian treaties. We would like
to note that the wording of the India-Singapore DTA is more
or less similar. Unfortunately this treaty has a service PE
provision and has no MFN clause.
As a main benefit of the Netherlands we would also like to
note that typically any dividends received and capital gains
realised on active companies (regardless of the application of
a treaty or directive) should be exempted by virtue of the
Netherlands participation exemption (without a minimum holding
period). Typically this is regarded as a strong feature of
Netherlands taxation. Moreover the proposed amendments to the
dividend WHT may benefit many investors into the Netherlands.
The Netherlands government has proposed to extend the existing
withholding exemption for participation dividends (involving
active business structures) to parent companies established in
countries with which the Netherlands has concluded a tax
treaty. To avoid abusive situations the exemption will not
apply to artificial arrangements and will only apply to active
business structures. The legislative proposal is intended to
become effective from January 1 2018. Without having to meet
some of the stringent conditions under tax treaties (such as
the limitation of benefits (LOB) provision in the
Netherlands-US DTA) foreign investors and MNEs might (i.e.
active business structures) end up with a full elimination of
dividend WHT (together with the existing WHT exemption for
interest and royalties). As a result, US companies may want to
explore hosting their Indian investments via the
Netherlands.
Attention is, however, required in respect of the impact of
the effect of the MLI on (among others) the India-Netherlands
DTA. Based on India’s and the
Netherland’s (provisional) list of reservations
and notifications we expect the insertion of the principle
purpose test (PPT) as a minimum standard. As per the PPT, the
benefit of the tax treaty shall not be granted if obtaining
such a benefit was one of the principal purposes of any
arrangement or transaction. In addition to the PPT rule,
it could be that also a simplified LoB clause (SLOB) is
installed. The SLOB seeks to create supplementary conditions to
be satisfied to avail the benefit of the Netherlands-India DTA.
It is not fully certain, however, whether the Netherlands
government followed this position. In any case, new structures
need to be set-up with sufficient substance (i.e. active
business structures). From a legal point of view the
Netherlands or perhaps Luxembourg fund regimes might be helpful
as well to support the economic rationale of setting up holding
companies.