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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.
