The Indian Tax Administration provides clarification on the application of the Principal Purpose Test (“PPT”) under the Mauritius-India Tax Treaty.
On January 21, 2025, the Central Board of Direct Taxes (“CBDT”) in India has issued guidance on the application of the PPT under the Mauritius-India Double Taxation Avoidance Agreement (“DTAA”) through its Circular No. 01/2025 (the “2025 Circular”).
As background, Mauritius signed a new protocol (“the 2024 Protocol”) amending the Mauritius-India DTAA on March 7, 2024 to incorporate Base Erosion and Profit Shifting (“BEPS”) related anti-abuse provisions, such as the PPT. Under the PPT, a benefit under the DTAA shall be denied if it is reasonable to conclude, having considered all the relevant facts and circumstances, that one of the principal purposes of an arrangement or transaction was to obtain a benefit under the DTAA, directly or indirectly, unless it is established that granting of the benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the DTAA.
The PPT provision in the 2024 Protocol led to uncertainties amongst stakeholders, as a result of which the 2024 Protocol is yet to be ratified. The Indian and Mauritian tax authorities announced that the 2024 Protocol would be ratified once further clarifications are issued by both concerned tax authorities. Post ratification, the 2024 Protocol will be in force at the later of notification from each country.
The 2025 Circular issued by the CBDT provides clarification on PPT as follows:
1) Prospective application of PPT
For DTAAs modified through bilateral processes, as in the case for the Mauritius-India DTAA, the PPT would apply prospectively from the date of entry into force of the DTAA or the amending protocol incorporating the PPT.
2) Grandfathered investments excluded from application of PPT
The existing Mauritius-India DTAA provides for grandfathering clauses for investments in shares acquired before April 1, 2017. The 2025 Circular clarifies that transactions covered by the grandfathering provisions would remain outside the purview of PPT and will remain governed by the specific terms of the DTAA.
3) Supplementary guidance
The CBDT clarifies that the invocation of PPT rule will be on a case-to-case basis and tax authorities may refer to the Commentary to Articles 1 and 29 of the UN Model Tax Convention (updated in 2021) and the BEPS Action Plan 6 Final Report, subject to India's reservations, as additional sources of guidance when deciding on the invocation and application of the PPT provision.
Our comments
Such clarification from the CBDT is welcomed and provides relief to the industry. In view of the prospective application of the PPT, we would advise investors to review their current structures and ensure that they have adequate documentation illustrating commercial intent and economic substance in Mauritius. Unless grandfathered, it is recommended existing and future investment opportunities are evaluated in view of the PPT rule.
Our specialised tax team will be happy to assist with any review of structures, questions, or advice on current and potential investments and their interaction with the PPT.
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