The new requirements for getting TRC in Mauritius need to be handled carefully.

In the early ‘90s, with the opening up of the Indian economy for foreign investment, the island nation of Mauritius benefitted massively as it became the hub for directing foreign investment into India.

Not surprisingly, the Indian revenue authorities have, over the years, aggressively sought to probe substance in many Mauritius-based companies and used the probes as armour to deny benefits under the India-Mauritius tax treaty (Mauritius Treaty). This has been the approach, notwithstanding an administrative circular issued by the Central Board of Direct Taxes laying down that a Tax Residency Certificate (TRC) is sufficient for a Mauritius-based company to be eligible for the benefits under the Mauritius Treaty. The validity of the circular was also upheld by the Supreme Court in its landmark ruling in Azadi Bachao Andolan.

The uneasy truce on this issue has always been subject to public and private posturing of the Indian government on its repeated attempts to renegotiate the Mauritius Treaty. In the meantime, there have been many attempts to unilaterally neutralise the effect of the Mauritius Treaty. With the introduction of the General Anti Avoidance Rules (GAAR) now close (the proposed date of introduction is April 1, 2015), and with a clear provision that allows GAAR to override Tax Treaties, many believe that the Indian government will be now less inclined to push for amendments to the Mauritius Treaty, and instead apply GAAR for any checks and balances.

Considering this, the timing of the announcement made by the Financial Services Commission (FSC) in Mauritius on additional economic substance requirements that Category-1 Global Business Companies (GBC 1 companies) will have to comply with in the country in order to be able to get a TRC, is clear.

The existing requirements have been very perfunctory.  The new rules seek to provide far more real, but equally subjective, guidance on ensuring proper control and management in Mauritius.

The new conditions require the resident directors in Mauritius to be ‘appropriately qualified’. The resident directors are required to have relevant qualification and experience, and to exercise sufficient care, diligence and skill for the good conduct of the business.

Sufficient time and attention would have to be devoted to the affairs of the board by a director and he/she should be adequately and actively involved in the control and management of the company.

The main changes however, are in the following supplementary conditions prescribed by the FSC, and it is mandatory for the company to satisfy at least one of the conditions:

• The company should have office premises in Mauritius
• The company should employ at least one person who is a resident in Mauritius
• The company’s constitution should provide for all disputes to be resolved by way of arbitration in Mauritius
• The company should hold or is expected to hold in the next 12 months, assets of at least $100,000 in Mauritius, excluding cash held in bank account or shares/interests in another GBC1 Company
• The company’s shares should be listed on a securities exchange licensed by the FSC
• The company should already have, or is expected to have, a yearly expenditure in Mauritius reasonably expected from any similar company controlled and managed from the country

Interestingly, it has been prescribed that where a group has more than one entity registered as GBC 1 company in Mauritius, all such companies would be deemed to have satisfied one of the supplementary conditions listed above, if one of these companies satisfies any of the supplementary conditions. These conditions are not unusual by themselves. In fact, the protocol of the India-Singapore Treaty also contains conditions on de minimus expenditure to be incurred, requiring the demonstration of the company not being a shell set up only for the purposes of availing benefits under the Treaty.

However, a key difference is that unlike in the case of the Singapore Treaty, the additional conditions announced by the FSC are not part of the auritius Treaty and hence, do not reflect acceptance of the revenue authorities on the substance requirements. This is particularly important as one of the recommendations made by the Shome Committee on implementation of GAAR is that GAAR should not apply in cases where the Treaty itself contains specific limitations.