Double Taxation Avoidance Treaties

Double Taxation Avoidance (DTA) Treaties are signed between two countries and are usually set out according to the OECD model.

Once signed, treaties do not come into force until they are Ratified.  This happens when Parliament of that country ratifies this treaty and it gets published in their Government Gazette.  So, before a treaty is of any use, it needs to be ratified by both parties.

Treaties have three basic features:

  • Definitions of taxes and how they are taxed in each country
  • “Discounts” on withholding taxes normally charged by one country to taxpayers of the other country.
  • An information sharing agreement between the two governments where taxpayer’s details can be exchanged.

To take advantage of a treaty, the tax payer needs to be taxable in both countries.  A common example would be a company in South Africa with a subsidiary in Mauritius.  If conditions are met within the treaty then the Mauritius Subsidiary would be taxable at 15% while the South African parent company would be taxed at 29%.  The subsidiary’s income should not be taxed again if it is brought into South Africa as a dividend.

An important aspect of any treaty for companies is that some measure of substantive business activity needs to occur in both countries.   The treaties try to define minimum standards for a company to qualify as tax resident in that country.  Mauritius issues a Tax Residency Certificate for a company to include in its tax return in the other country.  Each certificate is unique to each treaty as countries have differing standards.  For example, a Mauritius Company with a presence in France and South Africa, would need two tax residency certificates.

India

Mauritius has a tax treaty with India.  This particular treaty has resulted in 42% of Foreign Direct Investment going through Mauritius into India.  This saves investors from 3rd countries from capital gains tax in India.

How this works is that the Indian treaty says that income earned in India is subject to capital gains tax in Mauritius.   Mauritius only taxes capital gains from fixed property held in Mauritius.   Therefore, a UK investor who sets up a tax resident entity in Mauritius that invests on the Indian Stock Exchange (NSE) would pay no capital gains tax on their Indian Investment.

Obviously the Indian Receiver of Revenue is a bit upset by the amount of potential tax income he sees leaving his country.  Attempts at renegotiation of the treaty result in sharp downward moves on the Indian Stock Exchange.   This is evidence that the treaty relationship between India and Mauritius is a major reason people invest in India in the first place.  Removal or renegotiation of the treaty could tip the balance and cause foreign investors to look for returns elsewhere.

GAAR:  General Anti Avoidance Rules – An attempt to introduce a stringent attack on treaty based activities, specifically Foreign Institutions routing their investments via Mauritius into India to avoid tax, caused a global uproar.  The attack has been softened and deferred for a year.  Let’s see what happens.

The best way for India to remove itself from dependence on this treaty would be for them to cancel or significantly cut their tax on capital gains.

South Africa

Mauritius has a tax treaty with South Africa.  The two key advantages of this treaty from a Mauritian perspective are:

  1. Tax residents of Mauritius are not taxed in South Africa.  What this means to individuals is that if they are resident in Mauritius for 183 days each calendar year, they can apply to the Mauritius Revenue Authority for a Tax Residency Certificate.  In terms of the treaty, this Certificate removes any doubt as to whether the person may be tax resident in South Africa as well.  Since personal taxes in Mauritius are charged on domestic remittances only (what comes into Mauritius as income) this has major benefits to wealthy individuals with international activities.
  2. Mauritius Tax Resident Companies holding more than 10% shares in a South African company will only be subject to 5% withholding tax on their dividends rather than 15%.  Anyone purchasing a stake in a company or setting one up in South Africa should seriously think of holding it via a Mauritian company.   If the shares are held by a GBL1 company (see the post on Tax in Mauritius) then the company loses 5% of the dividend coming in, instead of 15%, and is subject to net 3% tax in Mauritius (if he does it right).  That means that the holder of the shares effectively saves about half the tax he would normally pay.
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Categories: taxes

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