MAURITIUS: THE MRA CLARIFIES THE TAX TREATMENT OF DISTRIBUTIONS MADE BY FISCALLY TRANSPARENT ENTITIES
Mauritius is often used as a jurisdiction of choice for the structuring of funds or investment holding entities which in turn invest in Indian Alternative Investment Funds (AIFs).
An AIF is a fund established or incorporated in India as a privately pooled investment vehicle that collects funds from sophisticated investors, whether Indian or foreign, for investment in accordance with a defined investment policy for the benefit of its investors.
AIFs can be registered with the Securities and Exchange Board of India (SEBI) under three categories, namely category I, II and III. AIF categories I and II are pass-through for tax purposes, while an AIF under category III is a taxable entity, under Indian law.
The Mauritius Revenue Authority (MRA) has recently issued a tax ruling (TR 235) relating to income received by a Mauritian tax resident company from its investments in AIFs established as trusts and registered under category II and category III.
The MRA made no distinction between a tax transparent AIF and a taxable AIF. It ruled that any income in the form of dividends, interest and capital gains received by the Mauritian entity from the AIFs established as trusts, will be treated as dividend income and will not retain its initial characteristics.
The consequence of the ruling is that capital gains accrued by a tax transparent AIF and distributed to a Mauritian tax resident shareholder will be subject to income tax in Mauritius. This would not have been the case had the capital gain retained its initial characteristics (given that capital gain is exempt from tax in Mauritius).
The issuance of TR 235 has resulted in growing concerns amidst foreign investors investing in tax transparent AIFs through Mauritius. The MRA disregarded the tax transparency nature of AIF category II under Indian law and treated the distribution made by AIFs established as trusts in the same way it would have treated a distribution made by Mauritius trust. Under Mauritian law, a trust is a taxable entity and any distribution made by a trust is regarded as dividend income in the hands of the recipient.
TR 235 is also not in line with previous rulings issued by the MRA which provided that tax-transparent entities would retain their initial characteristics (i.e. the MRA would disregard the intermediary transparent entity and consider that the payment is made directly from the underlying investee company to the Mauritian entity).
The MRA subsequently released a statement, on 1 July 2022, to clarify that any distribution made by a foreign fiscally transparent entity to a Mauritian resident will retain its initial character. Accordingly, any distribution of capital gains accrued by a foreign fiscally transparent entity (including an AIF Category II) will be recognised as capital gains and will not be subject to income tax in Mauritius.
This statement is reassuring to foreign investors investing in tax transparent entities through Mauritius and reaffirms Mauritius' status as a desirable international financial centre.