Choosing the best offshore center for India-bound investment requires careful consideration of the risks and financial rewards. Nandan Nelivigi and Brendan McNallen compare the attractions of Mauritius, Cyprus and Singapore.

Foreign direct investment into India from the tiny island nation of Mauritius exceeds the inflows from any other country in the world.

Inflows from Mauritius were more than double those from the second-largest investor, the United States, throughout the decade, leading up to 2002 and more than quadrupled the total over the last ten months, according to statistics published by the Indian government.

This is not because Mauritius in itself is an overpowering economy, but rather because the island is an ideal route for investments into India. In addition to Mauritius, the Republic of Cyprus (Greek Cyprus) and Singapore have also emerged as popular routes for Indiabound direct investment.

All three jurisdictions enjoy double tax avoidance agreements (DTAA) with India, but it is worth examining these agreements carefully and also considering several other key factors before choosing the best investment route.

Key Considerations

The capital gains from sale of shares, dividends and interest are the principal means for foreign investors to realize their returns from investments.

Aside from foreign investment regulations, there are a number of important considerations for direct investors targeting any country. Foremost among these are tax efficiency in repatriating funds, the absence of foreign exchange restrictions and the ease of establishing and operating entities in intermediate countries.

Tax regulations and any agreements between the country where the investment is made and the country of origin are relevant in determining tax efficiency. The key question while investing in India is: what is the applicable tax on capital gains, dividends and interest in India and in the intermediate jurisdictions through which proceeds are routed?

Corporate regulations in the country of investment and any intermediate jurisdictions are equally relevant. Foreign investors must understand the minimum capitalization rules and whether there are restrictions on the distribution of dividends in order to determine whether capital should be structured as debt or equity.

The provisions of any existing DTAAs are important because they typically modify or determine how the country of investment will tax capital gains, dividends, interest or other applicable proceeds payable to a foreign investor. To benefit from a DTAA, it is critical that the investor is a tax resident of the country from which the investment is made and does not have a “permanent establishment” in the country of investment.

Tax on Share Sales

Under the provisions of the Indian Income Tax Act, 1961, gains from the sale of shares of Indian companies are taxable in India. The level of tax is determined by whether the gains from the purchase and sale of shares are deemed business income or capital gains and in turn, whether capital gains are long-term (from shares held longer than 12 months) or short-term (from shares held for 12 months or less).

If a foreign investor is an active trader and Indian revenue authorities classify the investor’s gains from the sale of shares as business income, India will usually tax such business income only if the investor has a tax residence in India. As a result, the country from which the investments have been made—and any prevailing DTAA—is not usually relevant in determining tax liability as long as the investor has no tax residence in India.

If, however, the profits are deemed to be capital gains, the investor will incur Indian capital gains taxes ranging from approximately 10.5 percent to 42 percent depending on whether the gains are from the sale of shares of a private company or of a listed company, whether the sale was on or outside of a recognized Indian stock exchange and whether the gains were short-term gains or longterm gains.

India currently does not impose capital gains tax on long-term gains from shares sold on a recognized Indian stock exchange. For all off-exchange share sales, the provisions of the DTAA are important in determining whether the investor can avoid paying capital gains tax in India.

Dividends and Interest Payments

Corporate law allows Indian companies to distribute dividends solely out of net profits.

In addition, except in certain specified sectors (such as banking, finance and insurance), Indian laws do not have material requirements relating to minimum capitalization.

While these considerations typically support a capital structure with a significant debt component, Indian foreign exchange regulations have historically imposed stringent restrictions on Indian companies from incurring foreign debt. Recent changes, which reflect a tightening credit policy, have severely limited foreign debt for domestic expenditure.

The government has also clarified that foreign investment in preference shares of Indian companies must be in the form of fully convertible preference shares in order to be considered share capital and not debt, which is subject to a number of restrictions. Likewise, only debentures that are fully and mandatorily convertible into equity within a specified time qualify as equity.

Dividends on preference shares, unlike equity shares, are subject to a cap under Indian foreign exchange regulations. These regulations have significantly reduced the ability of foreign investors to structure their investments in Indian companies in the form of preference shares or debt instruments.

Fully convertible preference shares are treated as equity for the purposes of Indian foreign investment regulations. Dividends on these shares are taxed in the same manner as dividends on equity shares.

Fully convertible debentures are also treated as equity but returns on investment can be structured as interest payments for the purposes of Indian tax regulations.

Current Indian laws do not tax dividends in the hands of a shareholder. However, Indian companies are subject to a dividend distribution tax at an effective rate of 16.995 percent on the amount they distribute as dividends.

Some of the DTAAs India has entered into (with Mauritius, for example) stipulate a concessional tax rate on dividends received by investors who are tax residents of the applicable country. Since India has eliminated dividend taxes in the hands of a recipient of such dividends, these provisions are not relevant at the moment.

Interest income, on the other hand, is subject to withholding tax at an effective rate of approximately 42 percent for a foreign company and 23 percent for an Indian company. The provisions of a DTAA, however, may modify this tax rate.


Since independence in 1968, the Indian Ocean island of Mauritius has emerged as a successful open economy and (nominally at least) the world’s largest investor into India.

Under the India-Mauritius DTAA, Mauritian tax residents without a permanent establishment in India are not taxed in India on capital gains from the sale of shares of an Indian company. This allows Mauritian tax residents to avoid the approximately 10.5 percent to 42 percent tax on capital gains from the sale of shares under domestic Indian tax laws.

The India-Mauritius DTAA does not provide any concession with respect to Indian tax on interest payments, so Mauritian tax residents will pay an approximate rate of 42 percent on interest income received from Indian companies.

Mauritius does not tax capital gains from the sale of shares in an Indian company. Nor does it tax dividends received from an Indian company if the Mauritian entity owns more than five percent of that company. Where the ownership is less than five percent, it is generally possible to reduce the three percent Mauritius income tax to effectively zero. These favourable local tax features have been noticed by international investors.

Furthermore, investors from Mauritius have clarity on how to establish tax residency in Mauritius for purposes of the DTAA. The Indian Supreme Court, in the Azadi Bachao Andolan case in 2003, held that companies can establish Mauritian tax residency under the DTAA simply by obtaining a tax residence certificate from the government of Mauritius. In order to obtain a tax residence certificate, Mauritius requires, among other conditions, that at least two directors are resident in Mauritius, a bank account is maintained in Mauritius and a Mauritius auditor is appointed.

While the Indian Supreme Court decision and the clarity of the Mauritian regulations provide comfort to Mauritius-based investors of their tax residency status, prudent investors typically take additional measures in terms of corporate formalities to bolster their substance as Mauritius residents and avoid the accusation of “treaty-shopping.”

Investors through Mauritius enjoy the benefits of Mauritius’ status as India’s primary investment hub with a reasonably stable government, a well-developed legal system and flexible corporate laws. The administrative infrastructure for establishing and operating special-purpose entities in Mauritius is well established. Furthermore, given the considerable business interests already exercising their rights under the treaty, the potential for a major disruption in the flow of foreign investments into India is likely to act as a brake on any steps by India to take away the benefits under the DTAA.

To cater to the needs of the large number of investors routing their money through the country, Mauritius has a well-developed business services sector that includes lawyers, accountants and bankers as well as providers of end-to-end incorporation and management services. These companies handle the appointment of resident directors and look after tax, corporate and regulatory compliance in Mauritius. From a timing standpoint, although the government agencies will grant the registration within a short period with a complete application, given the requirements of the application, it would normally take much longer than expected to complete the registration process from start to finish. Experienced advisers can reduce this wait time, but the wise investor will start the corporate formation as soon as possible.


A popular alternative to Mauritius as an investment gateway to India is the Mediterranean island of Cyprus.

As with the India-Mauritius DTAA, the agreement between India and Cyprus provides exemptions from Indian capital gains tax from the sale of shares in an Indian company by a Cyprus tax resident without a permanent establishment in India.

Unlike the India-Mauritius agreement, the India- Cyprus DTAA caps the withholding tax on interest income paid to a Cyprus tax resident at 10 percent (as opposed to approximately 42 percent to which a Mauritius resident would be subject). However, the tax savings may be limited due to restrictions under Indian law in respect of the amount of interest payable on debt instruments.

Under Cyprus law, tax on interest could be as low as 10 percent, the effect of which could be further limited to the net interest margin ultimately retained by the Cyprus resident company. Cyprus does not impose any taxes on dividends received by a Cyprus tax resident from an Indian operating company in which it owns more than one percent of the share capital if certain conditions are met. Capital gains are not subject to any tax in Cyprus.

In order to enjoy the benefits of the India-Cyprus DTAA, the Cyprus company must be the beneficial owner of the relevant asset from which the revenue is derived and must be a tax resident of Cyprus, which under the India-Cyprus DTAA means a person who is liable to pay tax in Cyprus by reason of domicile, residence, place of management or other similar criterion.

Without a clear-cut definition of residence, some advisers have taken the stance that the standard will be satisfied if: (i) either the affairs of the company are managed by the board members, the majority of whom are tax residents of Cyprus and board meetings take place in Cyprus or (ii) any other body manages and controls the company, such as the shareholders or an investment committee and such shareholders or investment committee are tax residents.

This ambiguous standard of “management and control” creates uncertainties alleviated by the clear-cut requirements for Mauritius residency.

Furthermore, since the India-Cyprus route has not been as heavily relied upon by investors as the Mauritian route, the DTAA may be more vulnerable to an amendment. Whispers of negotiations between the governments of India and Cyprus to remove the capital gains exemption are commonly heard and while it is unclear if (or when) an amendment will be made, investors should certainly plan for this eventuality. Cyprus recently enacted laws to facilitate the re-domiciliation of its corporate entities, but those mechanics are yet untested and their effectiveness in the eyes of Indian tax regulators is unclear.

Since its accession to the European Union, Cyprus has slowly but steadily developed a combination of favorable features, from an investor-friendly tax regime to better enforcement of money laundering laws, which have increased its attractiveness to India-bound investors. However, as with Mauritius, in practice Cyprus proves slow-going for those looking to establish business entities quickly. Coordinating the necessary approvals takes up to six weeks or more yet, investors can reduce their wait time by using off-the-shelf companies already created.

Investors should establish entities as early as possible and be prepared to work around a number of rigid provisions under Cyprus corporate laws.


Moving from the Mediterranean to the Malay Peninsula, Singapore also entices India-bound investors with an array of offshore advantages.

Under the India Singapore DTAA, which was amended in 2005, a Singapore tax resident is not subject to Indian taxes on capital gains derived from the sale of shares in an Indian company.

Furthermore, interest payments on fully convertible debentures paid to Singapore tax residents incur a 15 percent tax rate; lower than the approximately 42 percent rate in Mauritius but higher than the 10 percent in Cyprus.

Under Singapore law, interest payments received in Singapore by a Singapore tax resident company would generally be taxed at 18 percent, subject to a potential foreign tax credit for any Indian tax paid. Dividends may be exempt from Singapore income tax if certain prescribed conditions are satisfied.

Singapore generally does not tax capital gains if they are not from trading activities.

Changes introduced in 2005 put the Singapore DTAA on par with the India-Mauritius DTAA with respect to tax exemption on capital gains but include two important limitations on beneficial treatment for capital gains.

First, investors from Singapore do not receive an exemption from Indian capital gains tax if the affairs of the company were arranged with the “primary purpose” of taking advantage of the capital gains exemption (the so-called “limitation on benefits”). Specifically, a “shell/conduit” company cannot avail itself of the capital gains exemption, but provides a safe harbour for companies listed in India or Singapore or a company with more than US$200,000 or Rs. 5 million of total annual expenditures on operations in Singapore in the preceding 24-month period.

A second important limitation ties the fate of the capital gains exemption under the Singapore DTAA to the India-Mauritius DTAA. Investors from Singapore will lose their capital gains exemption if India and Mauritius amend their DTAA to take away the corresponding exemption.

The tax residency requirements under the India- Singapore DTAA are more stringent than those of Mauritius and arguably more so than Cyprus. However, they do offer two major advantages over the Cyprus requirements.

First, Singapore’s bright-line requirements reduce the risk of misinterpretation and avoid the ambiguity of the malleable “management and control” standard used in Cyprus. Second, as an established hub of international finance, Singapore is already the home to many investors and more likely than Cyprus to house established subsidiaries to international companies interested in investing into India with the expenditures in excess of the safe harbour thresholds.

While the tax rate on interest payments is lower under the India-Cyprus DTAA than the India-Singapore DTAA, Singapore may provide other benefits. As a larger source of foreign direct investment than Cyprus, it may prove favorable to investors concerned about treaty amendments and accusations of “treaty-shopping”.

The express link between the capital gains exemption in Singapore and the India-Mauritius DTAA increases risk, but opposition to any amendment of the India-Mauritius DTAA militates against such risk and offers additional protection to Singapore investors.

In terms of establishing business entities, Singapore is more attractive than Mauritius and Cyprus. An entity can be established in Singapore within a week or two. Furthermore, the network of experienced and sophisticated advisers who have already built Singapore into a pan-Asian financial center offers significant advantages to investors heading into India.

Island Hopping

The offshore attractions of Mauritius, Cyprus and Singapore*

Future Concerns

The two primary risks associated with structuring investments through Mauritius, Cyprus or Singapore are the risk of amendments to the respective DTAA and the risk of running afoul of the residency requirements of a particular jurisdiction.

India and the United Arab Emirates recently signed a protocol amending their DTAA to eliminate capital gains exemptions for the sales of shares of companies resident in one country by shareholders resident in the other. The sophisticated investor must stay apprised of the rumblings concerning treaty amendments and prepare for the event that such rumors reach fruition.

Many paths lead to successful investment into India. The savvy investor must evaluate the options and weigh his or her appetite for risk against the material benefits offered by India’s DTAAs to choose the most appropriate route.