Introduction
India has recently renegotiated its tax treaties with Mauritius and Cyprus. Both countries belong to the group of largest investors in India together with countries like Singapore, the United Kingdom and the Netherlands. The tax treaty changes, however, now will cause a huge boost for investing in Indian companies via a Dutch holding company. Only in this way capital gains derived from the disposal of (qualifying) shares in an Indian company will be fully exempted under local law in the Netherlands, while India will be prevented from taxing these gains under the treaty in most cases. A renegotiation of the India-the Netherlands tax treaty on this matter is furthermore not to be expected soon.
Capital gains
Recently, India and Mauritius renegotiated the India-Mauritius Double Tax Treaty ('DTT'). In the DTT a new provision is introduced whereby the source state is entitled to tax capital gains on the disposal of shares of its resident companies only when they are acquired on or after April 1st 2017. Capital gains realized on the disposal of shares in an Indian company acquired prior to April 1st 2017, are not subject to tax. Furthermore, transitional rules applies for capital gains arising in the period April 1st 2017 up and to including March 31st 2019. Gains arising in that period are taxed at a maximum rate of 50% of the Indian domestic tax rate. To get the 50% reduction the taxpayer must meet a limitation of benefits ('LOB') provision.
As from April 1st 2019 capital gains realized on the disposal of shares of an Indian company will be taxable in India at the domestic tax rate.
Moreover, the change in the India-Mauritius tax treaty possibly also affects Singaporean investors in India companies. The protocol to the India-Singapore tax treaty provides that the exemption of capital gains realized on the disposal of shares of an Indian company only remains in force as long as the India-Mauritius tax treaty continues to provide the exclusive resident taxation on realized gains on shares. As a result of the amendment to the India-Mauritius tax treaty, the exclusive residence taxation under the India-Singapore treaty will no longer apply. Furthermore, as the amended protocol to the India-Mauritius tax treaty provides a transitional rule for shares acquired before April 1st 2017, it is not possible to extend such treatment to investments made under the India-Singapore tax treaty. At this stage it is not clear how the transitional provision in the India-Mauritius tax treaty will affect the position of Singapore, however, it is to be expected that Singapore investors will be confronted with Indian taxation on realized capital gains on shares as well.
Capital gains realized on the disposal of (qualifying) shares are fully exempt from corporate income tax in the Netherlands. Under the India-Netherlands tax treaty, in most cases taxation of capital gains is exclusively allocated to the country of residence of the investment company (i.e. the Netherlands).
Dividends
A dividend received by a Dutch company is exempted from corporate income tax if the India investment qualifies for the participation exemption. Under the India-Netherlands tax treaty, India is entitled to tax a dividend distribution at 5% of the gross amount of the distributed amount if the Dutch holding company directly owns at least 10% of the capital of the Indian company.
Furthermore, the protocol to the India-Netherlands tax treaty contains a so-called 'most favored nation clause'. Such clause provides that in the event India concludes a tax treaty with a third State which is a member of the OECD and India limits its taxation at source on dividends, then as from the date on which the relevant tax treaty between India and that third country enters into force the same rate as provided for in that tax treaty shall also apply under the India-Netherlands tax treaty. This most favored nation clause also applies to interest, royalties and fees for technical services or payments for the use of equipment.
Other advantages routing investments via the Netherlands
The Netherlands is a member of the European Union. Companies in the Netherlands have excess to the internal market and benefit from the free movement of goods, people, capital, right of establishment, the freedom to provide services within the European Union and other regulatory (tax) directives.
In general, it is often possible to discuss in advance with the Tax Authorities the Dutch tax aspects of intended operations, of proposed transactions or of transfer pricing aspects. The Dutch Tax Authorities will normally confirm the tax position in writing in a so-called Advanced Tax Ruling ('ATR') or Advanced Pricing Arrangements ('APA').
The Netherlands offers a special tax regime for expats: the 30%-ruling facility. This facility enables an employer to pay an employee a tax free allowance of up to 30% of present employment income and a tax free reimbursement of school fees for children attending international schools.
Furthermore, the Netherlands does not impose withholding tax on interest and royalty payments by a company resident in the Netherlands. Dividend withholding tax can be often reduced to zero. The Netherlands also concluded 99 bilateral investment treaties ('BITs'). Many international operating companies have structured their investments through a Dutch based holding company due to the asset investment protection that is available through the BITs.
This in combination with its extensive tax treaty network makes the Netherlands an attractive location for holding companies.
If you have any questions about this subject, please do not hesitate to contact Sander Schildt.
Introduction
India has recently renegotiated its tax treaties with Mauritius and Cyprus. Both countries belong to the group of largest investors in India together with countries like Singapore, the United Kingdom and the Netherlands. The tax treaty changes, however, now will cause a huge boost for investing in Indian companies via a Dutch holding company. Only in this way capital gains derived from the disposal of (qualifying) shares in an Indian company will be fully exempted under local law in the Netherlands, while India will be prevented from taxing these gains under the treaty in most cases. A renegotiation of the India-the Netherlands tax treaty on this matter is furthermore not to be expected soon.
Capital gains
Recently, India and Mauritius renegotiated the India-Mauritius Double Tax Treaty ('DTT'). In the DTT a new provision is introduced whereby the source state is entitled to tax capital gains on the disposal of shares of its resident companies only when they are acquired on or after April 1st 2017. Capital gains realized on the disposal of shares in an Indian company acquired prior to April 1st 2017, are not subject to tax. Furthermore, transitional rules applies for capital gains arising in the period April 1st 2017 up and to including March 31st 2019. Gains arising in that period are taxed at a maximum rate of 50% of the Indian domestic tax rate. To get the 50% reduction the taxpayer must meet a limitation of benefits ('LOB') provision.
As from April 1st 2019 capital gains realized on the disposal of shares of an Indian company will be taxable in India at the domestic tax rate.
Moreover, the change in the India-Mauritius tax treaty possibly also affects Singaporean investors in India companies. The protocol to the India-Singapore tax treaty provides that the exemption of capital gains realized on the disposal of shares of an Indian company only remains in force as long as the India-Mauritius tax treaty continues to provide the exclusive resident taxation on realized gains on shares. As a result of the amendment to the India-Mauritius tax treaty, the exclusive residence taxation under the India-Singapore treaty will no longer apply. Furthermore, as the amended protocol to the India-Mauritius tax treaty provides a transitional rule for shares acquired before April 1st 2017, it is not possible to extend such treatment to investments made under the India-Singapore tax treaty. At this stage it is not clear how the transitional provision in the India-Mauritius tax treaty will affect the position of Singapore, however, it is to be expected that Singapore investors will be confronted with Indian taxation on realized capital gains on shares as well.
Capital gains realized on the disposal of (qualifying) shares are fully exempt from corporate income tax in the Netherlands. Under the India-Netherlands tax treaty, in most cases taxation of capital gains is exclusively allocated to the country of residence of the investment company (i.e. the Netherlands).
Dividends
A dividend received by a Dutch company is exempted from corporate income tax if the India investment qualifies for the participation exemption. Under the India-Netherlands tax treaty, India is entitled to tax a dividend distribution at 5% of the gross amount of the distributed amount if the Dutch holding company directly owns at least 10% of the capital of the Indian company.
Furthermore, the protocol to the India-Netherlands tax treaty contains a so-called 'most favored nation clause'. Such clause provides that in the event India concludes a tax treaty with a third State which is a member of the OECD and India limits its taxation at source on dividends, then as from the date on which the relevant tax treaty between India and that third country enters into force the same rate as provided for in that tax treaty shall also apply under the India-Netherlands tax treaty. This most favored nation clause also applies to interest, royalties and fees for technical services or payments for the use of equipment.
Other advantages routing investments via the Netherlands
The Netherlands is a member of the European Union. Companies in the Netherlands have excess to the internal market and benefit from the free movement of goods, people, capital, right of establishment, the freedom to provide services within the European Union and other regulatory (tax) directives.
In general, it is often possible to discuss in advance with the Tax Authorities the Dutch tax aspects of intended operations, of proposed transactions or of transfer pricing aspects. The Dutch Tax Authorities will normally confirm the tax position in writing in a so-called Advanced Tax Ruling ('ATR') or Advanced Pricing Arrangements ('APA').
The Netherlands offers a special tax regime for expats: the 30%-ruling facility. This facility enables an employer to pay an employee a tax free allowance of up to 30% of present employment income and a tax free reimbursement of school fees for children attending international schools.
Furthermore, the Netherlands does not impose withholding tax on interest and royalty payments by a company resident in the Netherlands. Dividend withholding tax can be often reduced to zero. The Netherlands also concluded 99 bilateral investment treaties ('BITs'). Many international operating companies have structured their investments through a Dutch based holding company due to the asset investment protection that is available through the BITs.
This in combination with its extensive tax treaty network makes the Netherlands an attractive location for holding companies.
If you have any questions about this subject, please do not hesitate to contact Sander Schildt.