September 16, 2021
Indian Tax Tribunal rules on re-domiciliation and its impact on treaty entitlement
The Mumbai Tax Tribunal has ruled in favor of non-Indian taxpayers that the re-domiciliation of a taxpayer does not affect treaty entitlement. The re-domiciled taxpayer was held to be entitled to the tax treaty benefits between India and the country of re-domiciliation.1 The Tribunal noted that re-domiciliation of the company by itself cannot lead to denial of treaty entitlements of the jurisdiction in which the company is re-domiciled. However, it also noted that the fact of re-domiciliation of the company could at best trigger a detailed examination on the re-domiciled company being actually fiscally domiciled in that jurisdiction.
This Alert summarizes the Tribunal’s decision and its implications for taxpayers.
The taxpayer was initially incorporated in the British Virgin Islands (BVI) as an “international business company.” Subsequently, the taxpayer re-domiciled itself in Mauritius and the Registrar of Companies issued a “certificate of incorporation by continuation” which was effective from the date of deregistration of the company in its initial place of incorporation.
The Registrar of Companies of the BVI issued a certificate stating that the taxpayer had discontinued its operations in the BVI on 30 June 1998. The taxpayer also obtained a tax residency certificate (TRC) from the Mauritian tax authority.
During the course of the appeals filed by the tax authorities on several grounds, the department representative raised the additional point of tax treaty eligibility mentioning that since the taxpayer was initially incorporated in BVI, the India-Mauritius tax treaty benefits could not be extended to the taxpayer.
There has been a lack of judicial guidance on the acceptability of the process of re-domiciliation and its impact on tax treaty benefits for the taxpayer. This ruling provides the much-needed guidance on this issue.
Indian Tribunal Ruling
The Tribunal’s considerations from its ruling are summarized as follows:
The concept of re-domiciliation has been a recent development with no precedence in an Indian tax context. This Tribunal decision, in the context of re-domiciliation of a taxpayer from BVI to Mauritius, provides much-needed guidance on the manner in which Indian Tribunals are likely to interpret/ apply the re-domiciliation concept from a tax treaty perspective. The Tribunal recognized that the tax residency of the taxpayer could be changed through the legal process of re-domiciliation and such action by itself does not adversely impact treaty entitlement of the target jurisdiction.
It is recommended that multinational companies with Indian investments contemplating any re-domiciliation process should evaluate the impact of this favorable ruling based on their facts and applicable provisions in corporate laws of both the existing and target jurisdictions.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (India), Mumbai
Ernst & Young LLP (India), Bangalore
Ernst & Young LLP (United States), Indian Tax Desk, New York
Ernst & Young LLP (United States), Indian Tax Desk, San Jose
Ernst & Young Solutions LLP, Indian Tax Desk, Singapore
Ernst & Young LLP (United Kingdom), Indian Tax Desk, London
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago