India tightens tax rules for investments through Mauritius

India has amended its Double Taxation Avoidance Agreement with Mauritius by adding Article 27B, titled Entitlement to Benefits. The amendment introduces a Principal Purpose Test, or PPT, and revises the treaty’s preamble. It matters because authorities can now examine why an investment structure was created before granting tax benefits.

For example, if a company establishes a Mauritius entity mainly to claim tax advantages on Indian investments, authorities may deny those benefits. They must still consider whether granting the benefit would match the purpose of the relevant treaty provisions. The rule therefore focuses on the purpose and facts of each arrangement.

The protocol was signed in March 2024 and came into force on 10 August 2026. India’s 13 October notification formally implemented it domestically. The amendment does not create a new capital gains rate, but it increases scrutiny of funds, holding companies and special-purpose vehicles using Mauritius.

The Principal Purpose Test is an anti-abuse rule in the amended India-Mauritius treaty. It lets tax authorities look beyond the legal form of a transaction and examine why an arrangement was created. If securing a treaty benefit was one of its main purposes, the benefit may be refused.

Consider a company that creates a Mauritius entity primarily to obtain tax advantages on investments in India. Authorities can deny the treaty benefit if that purpose is central to the arrangement. However, denial is not automatic. Benefits may still be granted when allowing them is consistent with the purpose of the relevant treaty provisions.

The test applies from 10 August 2026. Authorities are expected to examine the facts and purpose of each arrangement. The change brings the treaty closer to OECD Base Erosion and Profit Shifting minimum standards and addresses concerns about treaty shopping.

The new rule matters especially for foreign portfolio investors, private equity funds and venture capital funds. It also affects holding companies and special-purpose vehicles that use Mauritius-based entities to invest in India. These structures may face closer questioning when they claim benefits under the treaty.

The key issue is not simply whether an investor used Mauritius. Authorities can ask whether obtaining a tax benefit was one of the main reasons for the structure. A fund or company with commercial reasons, real decision-making and credible operations may have a stronger case. A structure created mainly for tax access faces greater risk of denial.

All Mauritius-routed investments do not automatically lose treaty benefits. Authorities will review each arrangement’s purpose and facts. The practical pressure is likely to be greatest for structures lacking a clear commercial rationale, particularly where current dividends, interest or other income is involved.

A Mauritius-based fund or holding company may need clear evidence explaining why its structure exists. The article specifically identifies governance, decision-making and purpose as areas that funds and holding companies should document. This evidence can help show that the arrangement has genuine commercial substance.

For example, records could explain where investment decisions are made, how the entity is governed and why Mauritius forms part of the business structure. The central mechanism is the Principal Purpose Test. Authorities examine whether obtaining a treaty benefit was one of the main reasons for the arrangement, then consider whether granting that benefit fits the treaty’s purpose.

The article does not prescribe a fixed checklist or documentary threshold. It says authorities will assess the facts of each case. Businesses should therefore prepare for scrutiny, especially where structures lack a real commercial rationale. Experts also called for clear guidance from India’s Central Board of Direct Taxes.

The India-Mauritius tax treaty was signed in 1982 and has played an important role in cross-border investment. Its latest changes build on a long history of disputes over treaty shopping and access to benefits. The treaty was not automatically covered by the Multilateral Instrument’s anti-abuse provisions.

In 2016, India and Mauritius amended the agreement so India could tax capital gains from selling shares acquired in Indian companies on or after 1 April 2017. Investments made before that date retained their earlier treatment. The 2016 protocol also imposed conditions on access to certain transitional concessions.

In March 2024, the countries signed another protocol. It revised the preamble and added Article 27B, introducing the Principal Purpose Test. The protocol came into force on 10 August 2026, and an Indian notification dated 13 October gave its provisions formal effect in India.

The treaty reaches several categories of cross-border income. The article discusses capital gains from selling shares in Indian companies, as well as dividends, interest and other income arising now. The new amendment is therefore broader than a single capital-gains rule, even though it does not introduce a new capital-gains tax rate.

The 2016 protocol gave India the right to tax gains from shares acquired on or after 1 April 2017. Investments made before that date retained their earlier treatment. Under the latest amendment, authorities can apply the Principal Purpose Test when taxpayers seek treaty benefits connected with relevant income.

The revised framework applies from 10 August 2026, regardless of when taxes are levied or which taxable years they relate to. The article identifies current dividends, interest and other income as pressure points. Benefits remain possible, but authorities will examine each arrangement’s purpose and facts.

A Double Taxation Avoidance Agreement, or DTAA, is a treaty between countries that coordinates taxation of cross-border income. It generally allocates or limits taxing rights so the same income is not taxed unfairly twice. Such agreements can also establish procedures and conditions for claiming tax relief.

The India-Mauritius treaty illustrates this role. It has governed cross-border investment between the two countries since 1982 and has addressed income connected with Indian investments. The 2016 amendment gave India rights over certain capital gains, while preserving earlier treatment for shares acquired before 1 April 2017.

Countries use DTAAs to provide greater certainty for investors and tax authorities while supporting cross-border trade and investment. They also need safeguards against abuse. India’s latest protocol adds a Principal Purpose Test, allowing benefits to be denied when obtaining them was a main purpose of an arrangement and granting them would conflict with treaty objectives.