Mauritius–India Tax Treaty: Investor Concerns and What the New Protocol Could Mean
However, the tax landscape is evolving. A protocol signed by India and Mauritius on 7 March 2024 proposes to introduce a Principal Purpose Test (PPT) and strengthen the treaty's anti-abuse framework. In July 2026, Mauritius took an important step by agreeing to ratify the protocol. However, the protocol was not yet in force as of the latest available information, because both countries still need to complete the required procedures and notify each other.
For investors, businesses and advisers using Mauritius-based structures, this development makes proper documentation, commercial substance and careful tax planning increasingly important.
What Is the India–Mauritius DTAA?
A Double Taxation Avoidance Agreement is a treaty between two countries designed to prevent the same income from being taxed twice while establishing rules for allocating taxing rights between the countries.
The India–Mauritius DTAA came into force in 1983 and was significantly amended through a protocol signed in 2016. The 2016 changes strengthened India's source-country taxation rights and introduced provisions including Limitation of Benefits (LOB), exchange of information and assistance in tax collection.
The treaty has historically been important for international investors because it provides a framework for determining how income and capital gains involving India and Mauritius are taxed.
The 2016 changes also introduced grandfathering for certain investments. In particular, shares acquired before 1 April 2017 received protection from India's source-based capital gains taxation under the treaty framework. The Government of India had expressly stated that such investments were grandfathered.
Why Is the 2024 Protocol Important?
India and Mauritius signed an amending protocol on 7 March 2024. The objective is to bring the treaty more closely in line with international Base Erosion and Profit Shifting (BEPS) standards.
Two important changes proposed by the protocol are:
- A revised treaty preamble focusing on preventing treaty abuse.
- Introduction of a Principal Purpose Test (PPT).
The PPT is an anti-abuse mechanism. Broadly, it can restrict treaty benefits where, considering the relevant facts and circumstances, obtaining a treaty benefit is one of the principal purposes of an arrangement or transaction, unless granting the benefit is consistent with the purpose of the relevant treaty provisions.
The intention is to discourage artificial arrangements designed primarily to obtain tax advantages.
What Is the Principal Purpose Test?
The Principal Purpose Test is particularly relevant in international tax planning.
Imagine an investor establishes a structure in Mauritius with little genuine commercial activity and uses that structure primarily to access treaty benefits. Under an applicable PPT framework, tax authorities could examine the purpose and substance of the arrangement before allowing treaty benefits.
This does not mean that every Mauritius-based investment automatically loses treaty protection.
The assessment is expected to depend on the facts and circumstances of the particular arrangement. India's CBDT issued Circular No. 1/2025 providing guidance on the application of PPT provisions and clarified that bilateral PPT provisions are prospective in nature.
Therefore, investors should distinguish between legitimate international investment structures and arrangements created primarily for tax advantages.
Mauritius Ratification: The Latest Development
The issue gained fresh attention in July 2026.
According to EY's July 2026 tax alert, the Mauritian Cabinet, at its meeting on 17 July 2026, agreed to ratify the 2024 Protocol. However, the protocol had not yet been notified by either country at the time of the alert. Both countries still need to complete their respective legal procedures and notify each other before the protocol can come into force.
This distinction is important.
Signing a protocol, approving ratification and bringing a protocol into force are different stages.
Therefore, investors should not assume that every proposed change automatically applies from the date of the announcement.
The exact implementation date and scope also require attention because the final text and related implementation details need to be considered before determining the impact on a particular investment.
What Does This Mean for Investors?
The proposed changes may increase the importance of demonstrating that a Mauritius structure has genuine commercial and economic characteristics.
Investors should consider whether their structures have:
- Genuine business or investment objectives
- Appropriate decision-making and governance
- Proper records and supporting documentation
- Commercial rationale beyond obtaining tax benefits
- Appropriate financial and operational substance
- Evidence supporting the nature and purpose of transactions
- Proper compliance with Indian and Mauritian tax requirements
A structure that is commercially genuine and properly documented is generally in a stronger position when its treaty entitlement is examined.
This is particularly relevant for investment funds, holding companies, private equity structures, family investment structures and other cross-border arrangements.
What Is Economic Substance?
Economic substance broadly refers to the real commercial activities and functions associated with an entity or arrangement.
For example, investors should be able to demonstrate why an entity exists, what activities it undertakes, where relevant decisions are made and how it operates in practice.
Simply having a legal entity registered in a particular jurisdiction may not, by itself, answer questions about the commercial rationale behind the structure.
Economic substance should therefore be considered alongside governance, management, documentation and the actual activities of the entity.
Impact on Existing Investment Structures
One of the major concerns for investors is whether existing structures will be affected.
This needs to be examined carefully rather than assuming that all existing investments will be treated in the same way.
India's CBDT Circular No. 1/2025 specifically clarified that grandfathering provisions under the India–Mauritius DTAA remain outside the scope of the PPT. In addition, EY notes that India's 2026 amendment to the GAAR grandfathering rules provides that GAAR consequences should not be invoked in respect of income from the transfer of investments made before 1 April 2017.
This provides important protection for qualifying grandfathered investments.
However, investors should not assume that every asset, transaction or type of income automatically receives grandfathered treatment. The specific investment, acquisition date, income involved and applicable treaty provisions need to be examined.
Why Documentation Matters
Documentation can become particularly important when treaty benefits are reviewed.
Investors should maintain records demonstrating:
- The original investment rationale
- Source and flow of funds
- Corporate structure
- Board and management decisions
- Investment decisions
- Agreements and contracts
- Financial statements
- Tax residency documentation
- Regulatory registrations
- Evidence of business or investment activities
- Correspondence supporting commercial decisions
Proper documentation can help demonstrate that a transaction was undertaken for legitimate commercial or investment reasons rather than solely to obtain a tax advantage.
Potential Impact on New Investments
For new investments, investors should consider treaty implications before implementing the structure.
Tax planning should not begin with the question, "Which jurisdiction gives the lowest tax?"
Instead, investors should consider:
What is the commercial objective?
Why is the investment structure being used?
Where are key decisions made?
What functions are actually performed?
Does the structure have sufficient substance?
Are the expected treaty benefits consistent with the purpose of the treaty?
This approach can help investors build structures that are commercially defensible as well as tax-efficient.
Mauritius Remains an Important Investment Jurisdiction
The development should not automatically be interpreted as meaning that Mauritius is no longer relevant for Indian investment.
Mauritius continues to have an established financial-services ecosystem and longstanding economic links with India. The proposed protocol is primarily aimed at strengthening anti-abuse standards and aligning the treaty with international tax developments.
The focus is therefore shifting toward legitimate investment, transparency, substance and compliance, rather than simply jurisdiction-based tax planning.
What Should Investors Do Now?
Investors using Mauritius-based structures should consider undertaking a structured review.
1. Review the existing structure
Identify the entities, investments, ownership arrangements and transactions involving India and Mauritius.
2. Check acquisition dates
Determine whether investments fall within grandfathered provisions, particularly where investments were made before 1 April 2017.
3. Evaluate commercial substance
Review the actual activities, management, decision-making and commercial rationale associated with the Mauritius entity.
4. Review documentation
Ensure that investment decisions, agreements, financial records and tax documents are properly maintained.
5. Monitor the Protocol's implementation
The 2024 Protocol was not yet in force according to the latest July 2026 information. Investors should therefore monitor official notifications from both jurisdictions rather than relying solely on announcements or commentary.
6. Obtain professional advice
Cross-border tax matters can involve treaty provisions, domestic tax law, GAAR, PPT, withholding tax and residency considerations. A structure should therefore be reviewed based on its specific facts.
Conclusion
The India–Mauritius tax relationship is entering an important phase.
The proposed Principal Purpose Test reflects the global movement toward preventing treaty abuse and ensuring that tax treaty benefits are connected with genuine economic and commercial activity. Mauritius' July 2026 decision to ratify the 2024 Protocol represents a significant step toward bringing these proposed changes into effect, although the protocol still requires completion of the relevant procedures and notifications before it becomes operational.
For investors, the key message is not to panic—but to prepare.
Review your Mauritius structures, understand the applicable grandfathering provisions, assess economic substance and maintain strong documentation. Proper planning today can help reduce uncertainty and support a stronger position when treaty benefits are evaluated.
Tax treaties can provide valuable benefits, but those benefits should be supported by genuine commercial purpose, proper structure and robust compliance.
📞 Need Professional Tax Guidance?
Taxla Services Pvt. Ltd. can assist businesses and investors with tax planning, compliance, international tax matters and professional tax advisory support.
#MauritiusIndiaDTAA #TaxTreaty #DTAA #InternationalTax #TaxCompliance #TaxPlanning #InvestorConcerns #IncomeTax #TaxConsultant #TaxExperts #TaxlaServices #ChennaiBusiness #BestAuditorInTamilnadu
Comments
Post a Comment