Foreign Investments into India: Tax Structuring

Foreign investors invest funds into Indian companies in anticipation of financial returns. These returns usually take the form of dividend payment by the Indian companies, interest payment (in case of debt securities that are yet to be converted into equity) and capital gains on sale of investment. Although all three types of returns are liable to tax in India, foreign investors are presented with a small menu of options to minimise such tax by taking advantage of double taxation avoidance agreements (DTAAs) entered into by the Government of India with certain other countries. Foreign investors typically route their investments through tax-friendly jurisdictions (with whom India has beneficial DTAAs) so as to take advantage of these tax benefits. Popular among such jurisdictions are Mauritius, Cyprus, and more recently, Singapore. Among these, Mauritius has attracted the largest number of investments from various countries that are flowing into India.

Although there are only marginal differences in the rates of taxation and the financial benefits available to investors in each of the jurisdictions, there are various other differences in the local laws of each jurisdiction, and their level of economic development, ease of establishing and carrying on business, and several other social and political factors. These are equally important to foreign investors in determining whether to use one jurisdiction or another to route their investments into India.

In this context, an article titled International Investment Gateways To India by Nandan Nelvigi and Brendan McNallen of White & Case that appears in Mondaq provides a concise, but useful analysis of the tax regime as well as advantages and disadvantages of investing through any one of Mauritius, Cyprus or Singapore into India. The article on Mondaq can be accessed only through registration, which is free.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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