India is unlikely to amend its tax treaty with the Netherlands as it did with Mauritius, Singapore and Cyprus and this could shape the investment strategy of foreign portfolio investors (FPI) and private equity (PE) funds investing in India, said three people in the know.
“There were talks to amend the tax treaty between India and Netherlands for last two years. Recently, we were told that as the Netherlands is not used for tax planning, (therefore) the current treaty can prevail,” one one of the persons quoted above told ET.
Senior officials from Netherlands also confirmed the development. The officials were talking on the sidelines of Vibrant Gujarat, the annual investment jamboree of the state government.
FPIs will see their returns from India getting impacted as a result of the amended Singapore, Mauritius and Cyprus tax treaties, and are already looking to shift their base to European jurisdictions like France, Spain and the Netherlands.
Industry trackers say status quo ante in the India Netherlands treaty could mean many FPIs could prefer the Dutch route. Dutch officials insisted that investors rooting their investment through the country are not doing it as a tax planning exercise. “There is a 25% tax on book profit and on interest,” said an official.
However, industry trackers said there could still be some benefits for the FPIs and PE investors to shift their base to Netherlands. FPIs are exempt from capital gains tax in Netherlands as the local tax is levied only on business income and not on capital gains subject to fulfilment of certain conditions.
“There could however be a 15% withholding tax when the Dutch FPI pays income to its investors, which is reduced under Dutch tax treaties so there is no complete pass-through like Mauritius. Nevertheless, some FPIs could consider moving to the Netherlands and a certainty around tax treaty could mean that some of them may take this step in the near future,” said Rajesh H Gandhi, partner, Deloitte Haskins & Sells.
Additionally, experts say there are even caveats in the 25% tax in Netherlands.
“While there is about 25% tax on income in the Netherlands, it is on net income and not on gross income. This could mean that any investor investing in India from the Netherlands could deduct the expenses and interest payouts and then pay taxes on the net income, in that situation the effective tax on total returns from India for investors will be less than 25%,” said Punit Shah, partner, Dhruva Advisors.
The Netherlands has Qualifying Investment company regime, under which the tax on such company could be zero, say experts. While moving to Netherlands could benefit FPIs and PE funds, some benefits could also benefit strategic investors.
“If a non-resident investor is selling shares of an Indian company to another non-resident, there is no capital gains tax in India. Similarly, if less than 10% shares of an Indian company are sold to an Indian resident; then also, there is no capital gains tax in India. Hence this treaty works well for investors based out of Netherlands to achieve tax efficiency in India,” said Sanjay Sanghvi, tax partner, Khaitan & Co, a leading taxation law firm.
Industry experts point out that shifting to Netherlands may just be a temporary fix for the next two years or so. The government may be looking at adopting a common tax agreement which could lead to uniform tax regulations for all investors irrespective of which destination they come from.
This multilateral agreement under the base erosion and profit sharing (BEPS) framework could solve a lot of confusion around tax treaties and tax arbitrage issues for India, experts said.
