India-Mauritius DTAA Amended to Block Treaty Shopping

In a significant development for international tax planning, the India-Mauritius Double Taxation Avoidance Agreement (DTAA) has been amended to curb treaty shopping and abusive tax avoidance arrangements. The revised agreement replaces the preamble and introduces a Principal Purpose Test (PPT) under Article 27B, aligning with the OECD’s Base Erosion and Profit Shifting (BEPS) Action 6 recommendations.

Principal Purpose Test Blocks Abusive Structures

The PPT clause enables Indian tax authorities to deny treaty benefits where one of the principal purposes of an arrangement or transaction is to obtain such benefits inappropriately. This targets entities set up in Mauritius solely to exploit treaty advantages without substantial business activities. The amendment reinforces India's stand against round-tripping of funds and artificial residency structures aimed at evading capital gains or withholding taxes.

"The test will be applied objectively to assess whether the structure lacks commercial substance or was designed primarily for tax avoidance,"

This change marks a shift from rule-based to principle-based treaty interpretation, enhancing tax certainty for genuine investors while deterring misuse. Practitioners must now conduct robust purpose analysis when advising on cross-border investments routed through Mauritius.