Mauritius Tax Treaty – Will a Principal Purpose Test really help?

Effective August 2026, the Principal Purpose Test (PPT) will go live in the Indo-Mauritius tax treaty (DTAA). While the intent of the test is laudable and essential, the question is about avoiding aggressive use of PPT.

What is the PPT all about?

Over the years, there have been concerns that the Mauritius Tax Treaty was becoming more of a garb to save on taxes. Global entities create shell companies in tax havens like Mauritius and then bring the funds into India. Due to the double taxation avoidance agreement (DTAA), there are substantial gains in dividend taxation and capital gains taxation if the transaction is routed through a tax-haven like Mauritius. However, in most cases, there was no economic rationale for the entity in Mauritius and it was purely a method of treaty shopping. That is what the PPT intends to curb in future.

Objective Test and the Subjective Test

The good thing is that these provisions will be applied prospectively. So, companies need not worry about any tax hounding over transactions that have already been concluded. The idea of the PPT is to deny treaty benefits like lower withholding taxes on dividends and interest on royalties, just because funds are routed through Mauritius. The Objective Test asks a primary question, whether obtaining treaty benefits were the main purpose of the arrangement. Not just the sole purpose, but the major aim will be evaluated. Subjective Test will be for the taxpayer to prove that granting treaty benefits aligns with the relevant purpose of the provisions of the DTAA. Both tests have to be passed.

What does this PPT mean for companies?

Broadly, going ahead, just having a tax residency certificate (TRC) or paper-work in a jurisdiction like Mauritius is not sufficient. Companies have to prove the economic rationale of their presence in Mauritius and the commercial logic. It will be a dominance of substance over form. The PPT is more powerful than the controversial GAAR (General Anti-Avoidance Rule). GAAR required tax avoidance to be the main purpose; now it has to only be one of the key intent of the transaction. In short; to claim treaty benefits, the company in question has to maintain more elaborate documentation of commercial intent, criticality in the transaction, and genuine commercial interest evidence.

We cannot ignore the risks of overreach

Despite being prospective, overreach is still a big risk. Most of the Grandfathering tax reliefs are only valid up to 2017. Transactions beyond that are still open to scrutiny. It does create a high level of uncertainty in the minds of global fund houses, as they do not want to get into protracted tax litigation. With the burden of proof on the tax payer, the arbitrary application is still a very big risk. Litigation in such cases tend to be in global courts and that could only prolong the uncertainty for the businesses. At a time when India has been struggling to attract FDI and FPI inflows, and the rupee has been under persistent pressure, this PPT was not only unnecessary, but also uncalled for.