Essar Oil-Rosneft deal likely to escape capital gains tax due to Mauritius treaty
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New Delhi: The sale of Essar Oil Ltd to Russia’s Rosneft PJSC and two other entities is unlikely to attract capital gains tax as Essar Oil’s holding companies, incorporated in Mauritius, are protected from capital gains tax on any sale till 31 March 2017 under a bilateral tax treaty, a senior official in the income tax department said.
Spokespersons for Essar Oil and Rosneft’s consortium partners—Trafigura Pte Ltd and United Capital Partners— said tax aspects of the deal will be dealt with as per Indian laws upon completing the deal.
India’s double-tax avoidance agreement (DTAA) with Mauritius has been used widely by companies for tax planning of cross-border transactions. That includes Indian firms using Mauritius-based holding companies to manage their outbound investments in countries like South Africa, taking advantage of the Mauritius-South Africa tax treaty to avoid capital gains tax.
India and Mauritius earlier this year signed a protocol to amend the bilateral treaty, which gives India the right to tax capital gains on investments from Mauritius, but this provision exempts investments made until 31 March.
Till then, the island nation has the right to levy capital gains tax, which it has kept at zero. Rosneft declined to offer any comment on a detailed questionnaire sent by Mint.
“If shares in the Indian company, Essar Oil Ltd, is sold by its Mauritius-based parents, there is a case for claiming the benefit of the treaty. Had the shares of the overseas parent itself been sold, then provisions dealing with indirect transfer of Indian assets may come into play,” explained the official cited above.
Essar and Rosneft statements on 15 October indicated that shares of the Indian company are being purchased from Essar Energy Holdings Ltd and Oil Bidco (Mauritius) Ltd—companies incorporated and managed under the laws of Mauritius.
“The parties have announced the execution of share purchase agreement and the completion of the transaction is conditional upon receiving requisite regulatory approvals and satisfaction of other customary conditions. The tax aspects would be dealt with in accordance with the tax laws in India upon completion of the transaction which is expected later this year,” said a spokesperson for Essar.
The $10.9-billion deal involves Rosneft buying 49% in Essar Oil Ltd and Trafigura Pte Ltd and United Capital Partners buying 49%. Trafigura and United Capital Partners echoed the views shared by Essar in an email.
Rahul Garg, leader (direct tax practice) at PwC India, said provisions of the tax treaty prevail over domestic law and that treaty provisions are used to resolve when questions of dual residency of companies arise.
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The shareholder is a Mauritius resident, which means that the capital gains realised will not be taxable in India to the extent they are realised by the Mauritius entity, said Daksha Baxi, Executive Director, Khaitan & Co, a law firm.
India levies long-term capital gains tax on unlisted shares held for more than 36 months at the rate of 20%. The India-Mauritius treaty was renegotiated as the agreement meant to prevent double taxation, has actually resulted in double-non-taxation in many instances and governments worldwide started a drive to prevent what they called aggressive tax avoidance.