India amends tax treaty with Singapore
The Third Protocol amending the India-Singapore Double Taxation Avoidance Agreement was signed on December 30th, 2016. The text of the protocol has been officially released by the Government of Singapore. Following are the details:
- Under this new protocol, India shall have the right to tax capital gains arising from alienation of shares (no threshold % of ownership) acquired on or after April 1st, 2017 by a Singapore resident.
- Investments in shares made before April 1st, 2017 are grandfathered and will continue to enjoy the benefits of the erstwhile provisions of the India-Singapore tax treaty. Capital gains arising from the alienation of such investments will not be subject to capital gains tax in India, subject to a revised Limitation of Benefits (“LOB”) clause provided for under the protocol.
- Capital gains arising out of the alienation of instruments other than shares (convertible debentures, bonds etc.) held by Singapore residents should continue to be entitled to benefits of taxation only in Singapore.
- The protocol provides for domestic anti-avoidance measures to override treaty provisions.
The long-awaited outcome of the renegotiation proceedings between India and Singapore for the tax treaty has finally been declared with the Central Board of Direct Taxes (CBDT) issuing a press release stating that a third protocol to the tax treaty has been signed by both countries on December 30th, 2016. While the text of the protocol has not been published by the Indian tax authorities, the Inland Revenue Authority of Singapore (IRAS) has published it.
The key takeaways from the third protocol are:
1. Capital Gains – Source based taxation of gains arising on alienation of shares of a company & Transition Period:
The taxation of capital gains in the amended India-Singapore tax treaty is similar to the taxation of capital gains under the amended India-Mauritius tax treaty. Accordingly, the taxation of capital gains on the alienation of shares under the amended tax treaty can be determined as follows:
2. Revised LOB Clause for capital gains benefits
The Protocol provides that grandfathered investments i.e. shares acquired before April 1st, 2017 which are not subject to the provisions of the Protocol will still be subject to a Revised LOB in order to avail of the capital gains tax benefit under the Singapore Treaty, which provides that:
- The benefit will not be available if the affairs of the Singapore resident entity were arranged with the primary purpose to take advantage of such benefit;
- The benefit will not be available to a shell or conduit company, being a legal entity with negligible or nil business operations or with no real and continuous business activities.
An entity is deemed to be a shell or conduit company in case its annual expenditure in Singapore is less than SGD 200,000 in Singapore, during each block of 12 months in the immediately preceding period of 24 months from the date on which the capital gain arises (“Expenditure Test”). A company is deemed not to be a shell/conduit company if it is listed on recognized stock exchange of the contracting state  or it meets the Expenditure Test. This is in line with the existing LOB that is in place under the 2005 Protocol.
With respect to availing the benefit of the Reduced Tax Rate during the Transition Period, the Revised LOB will still apply with one exception: the Expenditure Test will need to be fulfilled only in the immediately preceding period of 12 months from the date on which the capital gain arises. This is a deviation from the earlier LOB clause under the 2005 Protocol, which required expenditure of SGD 200,000 on operations in Singapore in the 24 months immediately preceding the alienation of shares.
3. Domestic anti-avoidance provisions to apply over tax treaty [enabling language for General Anti Avoidance Rules (“GAAR”)]
The Protocol has inserted Article 28A to the Singapore Treaty which reads:
“This Agreement shall not prevent a Contracting State from applying its domestic law and measures concerning the prevention of tax avoidance or tax evasion.”
The language of the newly inserted Article 28A makes it clear that the Indian government sees the GAAR as being applicable even to situations where a specific anti-avoidance provision (such as an LOB clause) may already exist in a tax treaty. The amended tax treaty does not prevent a contracting country from applying its domestic law and measures concerning prevention of tax avoidance or tax evasion.
4. Interest Withholding Rate Remains at 15%
The Protocol has not introduced any changes to the rate of withholding tax on interest payments prescribed under the Singapore Treaty.
As expected, the taxation of capital gains in the amended India-Singapore tax treaty is similar to the taxation of capital gains under the amended India-Mauritius tax treaty. However, the threshold expenditure in the revised LOB clause has not been reduced.
Since the amended tax treaty does not alter the withholding tax rate of 10% and 15% on interest income, it could provide an advantage to Mauritius and it could emerge as a preferred jurisdiction for routing debt investments into India as the amended India-Mauritius tax treaty provides for the lower 7.5% withholding tax rate on interest income.
The amended tax treaty with Singapore permits application of domestic laws for the prevention of tax avoidance/evasion over the tax treaty provisions. Accordingly, it appears that the provisions of GAAR (proposed to be effective in India from April 1st, 2017) may be invoked by India in case of the amended tax treaty, even though the treaty already has a specific anti-abuse provision in form of the LOB clause. Such a specific provision permitting application of domestic anti-avoidance law over the tax treaty provisions is not inserted in the amended India-Mauritius tax treaty.
While the signing of the Protocol provides clarity regarding the future taxation regime that would be applicable to investments by Singapore based entities in India, it has resulted in increased taxation for foreign investors. This revision was expected, given the recent trends, with India amending the tax treaties with Mauritius and Cyprus.
These amendments to the treaty puts Singapore at an advantage over Cyprus, as the Protocol provides for grandfathering of existing investments and provides for a transition phase of reduced taxation, the Protocol may result in Singapore falling behind Mauritius as a preferred jurisdiction for debt investments into India given the lower withholding tax rate of 7.5% on interest. Along with the Netherlands, where a few debt investment platforms have recently been set up, Mauritius will give Singapore some competition for being the preferred intermediate jurisdiction for investment into India. However, the media reports suggest that the Indian government may choose to not revise the tax treaty with the Netherlands but the treaty might instead change due to multilateral agreements. In such a scenario, existing investment structures will need to be reviewed, and preferred intermediate jurisdictions reassessed.
With an office presence in all the jurisdictions favorable for India Investments, Citco can assist with the setup, domiciliation (including the provision of dedicated office space and support facilities) and administration of investment structures based on the advice obtained from a legal and tax advisory firm.
 In the case of Singapore, the securities market operated by the Singapore Exchange Limited, Singapore Exchange Securities Trading Limited and The Central Depository (Pte) Limited in the case of India, a stock exchange recognised by the Securities and Exchange Board of India.