Tax Alert | Delivering Clarity 9 August 2021

Tax Alert | Delivering clarity 9 August 2021

Re-domiciliation of company by itself cannot lead to denial of tax treaty benefits The Mumbai Bench of the Income Tax Appellate Tribunal has rendered its decision that re-domiciliation of corporate entities in the offshore world is a fact of life and such re- domiciliation of a company by itself cannot lead to denial of tax treaty benefits

Background: • The taxpayer1, a company, was originally registered on 15 November 1991 as an ‘international business company’ in the British Virgin Islands (BVI). • The taxpayer was redomiciled in Mauritius on 29 June 1998 when the Registrar of Companies (of Mauritius) issued a certificate of incorporation by continuation, stating that the taxpayer in and from 29 June 1998, incorporated by continuation as a private company limited by shares and that the certificate of incorporation was effective on the date of deregistration of the company in its original place of incorporation. It was only upon the issuance of this certificate that the taxpayer company was discontinued in the BVI, vide certificate dated 30 June 1998, which stated that the Registrar of Companies (of the BVI), certified that the taxpayer, an international business company incorporated under section 3 of the International Business Companies Act of the law of the BVI had discontinued its operations in the BVI on 30 June 1998. As a result of these actions, a company originally incorporated in the BVI stood migrated to / redomiciled in Mauritius. • The taxpayer was issued a tax residency certificate (TRC) dated 6 July 1999 by the Government of Mauritius (GoM). • The Revenue authorities, amongst others, denied the India-Mauritius tax treaty (tax treaty) benefits to the taxpayer, as it was originally a BVI company. • In appellate proceedings, the matter reached before the Mumbai Bench of the Income-tax Appellate Tribunal (ITAT).

Decision of the ITAT: • The ITAT observed / noted the following: ─ Corporate re-domiciliation, also referred to as 'continuation', is the process by which a company moves its ‘domicile’ (or place of incorporation) from one jurisdiction to another by changing the

1 ADIT vs Asia Today Limited (ITA no 468 and 4629/Mum/2006) (Mumbai ITAT)

country under whose laws it is registered or incorporated, whilst maintaining the same legal identity. ─ With respect to the reasons and justification, the taxpayer had mentioned that due to business, and even legal, position being rather dynamic and constantly evolving, offshore entities are sometimes faced with a situation where the rules and regulations then prevailing in the current “domicile” (place of incorporation) of the company no longer fit the company’s purpose. For such and other reasons, transferring the domicile of a company by way of continuation from one place to another, may be a preferred option. Hence, many jurisdictions had enacted legislation in this regard. ─ For re-domiciliation, the existing jurisdiction (where the company is currently registered) and the target jurisdiction (where the company is to be ‘continued’) needed to be on the list of countries where re-domiciliation was possible and not all the countries allow re-domiciliation. Many popular offshore centres not only permitted but also facilitated re-domiciliation, and BVI and Mauritius were such jurisdictions. ─ The smoothness and ease with which the taxpayer company was redomiciled in another sovereign jurisdiction, and the fact that the TRC was issued even before the re-domiciliation process was complete (the re-domiciliation was completed on 30 June 1998 with the discontinuance of registration, but the TRC of Mauritius was issued on 29 June 1998), the concept of treaty entitlement on account of situs of incorporation, was less justifiable. ─ It was almost after the end of two decades from the relevant financial period that the issue regarding treaty benefit entitlement was being raised for the first time. Further, there was no specific ground of appeal in this regard. The lapse of time had extended finality to the findings about such foundational aspects. The Assessing Officer (AO) himself had granted tax treaty benefits to the taxpayer, and it could not be open to the Revenue authorities to now revisit this foundational aspect. ─ A re-domiciliation of the company by itself could not lead to denial of treaty entitlements of the jurisdiction in which the company is redomiciled. However, the fact of re-domiciliation of the company could at best trigger detailed examination or the redomiciled company being actually fiscally domiciled in that jurisdiction. ─ In light of past judicial precedents, one could possibly argue that once a TRC was issued, it could not be open to the tax authorities to make such investigations. However, there was no suggestion, that the taxpayer company was not now fiscally domiciled in Mauritius. • In view of the above, the ITAT held that there was nothing more than a doubt in the mind of the Revenue authorities, which could not be reason enough to reject the treaty entitlement in question. Thus, the ITAT rejected Revenue’s objection.

Comment: This ruling establishes the principle that re-domiciliation of the company by itself could not lead to denial of treaty entitlements of the jurisdiction in which the company is redomiciled. However, the ruling also emphasises that re-domiciliation could trigger detailed examination / examination that the redomiciled company is actually fiscally domiciled in that jurisdiction. Further, in addition to the above matter, the ITAT has upheld the taxpayer’s appeal on other grounds such asexistence of dependent agency permanent establishment being wholly tax neutral, unless it is shown that the agent has not been paid an arm's length remuneration. Taxpayers with similar facts may wish to evaluate the potential implications of this ruling to their specific cases.

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