Singapore seduces India-focused investors

For many years, Mauritius has been considered a tax-favoured destination for foreign direct investment in India, because of benefits, such as exemptions from capital gains, it provides to investors.

Although the routing of investments through Mauritius has been well optimized, Singapore too has come to the forefront as a popular jurisdiction through which many investors, including large financial institutions, have begun to channel their investments.

India and Singapore have executed the India-Singapore Comprehensive Economic Cooperation Agreement (CECA) and revised their double taxation avoidance agreement (DTAA) with the sole purpose of intensifying their economies and boosting trade between the two nations.

Singapore’s strategic location and political stability have made it an attractive destination for many foreign corporations and investors looking to target the Indian market. The change has come about as a result of several advantages that Singapore has to offer to its India-focused investors, such as capital gains tax exemptions.

The CECA permits foreign institutional investors (FII) to route their funds through Singapore, which today is considered as a premier financial destination. While investments in Mauritius are limited to tax benefits only, Singapore offers much more than just tax incentives. Investors are allowed to raise capital and are also permitted to establish full presence activities in Singapore.

Furthermore, visa restrictions have also been eased for Indian professionals under the CECA. Good transportations links, excellent infrastructure and a strategic location gives Singapore an edge over other nations and makes it a focal point of business in Asia for every foreign investor.

In an age of increasing competition, tax-friendly conditions are essential to attract firms and professionals.

In terms of the CECA and the DTAA, Singapore’s FIIs are not liable to pay capital gains tax on income from the sale of shares as well as other specific assets in India.

However, the exemption for capital gains under the revised DTAA is subject to the satisfaction of anti-treaty shopping provisions, to prevent any abuse of the capital gains tax exemption.

In light of this, the exemption for capital gains is subject to the satisfaction of a “primary purpose” test (to certify that the investment is not arranged with the primary purpose of claiming an exemption) and a “shell/ conduit company” test (to verify that the company has business operations in the contracting state).

A “shell/conduit company” is defined as any legal entity falling within the definition of a resident with nil business operations, or with no real and continuous business activities carried out in the contracting state.

In addition, a “safe harbour test” is required for the application of the shell/conduit company test, whereby a resident of a contracting state should not be a shell/conduit company if it is listed on a recognized stock exchange. In addition, companies with an annual expenditure of at least S$200,000 or Rs5 million rupees (US$114,000) on operations in the contracting state, will not be considered shell companies.

In line with the revised DTAA, any capital gains arising in India for a resident of Singapore would not be taxable in India except for (a) gains derived by a resident of Singapore from the alienation of immovable property; and (b) gains from the alienation of movable property forming part of the business property of a permanent establishment of a Singapore company in India.

Withholding tax rates on royalties and fees for technical services has also been reduced from 15% to 10%. This reduction is especially beneficial for software product companies that license technology.

India has negotiated a model DTAA with Singapore which incorporates a “limitation of benefit clause” to discourage treaty-shopping by residents of a third country and is now keen to renegotiate its DTAAs with other countries providing the residence based taxation of capital gains.

Companies are being encouraged to relocate their business operations to Singapore rather than to other business centres as a result of the tax benefits outlined above.

With the increasing participation of financial investors worldwide, Singapore’s economy is thriving, especially on the capital markets front where substantial growth is expected in the near future. In addition, Singapore is considered cost-competitive compared with other cities, an important deciding factor for foreign companies making overseas investments.

The country’s efficient legal and judicial framework, along with its favourable business environment that boasts a high level of transparency and reliability, is guaranteed to draw continuing interest from India-driven investors around the globe.

Sumes Dewan is a partner and Shradha Puri is a senior associate at KR Chawla & Co Advocates & Legal Consultants. The firm is headquartered in New Delhi and has offices in Chennai and Bangalore as well as a representative office in Singapore.