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India and Mauritius: LOB clause

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India and Mauritius have agreed on the principle of including a Limitation of Benefit (LOB) or anti-treaty shopping law clause in the revised tax treaty to ring-fence its jurisdiction from any attempts of round-tripping and money laundering activities.Mauritius.eps

The LOB clause limits treaty benefits to those who meet certain conditions including those related to business, residency and investment commitments of the entity seeking benefit of a Double Taxation Avoidance Agreement (DTAA). This LOB clause will have the effect of bringing even more substance to companies which want to be tax resident in Mauritius. It should here be noted that India and Mauritius already have a mutual DTAA in place and it is being revised amid concerns that the Indian Ocean nation is being used to round-trip funds to and from India, although Mauritius has always maintained that there has been no concrete evidence of any such misuse.

 

Limitation of Benefit (LOB) clause is an anti-abuse provision in any tax-related treaty between two nations that sets out where residents of the contracting states are entitled to the treaty’s benefits. With the rise of bilateral income tax conventions has came the need to ensure the benefits granted under the conventions were restricted to the intended parties. To restrict benefits, a limitation on benefits clause has been included in the tax conventions and treaties. Limitation on benefits clauses are drafted with the intention of avoiding treaty shopping, whereby a third-party national or corporation sets up a shell company in a contracting state through which income will be passed by the owners in an attempt to achieve a minimal tax rate, or to eliminate tax on the income altogether with no expense or real investment. The shell companies have no legitimate business purpose beyond minimizing tax exposure. The practice of structuring a multi-national business to take advantage of more favourable tax treaties available in certain jurisdictions is widespread. A business that resides in a home country that doesn’t have a tax treaty with the source country from which it receives income can establish an  op-eration in a second source  country that does have a favourable tax treaty in order to minimize its tax liab-ility with the home country. Most countries have established anti-treaty shopping laws to circumvent the practice.