Indian AAR Re-Characterizes Capital Gains Arising on Buyback of Shares as Dividends

Abstract

The taxation of cross-border transactions involving the transfer of shares of an Indian company to a Mauritius-based shareholder and the applicability of the India-Mauritius treaty has been a controversial and divisive issue for many years.

This ruling highlights the determination of the Indian tax authorities to block attempts at treaty shopping, albeit in an indirect manner. Although India did not have a general anti-avoidance rule (GAAR) when the transaction took place, the tax authorities had argued that the transaction was an attempt at tax avoidance and should be termed “colorable.” The AAR's re-characterization of capital gains as dividends is the first of its kind and seeks to ignore the very form of the transaction.

Keywords: GAAR, AAR, Mauritius, India, Dividend, Buy-Back, Otis, Capital Gains