Caribbean & Pacific Island Companies in India: Mauritius, Cayman Islands & Treaty Shopping Risks

Why Caribbean and Pacific Island Jurisdictions Are Under Scrutiny

For decades, Caribbean and Pacific island jurisdictions — particularly Mauritius, the Cayman Islands, Singapore (as a routing hub), and the British Virgin Islands — served as preferred conduits for foreign investment into India. The India-Mauritius Double Taxation Avoidance Agreement (DTAA) alone channelled an estimated 30-35% of all cumulative FDI into India, with much of it originating from investors in third countries who routed capital through Mauritian shell entities to access zero capital gains tax.

That era is effectively over. Between the 2016 treaty amendment, India's General Anti-Avoidance Rules (GAAR) becoming operational in April 2017, the 2024 Mauritius Protocol introducing the Principal Purpose Test (PPT), and the landmark Supreme Court ruling in Tiger Global (January 2026), India has built a multi-layered defence against treaty shopping that makes shell company structures in island jurisdictions legally perilous.

The Mauritius Route: How It Worked and Why It Broke

The Original Structure (Pre-2017)

Under the original India-Mauritius DTAA signed in 1982, capital gains from the sale of shares in an Indian company by a Mauritius resident were taxable only in Mauritius. Since Mauritius does not impose capital gains tax, investors could sell Indian shares with zero tax liability. A foreign investor from any country could set up a Global Business Licence (GBL) company in Mauritius, obtain a Tax Residency Certificate (TRC), invest in India, and on exit pay no capital gains tax in either jurisdiction.

The 2016 Protocol: Capital Gains Rights Shifted to India

In May 2016, India and Mauritius signed a protocol granting India the right to tax capital gains on shares in Indian companies. The amendment took effect on 1 April 2017 with a two-year transition period (2017-2019) at a concessional 50% rate, after which full Indian capital gains tax applied. Investments made before 1 April 2017 were grandfathered — or so it seemed.

The 2024 Protocol: Principal Purpose Test

In March 2024, India and Mauritius signed another protocol incorporating the Principal Purpose Test aligned with OECD BEPS Action 6. The PPT allows Indian tax authorities to deny treaty benefits if one of the principal purposes of an arrangement is to obtain a tax advantage, unless the taxpayer can demonstrate that the benefit aligns with the treaty's object and purpose. The preamble was amended to explicitly state that the treaty's purpose is to avoid double taxation "without creating opportunities of non-taxation or reduced taxation through tax evasion or tax avoidance, including through treaty shopping."

The Tiger Global Ruling: GAAR Overrides DTAA

The Supreme Court's 15 January 2026 ruling in the Tiger Global case represents the most significant development in India's anti-avoidance framework. The key facts and holdings that every Caribbean/Pacific island investor must understand:

Case Structure

Tiger Global International II/III/IV Holdings were Mauritius-based companies with GBL-I licences and TRCs from the Mauritius Revenue Authority. They held shares in Flipkart Singapore. Their immediate shareholders were also Mauritian entities, owned in turn by private equity funds organised in the Cayman Islands with diversified investor bases across multiple jurisdictions.

Three Critical Holdings

1. TRC is not conclusive proof of residency: The Supreme Court held that a Tax Residency Certificate alone is insufficient to claim treaty benefits. Indian tax authorities are empowered to investigate the actual centre of management and deny benefits to entities that are residents of third countries using treaty jurisdictions as conduits.

2. GAAR applies to pre-2017 investments: The Court clarified that GAAR provisions under Chapter X-A of the Income Tax Act apply to any arrangement that produces a tax benefit on or after 1 April 2017, even if the underlying investment was made before that date. The DTA grandfathering provisions protect only genuine investments, not arrangements subsequently found to be impermissible avoidance arrangements.

3. Substance over form: By rejecting treaty shopping structures, the Court signalled a decisive shift toward examining the economic substance of arrangements rather than their legal form.

India's GAAR Framework: What Caribbean Entities Face

India's GAAR provisions (Sections 95-102 of the Income Tax Act) define an Impermissible Avoidance Arrangement (IAA) as any arrangement whose main purpose (or one of the main purposes) is to obtain a tax benefit, and which meets any one of four additional tests:

• Creates rights or obligations not ordinarily created between persons dealing at arm's length
• Results directly or indirectly in misuse or abuse of the Income Tax Act's provisions
• Lacks commercial substance or is deemed to lack commercial substance under Section 97
• Is carried out by means not ordinarily employed for bona fide purposes

Under Section 97, an arrangement lacks commercial substance if the substance or effect as a whole differs significantly from its individual steps, or if it involves locating an asset, transaction, or party's residence without substantial commercial purpose other than obtaining a tax benefit.

The consequences under Section 98 are severe: the Assessing Officer can deny the entire tax benefit, recharacterize the arrangement, disregard entities, treat connected persons as one, and reallocate income and expenditure.

Cayman Islands: No DTAA, Only TIEA

Unlike Mauritius, the Cayman Islands does not have a comprehensive DTAA with India. The two countries signed a Tax Information Exchange Agreement (TIEA) on 21 March 2011, which covers:

• Exchange of all types of tax information, including banking and ownership details
• Representatives of one country conducting tax examinations in the other
• Anti-abuse clauses ensuring benefits are accessible only to genuine residents

This means Cayman Islands entities investing directly in India receive no treaty-based capital gains protection. They are taxed under India's domestic tax law, which applies a 20% long-term capital gains rate (for unlisted shares held over 24 months) and short-term rates at the applicable corporate tax rate of 35% for foreign companies (plus surcharge and cess).

Many Cayman-domiciled PE/VC funds historically layered a Mauritius entity between themselves and Indian investments. Post-Tiger Global, this layering is precisely the structure that attracts GAAR scrutiny.

Other Island Jurisdictions: A Quick Reference

Practical Implications for Genuine Businesses

If You Are a Genuine Mauritius-Based Business

You can still invest in India and claim treaty benefits, but you must demonstrate:

• Substance: Active office with dedicated employees (not shared registered agents), local board meetings with documented minutes, real business decisions made in Mauritius
• Commercial rationale: A documented business reason for the Mauritius entity beyond tax benefits — e.g., managing a portfolio of African/Asian investments from Mauritius as a regional hub
• Compliance: Proper FC-GPR filings, FLA returns, and annual compliance with both Mauritius Financial Services Commission and Indian authorities

If You Are Routing Through an Island Jurisdiction

Post-Tiger Global, the risk calculus has changed fundamentally:

• GAAR can be invoked retroactively: Even pre-2017 investments are not safe if the arrangement produces post-2017 tax benefits
• TRCs are starting points, not shields: Indian tax authorities will look through to the ultimate beneficial owner
• Penalty exposure: Beyond tax reassessment, GAAR proceedings can attract penalties of 100-300% of tax avoided under Section 270A

Recommended Structure for Caribbean/Pacific Island Companies

For companies genuinely based in Caribbean or Pacific island jurisdictions that want to invest in India:

1. Direct investment: Consider investing directly without routing through a treaty jurisdiction. While you won't get treaty benefits, you avoid GAAR risk entirely. India's domestic corporate tax rate for new manufacturing companies is 15%, and for other companies the effective rate is 25.17% under Section 115BAA.
2. Legitimate subsidiary: If you need a treaty jurisdiction entity, ensure it has genuine commercial substance — not just a mailbox and a registered agent. Budget for actual office space, 2-3 local employees, and local board governance.
3. Get professional advice early: Engage FDI advisory and tax advisory services before structuring your investment. Post-Tiger Global, restructuring an existing arrangement is far more expensive than getting it right from the start.

The Limitation of Benefits (LOB) Clause

Several of India's revised DTAAs now include Limitation of Benefits (LOB) clauses that deny treaty access to entities that do not meet specific ownership, activity, or purpose tests. For Caribbean entities, the most relevant tests are:

• Ownership test: A specified percentage of the entity must be owned by residents of the treaty country, not third countries
• Active trade or business test: The entity must carry on substantial business activities in the treaty country
• Derivative benefits test: Shareholders would have been entitled to equivalent benefits if they had invested directly

Under the Multilateral Instrument (MLI), India has opted for the PPT as its primary anti-abuse tool, which works alongside LOB clauses in specific DTAAs.

How Indian Tax Authorities Detect Treaty Shopping

Understanding the detection mechanisms helps Caribbean entities assess their exposure. Indian tax authorities use a multi-pronged approach that has grown increasingly sophisticated since GAAR became operational in 2017.

Automatic Exchange of Information (AEOI)

India exchanges financial information under the Common Reporting Standard (CRS) with over 100 jurisdictions, including Mauritius, Singapore, and the Cayman Islands. Indian tax authorities receive data on accounts held by Indian residents (and Indian-connected entities) in these jurisdictions, including account balances, interest, dividends, and gross proceeds from asset sales. This data is cross-referenced with Indian tax returns and FC-GPR/FLA filings to identify discrepancies.

Beneficial Ownership Registers

India's Significant Beneficial Ownership (SBO) rules under Section 90 of the Companies Act, 2013 require every Indian company to identify and declare any individual who holds — directly or indirectly — at least 10% of shares, voting rights, or the right to receive distributions. For island jurisdiction investors, this means Indian authorities can trace the chain of ownership from the Indian subsidiary through the Mauritius or Cayman entity to the ultimate beneficial owner, regardless of how many layers of holding companies exist.

Transfer Pricing Audits as a Gateway

Transfer pricing audits are often the entry point for deeper GAAR investigations. When the Transfer Pricing Officer (TPO) examines intercompany transactions, they review the overall group structure. If they identify an entity in a treaty jurisdiction that appears to lack commercial substance — minimal employees, no real office, decisions made elsewhere — they can refer the case to the Principal Commissioner for GAAR proceedings.

Judicial Anti-Avoidance Rules (JAAR)

Even before GAAR became statutory, Indian courts had developed judicial anti-avoidance doctrines. The Tiger Global ruling referenced these, noting that courts can look beyond the legal form of a transaction to its substance, apply the "piercing the corporate veil" doctrine, and deny benefits to arrangements that are shams or colourable devices. Post-Tiger Global, GAAR and JAAR operate in parallel, giving tax authorities two independent avenues to challenge treaty shopping structures.

Country-Specific Analysis: Beyond Mauritius and Cayman

Singapore

India's DTAA with Singapore was amended in 2016 to mirror the Mauritius changes. Article 6 of the India-Singapore protocol explicitly links Singapore's capital gains benefits to the India-Mauritius DTAA — when Mauritius benefits were removed, Singapore's automatically followed. Singapore remains valuable for non-capital-gains purposes: lower withholding on interest (15% vs 20% domestic), favourable treatment of royalties and technical fees, and access to Singapore's robust banking and fund management infrastructure. However, Singapore entities must also satisfy the LOB clause requiring genuine operations.

Cyprus

India renegotiated its DTAA with Cyprus in 2016, simultaneously with Mauritius and Singapore. The revised treaty grants India full capital gains taxation rights on share transfers. Cyprus entities that were popular for European investors routing capital to India are now subject to the same substance requirements and GAAR scrutiny as Mauritius entities.

Netherlands

The India-Netherlands DTAA provides favourable rates on dividends (10%), interest (10%), and royalties (10%). Unlike Mauritius, the Netherlands treaty was not specifically amended in 2016 for capital gains, but India has covered this through the MLI and domestic GAAR provisions. Dutch structures with genuine substance remain effective for holding and IP licensing arrangements.

UAE (Dubai)

India's revised DTAA with the UAE (effective 2024) provides competitive withholding rates. Dubai free zone entities are popular with Caribbean investors seeking an intermediate jurisdiction with genuine commercial activity. However, the same substance requirements apply — a Dubai free zone shelf company without real operations will face identical GAAR challenges.

Filing and Compliance Requirements

Caribbean and Pacific island entities investing in India must comply with the following regardless of structure:

• Form 15CA/15CB for every outward remittance from India
• Form 10F to claim DTAA benefits, filed electronically
• Tax Residency Certificate (TRC) from the home jurisdiction — necessary but no longer sufficient post-Tiger Global
• Transfer pricing documentation for all intercompany transactions
• Annual FLA return to the RBI by 15 July each year

Cost-Benefit Analysis: Treaty Route vs Direct Investment

For Caribbean and Pacific island entities evaluating their India investment structure, the post-Tiger Global economics have shifted decisively. Consider a hypothetical investment of $10 million with a $5 million capital gain on exit after 5 years:

The arithmetic is clear: for most Caribbean entities, direct investment into India now costs less than maintaining a substantive Mauritius entity plus paying the same capital gains tax plus bearing litigation risk. The Mauritius route retains value only where the entity has genuine multi-jurisdictional operations that would exist regardless of Indian investment — for example, a fund manager running an Africa-Asia portfolio from Mauritius.

For private equity and venture capital funds structured in the Cayman Islands (which remains the global standard for PE/VC fund formation), the optimal approach is typically to invest directly from the Cayman fund into the Indian portfolio company, accept Indian domestic capital gains tax on exit, and factor this into the fund's return calculations. The incremental tax cost is almost always less than the combined expense of maintaining a substantive Mauritius intermediate entity, the management time spent on GAAR compliance, and the potential liability if the structure is challenged.

Key Takeaways

• Treaty shopping through island jurisdictions is effectively dead: The combination of GAAR, PPT, LOB clauses, and the Tiger Global ruling creates a multi-layered barrier that no shell structure can reliably penetrate.
• Substance is non-negotiable: Any entity claiming treaty benefits must demonstrate genuine commercial activity, real employees, and documented business rationale beyond tax optimization.
• Direct investment may be cheaper overall: When you factor in the cost of maintaining a substantive Mauritius entity (USD 50,000-100,000/year) plus the litigation risk of GAAR challenge, direct investment at India's domestic rates often makes more economic sense.
• Pre-2017 investments are not grandfather-safe: The Tiger Global ruling clarified that GAAR can reach pre-2017 investments if they produce post-2017 tax benefits — shattering the assumption of blanket grandfathering.
• Professional structuring upfront saves multiples later: A proper FEMA-RBI compliance review before investment can prevent assessment proceedings that typically cost 5-10x the advisory fee in taxes, penalties, and legal costs.