India–Mauritius DTAA Protocol: The Principal Purpose Test and the Changing Treaty Entitlement Framework

Against this background, India and Mauritius signed a Protocol on 7 March 2024 amending the India and Mauritius DTAA. The protocol introduces two important changes to the treaty framework: a revised preamble and a new Article 27B Entitlement to Benefits, which incorporates a Principal Purpose Test (“PPT”).

In July 2026, the Government of Mauritius announced that the Cabinet had agreed to the promulgation of the Double Taxation Avoidance Agreement (India) (Amendment) Regulations 2026, as part of the process of bringing the Protocol into operation. The Cabinet paper explains that the amendments are intended to reinforce the common objective of eliminating double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, while introducing an entitlement-to-benefits rule aimed at preventing abusive use of the DTAA.

A Revised Purpose for the India and Mauritius DTAA

The first significant amendment concerns the DTAA’s Preamble.

Under the pre-Protocol wording, the Contracting States recorded that they were “desiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains and for the encouragement of mutual trade and investment”. The stated purpose of the DTAA was therefore twofold: the relief of double taxation and prevent fiscal evasion with the purpose of promoting trade and investment between the two jurisdictions.

The Protocol replaces that wording. The Contracting States are now expressed to be “intending to eliminate double taxation with respect to the taxes covered by this Convention without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit of residents of third jurisdictions)”. Two differences are immediately apparent. The reference to “the encouragement of mutual trade and investment” has been removed, and an express anti-abuse objective, including a specific reference to treaty shopping, has been added in its place which combats the malpractices of taxpayers in obtaining undue tax advantage available under the treaty.

The difference in application is one of interpretative direction. Under the previous preamble, a taxpayer could argue that granting a treaty benefit was consistent with the object and purpose of the DTAA because the treaty was itself intended to encourage investment flows between Mauritius and India. Under the revised preamble that argument is no longer available in the same form: investment promotion is no longer a stated purpose of the treaty, and the prevention of non-taxation is elevated to an objective standing alongside the elimination of double taxation. This matters because the second limb of Article 27B requires an assessment of whether granting a benefit would be in accordance with the object and purpose of the relevant provisions, and that assessment will now be made against the revised text.

The revised wording makes it clear that the treaty’s goal extends beyond eliminating double taxation. The treaty must also operate in a manner that does not facilitate tax evasion, tax avoidance or arrangements resulting in inappropriate non-taxation or reduced taxation. This change is important from a treaty interpretation perspective.

The preamble provides context for determining the object and purpose of the DTAA. Consequently, where questions arise as to whether a particular treaty benefit should be available, the anti-abuse objective expressed in the revised preamble may become relevant when interpreting the substantive provisions of the treaty.

The amendment therefore signals a broader change in the treaty framework. Access to treaty benefits will increasingly be considered not only by reference to the technical wording of a particular article but also by considering whether granting the benefit is consistent with the overall purpose for which the treaty exists.

Introduction of Article 27B – Entitlement to Benefits

The more substantive amendment is the Protocol’s provision for the insertion of Article 27B, entitled “Entitlement to Benefits”, which introduces the Principal Purpose Test (“PPT”) into the India–Mauritius DTAA.

The PPT provides that a treaty benefit shall be denied where, having regard to all relevant facts and circumstances, it is reasonable to conclude that obtaining that benefit was one of the principal purposes of an arrangement or transaction that directly or indirectly resulted in the benefit. However, the benefit shall not be denied under the PPT if it is established that granting it would be consistent with the object and purpose of the relevant provisions of the DTAA.

The PPT therefore involves a two-stage analysis.

First, the tax authority must consider whether the relevant facts and circumstances reasonably support the conclusion that obtaining the treaty benefit was one of the principal purposes of the arrangement or transaction. The existence of a tax saving does not, by itself, establish that purpose.

Second, where that threshold is met, consideration must be given to whether granting the benefit would nevertheless be consistent with the object and purpose of the treaty provisions concerned. If this is established, the PPT does not prevent the benefit from being granted.

This explains why bona fide transactions, meaning transactions undertaken in good faith for genuine commercial reasons, should not lose treaty benefits merely because they also produce a tax advantage. Where the arrangement serves a commercial activity and its structure is not driven by obtaining treaty benefits, this supports the position that obtaining those benefits was not a principal purpose. However, commercial reasons do not provide an automatic exemption: obtaining the benefit may still be another principal purpose, making the second stage necessary.

The distinction between an entity acting on its own account and a nominee requires examination of their actual roles. An entity acting on its own account may control its investments, bear the associated risks and have the right to use and enjoy its income. A nominee holds an asset or receives income on behalf of another person. Where the recipient must pass the income to that person, this may indicate that it is not the beneficial owner for the purposes of a treaty provision requiring beneficial ownership. The contractual obligations and the practical operation of the arrangement must both be considered.

A nominee arrangement can nevertheless be genuine and lawful. Nominee status is therefore not, by itself, proof of treaty abuse, and beneficial ownership must be distinguished from the PPT. The former concerns who has the right to use and enjoy the income; the latter concerns why the arrangement was undertaken and whether the treaty benefit is consistent with the relevant provisions. A transaction must satisfy each applicable requirement: being genuine does not automatically establish treaty entitlement, and involving a nominee does not automatically establish abuse.

The PPT Extends Beyond Fictitious Arrangements.

The introduction of the Principal Purpose Test (“PPT”) significantly broadens the scope of treaty anti-abuse analysis.

An arrangement does not need to be fictitious, contrived, simulated or legally ineffective before the PPT may become relevant. At the same time, treaty benefits should not be denied merely because tax considerations formed part of the decision-making process.

The appropriate enquiry is whether, having regard to the arrangement objectively and as a whole, obtaining a treaty benefit constituted one of its principal purposes.

Accordingly, an investment may be legally valid, properly documented and undertaken through an established Mauritian entity but may still be examined under the PPT where the surrounding facts and circumstances indicate that access to benefits under the India–Mauritius DTAA was a principal consideration behind the structure.

The PPT therefore shifts the analysis beyond legal form and places greater emphasis on the commercial rationale, economic substance and overall factual context of the arrangement.

It follows that the PPT is not directed at, and should not operate to deny treaty benefits to, bona fide transactions. The second limb of Article 27B exists precisely to preserve entitlement where the arrangement, examined objectively, is of a kind that the treaty was intended to accommodate. Commentary on the equivalent provision in the OECD and UN Models indicates that it should not lightly be assumed that obtaining a treaty benefit was one of the principal purposes of an arrangement, and that the provision is aimed at arrangements whose essential character is the securing of a treaty advantage rather than at ordinary commercial transactions that happen to attract treaty relief.

The distinction that matters in practice is between an entity that genuinely performs the role attributed to it and an entity interposed as a nominee or conduit for the benefit of another party. Factors indicating a genuine transaction include that the Mauritian entity holds and deploys its own capital and bears the resulting economic risk; that investment and divestment decisions are in fact taken at the level of its board or investment committee; that it is free to use the income it receives rather than being obliged, in law or in practice, to pass that income on to a person who could not have obtained the same benefit directly; that its commercial existence predates and extends beyond the transaction under examination; and that the reasons for its use, such as regional investment management, investor pooling, governance, regulatory or financing considerations, would have applied even if the treaty relief had not been available.

Conversely, features pointing towards a nominee or conduit arrangement include interposition of the entity shortly before the relevant transaction, income received and substantially on-paid under a pre-existing or practical obligation, an absence of decision-making capacity or personnel at the Mauritian level, funding and risk retained wholly by an affiliate elsewhere, and contemporaneous documentation in which the treaty benefit is itself identified as the reason for the structure.

Article 27B is directed at the second category. Where a transaction falls within the first, treaty benefits should continue to be available, because denying relief to an arrangement with genuine commercial content would not be in accordance with the object and purpose of the DTAA.

PPT and India's Domestic General Anti-Avoidance Rules

The PPT should also be distinguished from India's domestic General Anti-Avoidance Rule (“GAAR”).

Before the Protocol becomes operative, treaty entitlement may already be examined under several legal mechanisms, including Indian domestic tax provisions, conditions contained in the DTAA, statutory requirements governing treaty relief, GAAR and judicially developed anti-abuse principles. Questions may also arise regarding tax residence, beneficial ownership, commercial substance and the characterisation of income.

GAAR constitutes India's principal domestic general anti-avoidance regime and involves a prescribed statutory procedure before an arrangement can ultimately be treated as an impermissible avoidance arrangement. The PPT is different.

Once effective, Article 27B will provide a specific treaty-based ground upon which a benefit under the India–Mauritius DTAA may be challenged or denied. It therefore operates independently from the domestic GAAR framework, although the same transaction may potentially raise questions under both regimes depending on the circumstances.

This distinction is particularly important for taxpayers because the PPT creates an anti-abuse test within the treaty itself rather than requiring the tax authority to rely exclusively on domestic anti-avoidance legislation.

Substance Becomes Functional Rather Than Merely Formal

One of the most significant practical consequences of Article 27B is the increased importance of commercial substance.

For Mauritius investment holding companies and investment vehicles, possessing a Tax Residence Certificate, maintaining a Mauritian bank account, appointing resident directors or holding board meetings in Mauritius may remain relevant. However, those factors may not, individually, conclusively establish entitlement to treaty benefits where a PPT enquiry arises.

The enquiry is likely to be more substantive.

Relevant considerations may include:

• why Mauritius was selected as the investment or holding jurisdiction;
• whether the Mauritian entity performs genuine functions consistent with its stated role;
• where investment and divestment decisions are actually taken;
• whether the Mauritian entity assumes genuine economic and commercial risks;
• whether the structure has identifiable non-tax commercial objectives; and
• whether the timing, routing and documentation surrounding the transaction indicate that treaty access was a principal consideration.

The question therefore moves from “Does the entity have substance?” to the more meaningful question of “Does the substance correspond to the commercial role that the entity claims to perform?”

A company whose function is genuinely to make investment decisions, manage investments, assume investment risk and exercise appropriate governance will generally present a stronger factual position than an entity whose activities are limited to formally holding investments while all economically significant decisions are made elsewhere.

Commercial Rationale Becomes Central to Treaty Entitlement

The PPT does not mean that Mauritius can no longer be used as an investment jurisdiction into India.

Rather, investors must be capable of explaining why Mauritius forms part of the commercial structure independently of the tax benefits available under the DTAA.

A Mauritius vehicle may have legitimate commercial purposes relating to regional investment management, investor pooling, access to capital, governance, financing arrangements, legal infrastructure, risk management, or the administration of investments.

However, these commercial objectives should be capable of being demonstrated by the actual conduct of the entity.

It will therefore become increasingly important that the facts surrounding the investment are consistent with the stated business rationale.

An investment structure created principally on paper, without meaningful decision-making functions or commercial responsibilities in Mauritius, is likely to face considerably greater scrutiny under the PPT than a structure supported by genuine commercial activity.

Importance of Contemporaneous Documentation

Documentation is consequently likely to assume much greater importance.

Under a PPT analysis, taxpayers may need to establish the commercial reasons that existed when the arrangement or investment was undertaken. These reasons should be supported by records prepared at the time, rather than explanations reconstructed only after a tax authority raises questions.

Investment memoranda, board minutes, business plans, feasibility studies, financing documentation, internal correspondence, and records relating to investment and exit decisions may therefore become highly relevant.

Investors should expect increased scrutiny of contemporaneous records demonstrating the actual functions and conduct of the Mauritian entity in relation to the transaction under assessment. These records should show the entity’s role, the decisions it makes and the risks it assumes. They should also support the commercial reasons for the transaction and help establish why granting the treaty benefit in those circumstances would be consistent with the object and purpose of the relevant treaty provisions. Describing a transaction as bona fide does not, by itself, establish that the PPT cannot apply.

The practical implication is that treaty risk management and the preparation of supporting documentation should begin when an investment structure is designed and continue throughout its implementation.

Grandfathered Investments

The Protocol must also be considered alongside the earlier changes to the capital gains provisions of the India–Mauritius DTAA. Under the existing treaty framework, qualifying investments in shares acquired before 1 April 2017 benefit from grandfathering protection against Indian capital gains taxation.

CBDT Circular No. 1/2025 confirms that the PPT is intended to apply prospectively and that the grandfathering provisions under the India–Mauritius DTAA remain outside its scope. Accordingly, the introduction of Article 27B should not, in itself, remove the capital gains protection available to qualifying pre-April 2017 share investments.

However, the non-application of the PPT does not automatically prevent India from applying its domestic General Anti-Avoidance Rules (“GAAR”). Where GAAR applies and an arrangement is found to be an impermissible avoidance arrangement, a treaty exemption may be denied even though the PPT does not apply. This concern arose in the Supreme Court of India’s judgment of 15 January 2026 in the Tiger Global case. Under the rules then in force, the Court interpreted Rule 10U(2) as allowing GAAR scrutiny of arrangements producing tax benefits on or after 1 April 2017, notwithstanding that the underlying investments had been made before that date.

That position must now be read alongside CBDT Notifications Nos. 54/2026 and 55/2026, both dated 31 March 2026. These amended Rule 10U of the Income-tax Rules, 1962 and the corresponding Rule 128 of the Income-tax Rules, 2026 to expressly exclude income from the transfer of investments made by the taxpayer before 1 April 2017 from GAAR. Notification No. 54/2026 states that GAAR shall not be invoked for such income on or after its publication date. The corresponding amendment under Notification No. 55/2026 takes effect from 1 April 2026.

Consequently, the prospective application of the PPT should not be treated as a general exemption from GAAR. Equally, it would be incorrect to suggest that GAAR can now routinely override the specific protection for income from transfers of qualifying pre-April 2017 investments. Other income, transactions or tax benefits associated with an older investment structure may remain subject to GAAR, depending on the applicable conditions and exclusions.

Post-April 2017 Investments

Investments made on or after 1 April 2017 require particular attention.

Following the earlier amendment to Article 13 of the DTAA, India obtained source-based taxing rights over capital gains arising from shares acquired on or after 1 April 2017.

A transitional regime applied between 1 April 2017 and 31 March 2019, under which qualifying capital gains could benefit from a 50% reduction in the applicable Indian tax rate, subject to the relevant limitation-of-benefits requirements.

The introduction of the PPT adds another layer to the analysis.

For structures established or investments made after 01 April 2017, taxpayers may need to consider both the substantive taxing provisions of the DTAA and whether the wider structure can withstand examination under Article 27B once the Protocol becomes effective.

Treaty Benefits Potentially Exposed to PPT Review

Although discussions surrounding the India–Mauritius DTAA have historically focused heavily on capital gains, Article 27B is not limited to capital gains.

The PPT is a general treaty anti-abuse provision and may therefore become relevant whenever a benefit is claimed under the DTAA.

Potential areas of examination may include dividend withholding tax relief under Article 10, treaty treatment of income derived from financial instruments, and claims that particular income is taxable exclusively in Mauritius in the absence of an Indian permanent establishment.

This reinforces an important point: the PPT should not be viewed merely as another capital gains rule.

It concerns entitlement to treaty benefits generally.

The Tiger Global Context

The introduction of the PPT is particularly relevant when considered against the background of Indian litigation involving Mauritius investment structures, including the Tiger Global litigation.

That litigation brought renewed attention to questions concerning the extent to which a Mauritian holding company may rely on treaty protection where the broader investment arrangement is alleged to lack independent commercial substance.

The principal lesson from the litigation is not that Mauritius investment structures are inherently ineffective. Rather, it illustrates the importance of establishing genuine commercial rationale, meaningful decision-making functions, the assumption of economic risk and contemporaneous evidence supporting the role of the Mauritian entity.

The introduction of Article 27B makes these considerations more significant because the treaty itself will now contain an express test requiring examination of the purpose underlying an arrangement.

Treaty Residence Remains Necessary but May Not Be Sufficient

A Mauritius Tax Residence Certificate (“TRC”) remains important evidence for establishing treaty residence and accessing treaty relief.

However, treaty residence and treaty entitlement are distinct questions.

Once the PPT applies, establishing that an entity is resident in Mauritius does not necessarily conclude the enquiry. A taxpayer may establish residence but still need to demonstrate that the particular treaty benefit being claimed is not being obtained through an arrangement whose principal purposes include securing that benefit in a manner inconsistent with the object and purpose of the treaty.

This distinction is expressly reflected in the practical implications identified in the reference article: treaty residency remains relevant, but it will not necessarily be dispositive of a PPT enquiry.

Entry Into Force and Timing

The timing of the Protocol is also important.

The Mauritius Cabinet paper records that Cabinet agreed in July 2026 to proceed with the relevant domestic measures and states that the Protocol will enter into force following completion of the applicable ratification procedures and notification to the Indian authorities.

The technical article states that, as at the time of its July 2026 publication, India had yet to ratify the Protocol.

Accordingly, taxpayers should distinguish between the date on which the Protocol was signed, the completion of domestic ratification procedures, the date of entry into force, and the date from which particular provisions become effective for tax purposes.

The precise operative date should therefore be verified by reference to the final governmental notifications issued by both jurisdictions.

Practical Considerations for Mauritius Investment Structures

Once Article 27B becomes operative, taxpayers using Mauritius for investments into India should consider reviewing their existing and proposed structures from a PPT perspective.

Particular attention should be given to whether:

• the Mauritius entity performs functions proportionate to the role attributed to it;
• investment decisions are genuinely undertaken at the Mauritian level where this is represented to be the case;
• the entity bears genuine financial and investment risks;
• the structure has identifiable commercial objectives independent of treaty relief;
• the governance arrangements operate in practice in the manner reflected in the legal documentation;
• contemporaneous documentation explains the commercial reasons supporting the structure; and
• the overall arrangement remains consistent with the object and purpose of the relevant provisions of the DTAA.

The analysis should therefore extend beyond a conventional substance checklist.

An office, local directors and board meetings may support the position of the Mauritian entity, but the stronger enquiry will concern whether the company performs real economic and decision-making functions appropriate to its position within the investment structure.

Conclusion

The 2024 Protocol represents a significant development in the evolution of the India–Mauritius DTAA.

It does not terminate the treaty, nor does it automatically prevent Mauritian residents from claiming benefits under it. Instead, the Protocol introduces an express treaty-based anti-abuse framework under which the purpose of an arrangement or transaction becomes directly relevant to treaty entitlement.

The revised Preamble reinforces the principle that the DTAA is intended to eliminate double taxation without facilitating tax evasion or avoidance, while Article 27B introduces the Principal Purpose Test as a substantive condition governing access to treaty benefits.

For genuine Mauritius investment structures, the principal consequence is, therefore, not the disappearance of treaty benefits but a higher standard of justification.

Mauritius can continue to serve as an important jurisdiction for investment into India where structures are supported by genuine commercial rationale, meaningful governance, substantive decision-making, assumption of economic risk and appropriate contemporaneous documentation.

The key shift is that treaty entitlement will increasingly be determined by looking at the arrangement as a whole rather than solely at its legal form.

For investors and multinational groups using Mauritius, the most effective response is, therefore, not simply to increase formal substance, but to ensure that the Mauritian entity has a genuine commercial role that can be clearly demonstrated if the structure is examined under the Principal Purpose Test.