India–Mauritius Tax Treaty 2026: Does the New Principal Purpose Test Put Your Investment Structure at Risk?

An international investment structure can be legally established, properly documented and supported by a valid tax residency certificate, yet still face a challenge when the investor claims treaty benefits.

That is the question confronting foreign investors using Mauritius to invest into India.

On 13 October 2026, India notified the protocol signed with Mauritius on 7 March 2024, introducing a comprehensive Principal Purpose Test (PPT) through a new Article 27B of the India–Mauritius Double Taxation Avoidance Agreement (DTAA).

The protocol entered into force on 10 August 2026. Its terms provide for effect from that date, including a specific provision addressing taxes and taxable years. It also revises the treaty's preamble to emphasise the prevention of tax avoidance and treaty shopping.

For private equity funds, venture capital investors, foreign portfolio investors and multinational groups, this is more than another treaty amendment.

It raises a commercially important question: Can a Mauritius investment vehicle continue to claim treaty benefits if obtaining those benefits was one of the principal reasons for using it?

The answer is not that Mauritius structures have become invalid.

It is that treaty eligibility, commercial purpose and the actual investment arrangement must now be examined with greater care.

A tax treaty may protect an investment. It does not automatically protect every arrangement created to obtain that protection.

What the New Principal Purpose Test Actually Changes

The new Article 27B permits a treaty benefit to be denied where, considering all relevant facts and circumstances, it is reasonable to conclude that obtaining that benefit was one of the principal purposes of the relevant arrangement or transaction.

An important qualification follows: the benefit may still be available if granting it would accord with the object and purpose of the relevant treaty provisions.

This is not a test that applies only when tax avoidance is the sole purpose.

An investment arrangement may have genuine commercial objectives and still attract scrutiny if securing a particular treaty benefit was also a principal consideration.

Equally, the existence of a tax advantage does not automatically establish treaty abuse. OECD commentary requires an objective, fact-specific examination rather than assuming that every tax-efficient investment structure is inappropriate.

The new provision is broader than the treaty's earlier limitation-of-benefits clause. It can affect benefits relating to dividends, interest, capital gains and other covered income, depending on the applicable provisions and facts.

What Happens to Investments Made Before April 2017?

This is probably the most consequential question for existing Mauritius investors.

The answer requires distinguishing the 2016 treaty amendment from the newly notified 2024 protocol.

Under the 2016 protocol, India obtained taxing rights over gains from transfers of shares of Indian-resident companies acquired on or after 1 April 2017.

Eligible investments in shares acquired before that date retained grandfathering protection under the treaty.

For qualifying shares acquired from 1 April 2017, gains arising during the transitional period ending 31 March 2019 could qualify for a reduced Indian tax rate, subject to the applicable limitation-of-benefits conditions. Thereafter, the treaty generally permits India to tax relevant share gains under its domestic law.

The new PPT does not expressly repeal that grandfathering provision.

More importantly, CBDT Circular No. 1/2025, dated 21 January 2025, clarifies that the PPT applies prospectively and that treaty-specific grandfathering arrangements under India's treaties with Mauritius, Singapore and Cyprus remain outside its scope. Such grandfathering is governed by the relevant treaty provisions.

There is, however, a distinction between the prospective application of the PPT and the protocol's broadly worded entry-into-effect provision. Article 3(2) refers to effectiveness from entry into force without regard to taxable years or the dates on which taxes are levied. Their interaction should be considered carefully in any dispute involving historical arrangements.

The practical conclusion is that grandfathering has not automatically disappeared, but neither should every pre-2017 investment be described as immune from all tax challenges.

Why the Supreme Court's Tiger Global Decision Matters

The timing of the treaty amendment is especially significant because of the Supreme Court's decision in Authority for Advance Rulings v. Tiger Global International II Holdings, delivered on 15 January 2026.

The case concerned Mauritius-resident investment entities that sold shares in a Singapore company whose value was derived substantially from Indian businesses.

The shares had been acquired before April 2017.

The investors relied on the India–Mauritius treaty, Mauritius tax residency certificates and grandfathering arguments to claim protection from Indian capital gains taxation.

The Supreme Court ruled against the investors, addressing the treatment of indirect share transfers, the scope of Article 13 and the evidence concerning the investment arrangement. It also emphasised that treaty protection cannot automatically defeat applicable anti-avoidance scrutiny.

The distinction is essential.

The case did not concern the application of the newly inserted Article 27B. Nor does it establish that every genuine pre-2017 direct investment in shares of an Indian company has lost grandfathering protection.

However, it reinforces the importance of examining the precise asset transferred, the actual investment structure and the commercial facts supporting the treaty claim.

A Tax Residency Certificate Is Important, but Not the Whole Analysis

Historically, Mauritius tax residency certificates have played a central role in establishing treaty eligibility.

They remain important evidence of residence.

However, the existence of a certificate does not necessarily resolve every question concerning treaty entitlement, the nature of the income, beneficial ownership where relevant, or the application of anti-abuse provisions.

The new PPT introduces a separate examination of the purposes underlying the arrangement.

Consider a US investment fund that establishes a Mauritius holding company to invest in several Asian markets, including India.

The Mauritius company has a functioning board, genuine investment-management responsibilities, independent commercial reasons for its location and documented authority over investment decisions.

That profile is different from a company established shortly before an Indian investment, with no meaningful decision-making and arrangements designed principally to secure a treaty advantage.

Neither example can be decided from the incorporation documents alone.

For a defensible structure, I would examine where investment decisions are made, who controls the risks, where personnel and expertise are located, how funds move, and whether the entity performs a genuine commercial role.

Those facts are more persuasive than generic references to substance in a board resolution.

The PPT Is Not India's Only Anti-Abuse Protection

An important qualification appears in CBDT's press release dated 15 March 2025.

The CBDT clarified that its guidance protecting treaty-specific grandfathering from the PPT does not interfere with other treaty provisions or independently applicable anti-abuse rules.

Those include India's General Anti-Avoidance Rule (GAAR), Specific Anti-Avoidance Rules and judicial anti-abuse principles, subject to their respective statutory conditions.

Consequently, excluding a grandfathered investment from the new PPT analysis does not automatically resolve every possible challenge under domestic law or judicial principles.

These rules must not be treated as interchangeable. Each has different requirements, exceptions and consequences.

For investors, the most useful approach is to identify the precise basis on which treaty relief is claimed and then test each potentially applicable limitation separately.

Why This Matters Beyond Mauritius

The development reflects the broader direction of international tax treaties under OECD/G20 BEPS Action 6, which targets treaty shopping and inappropriate treaty benefits.

Countries have increasingly incorporated PPT provisions through the Multilateral Instrument or bilateral treaty negotiations.

The issue is therefore relevant to investment arrangements involving Singapore, the UAE, Luxembourg, the Netherlands and other holding-company jurisdictions.

But different bilateral treaties contain different protections, definitions and effective dates.

A Mauritius-specific grandfathering provision cannot simply be assumed to apply to a Luxembourg structure. Likewise, satisfying one treaty's residence or limitation-of-benefits requirements does not establish eligibility under another.

The UN Model Tax Convention's commentary also provides guidance on treaty abuse. CBDT Circular No. 1/2025 expressly identifies the UN commentary, alongside OECD BEPS Action 6 materials, as a supplementary interpretative source, subject to India's positions and reservations.

The common international principle is increasingly clear: treaty protection is intended for qualifying cross-border arrangements, not artificial structures created principally to secure benefits for persons who would not otherwise obtain them.

What Should Investors Review Before an Exit?

Consider a Mauritius holding company that invested in an Indian technology business in 2015 and now plans to sell its shares.

I would not begin by recommending a restructuring.

I would first verify whether the shares are directly held in the Indian company, whether their acquisition is covered by the 2016 grandfathering provisions, and whether the seller satisfies the treaty's residence requirements.

The next step is examining the original investment rationale, funding records, investment decisions, board governance and proposed exit arrangements.

For investments made after March 2017, I would separately determine the source-country taxation applicable under Article 13 and assess whether any other treaty benefit is being relied upon.

Special care is warranted for indirect transfers involving shares of foreign companies, convertible instruments, reorganisations and transactions that change the identity of the legal holder.

If an investment is expected to generate material withholding obligations or a disputed tax outcome, the analysis should also consider available domestic procedures and treaty dispute-resolution mechanisms, including the Mutual Agreement Procedure where applicable.

The purpose is not to manufacture historical substance before an exit.

It is to establish whether the existing facts genuinely support the legal position being claimed.

Closing Perspective

Mauritius remains a legitimate international investment jurisdiction, and the new protocol does not prohibit investors from using Mauritian holding companies.

Nor does it automatically remove the grandfathering protection negotiated in 2016.

What it changes is the emphasis placed on the purpose of the arrangements through which treaty benefits are obtained.

For founders, foreign investors and multinational groups, the most useful question is no longer simply:

Does the Mauritius company qualify as a treaty resident?

It is also:

Why was the investment structured through Mauritius, what commercial purpose does the entity genuinely serve, and can those facts withstand independent examination?

The strongest structures should be able to answer those questions without relying exclusively on a tax residency certificate or a favourable treaty provision.

International investment structures must now be defensible not only when they are established, but also when income is received and investments are exited.

Research basis

This article is based on Notification No. 135/2026 (S.O. 5611(E)), dated 13 October 2026; the India–Mauritius DTAA and its 2016 and 2024 protocols; CBDT Circular No. 1/2025; CBDT's clarification dated 15 March 2025; the Supreme Court's judgment in Tiger Global dated 15 January 2026; and OECD BEPS Action 6 and UN treaty commentary.

Research cut-off: 18 October 2026. The exact application of the protocol's entry-into-effect wording to historical transactions, and the interaction between treaty grandfathering and independently applicable anti-avoidance provisions, remain fact-sensitive and should not be treated as conclusively settled for every investment structure.