Summary of Mauritian substance requirements and CFC rules
The Mauritian corporate tax regime has changed dramatically over the last three years, largely due to pressure from the OECD and the EU, with Mauritius only being removed from the EU “grey list” of non-cooperative tax jurisdictions in late 2019. (Just in time, of course, to be put on another EU list, this time the blacklist for financial centres with perceived weaknesses in anti-money-laundering controls – see May 11 newsletter.)
The tax shake-up started in 2018 with significant restrictions to the GBC and deemed tax credit regimes and continued with the introduction of substance requirements and controlled foreign company (CFC) rules. We summarise these below.
Mauritian substance requirements
With effect from 1 January 2019 (and subject to grandfathering to June 2021), Mauritius abandoned the deemed foreign tax credit available to Global Business License Companies (“GBC’s) and instead put in place an 80% partial tax exemption on certain income streams. The 80% partial exemption generally applies in respect of foreign-source dividends, interest income, profits of a permanent establishment, certain financial services and other specified activities, resulting in an effective tax rate of 3% on such income streams. However, in order for GBC’s to qualify for the partial exemption, they are required to satisfy new Mauritian substance requirements (in addition to the general requirements such as two local directors, local bank account etc) by meeting two tests as follows:
Test 1: Substance requirements
- carry out their Core Income Generating Activities (“CIGA”) in or from Mauritius (refer to test 2 below); and
- incur a minimum level of expenditure and employ directly or indirectly an adequate number of qualified persons.
Test 2: Core Income Generating Activities
There is no specific guidance as to what constitutes a CIGA and it is interpreted based on the specific business in question. In the case of an investment holding company, the primary income is likely to be the dividend income, in which case the CIGA could be the monitoring of the investment and thus consideration should be given as to how to demonstrate that this takes place in Mauritius.
When determining the minimum level of expenditure and the adequate number of suitably qualified staff, the Financial Services Commission has set out an indicative guideline (see below). However, this guideline is not prescriptive and facts will be considered on a case-by-case basis. The annual expenditure represents any expenses and costs that the GBC incurs during the course of doing business, and includes FSC annual license fees, management company costs as an agent to the company, any corporate secretary costs, employee costs, directors fees, rent, utilities, tax advisor fees, audit fees, etc.
|Category||Sub-Category||Minimum annual expenditure (USD)||Minimum employment in Mauritius|
|Non-financial||Investment Holding (excluding IP rights)||12 000||No minimum employment specified|
|Non-Investment Holding||15 000||If annual turnover is:
|Financial||CIS Manager / Asset Manager||30 000||If assets under management are:
(e.g. insurance, leasing, credit finance)
|100 000||If annual turnover is:
(e.g. investment advisor, insurance broker, insurance agent)
In addition, GBC’s are also required to be either managed and controlled from Mauritius, or be administered by a Mauritian management company.
Mauritian CFC rules
In 2019 Mauritius introduced CFC rules for the first time, which came into operation on 1 July 2020 and generally apply to foreign companies which are majority-owned (directly or indirectly) by a Mauritian resident company, where the accounting profits exceed EUR 750 000 per annum.
The CFC rules will not apply where:
- the accounting profits amounts to less than 10% of operating costs (excluding the cost of goods sold) outside the CFC’s country of residence; or
- the tax rate in the CFC’s country of residence is more than 50% of the tax rate in Mauritius.
The CFC rules provide that the foreign entity’s income will be imputed, i.e. will be deemed to form part of the Mauritian resident’s taxable income, if the Mauritian resident carries on business through the CFC in a foreign country and the Mauritian Revenue Authority (“MRA”) considers that the non-distributed income of the CFC arises from non-genuine arrangements which have been put in place for purposes of obtaining a tax benefit.
An arrangement is generally regarded as non-genuine where the CFC would not own the assets or would not have undertaken the risks which generate all, or part of, its income if it was not controlled by a company were the significant people functions, relevant to its assets and risks, are carried out and instrumental in generating the income of the CFC.
Where the CFC rules result in an imputation, taxes paid by the CFC in its country of tax residence will be allowed as a credit against Mauritian tax on this income. In addition, when the previously attributed and taxed CFC income is distributed (as a dividend) to the Mauritian shareholder, it is excluded from the chargeable income of the Mauritian shareholder when calculating its tax charge.
The CFC rules are a big change for Mauritius, and it will interesting to see how they affect groups with Mauritian holding companies.
If you would like to discuss the above in more detail or the impact this may have on your business, please contact us for a discussion.
How can we help?
How you structure your business is a critical question as you expand globally. The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.
Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.