Does Mauritius still work?
A recent Jersey Finance sponsored article gleefully heralded the death of Mauritius as an offshore location, linked to scare-mongering about EU banks refusing to deal with Mauritian entities as a result of the Anti-Money Laundering (“AML”) blacklisting (read our related newsletter here). And there is more and more talk about Dubai or even Rwanda as alternative jurisdictions to hold and support African businesses, as new ‘gateways to Africa’. Now with the end of the Mauritian GBC2 and deemed credit regimes from 1 July (as discussed in this newsletter), in tandem with increased effective personal tax rates (due to the reasons we discussed here), there is a real concern that there will be an exodus of international business from Mauritius. What is really going on? What has happened, why, and how will Mauritius work going forward?
Mauritius has been getting a kicking in recent years from various Big Brother style bodies as a result of its so-called harmful tax practices. When a self-appointed referee criticises your tactics, you either follow his rules to stay in his game, or you keep playing on your own and hope the other players are not scared enough of the ref to leave. Mauritius has chosen the former route, unlike many other “tax favourable jurisdictions”, and Mauritius’ tactic seems to be paying off. Especially with the growing global chatter on a minimum tax rate (which if it happens will be closer to the EU 12,5% than to Joe Biden’s 21%).
It does mean players who aren’t worried about being red-carded are leaving the Mauritius regime. This will likely increase the quality of businesses with operations in Mauritius while reducing the quantity.
What has Mauritius implemented?
In essence, in order to keep the OECD and EU referees happy, Mauritius has had do four things:
- Abolish the GBC2 regime (a type of Mauritian legal entity which was not tax resident in Mauritius);
- Abolish the deemed credit regime (whereby global businesses which could claim a deemed tax credit of 80% of their tax bill and thus only pay an effective 3% tax);
- Introduce tighter substance rules; and
- Introduce controlled foreign company rules.
One day soon, Mauritius will also have to bring in transfer pricing rules (and when they do, don’t forget we are the only specialist firm in Mauritius offering full TP services for Africa!)
The first two were really the bedrock of the Mauritian tax regime. The increased substance rules will definitely weed out aggressive players operating close to the rules. The rules will, however, not impact businesses with parents in developed countries who will anyway look at the overseas subsidiaries’ substance in terms of residence, controlled foreign company, and transfer pricing rules. And Mauritius CFC rules are rarely going to apply, just a necessary tick-the-box exercise.
Getting on the right side
And now (or once it gets off the AML blacklist) Mauritius is firmly on the ref’s right side – Mauritius has a headline tax rate of 15% which will apply across the board, no specific “harmful” regimes (although some say the Authorised Company will be seen as such), and meaningful substance requirements, and so should have little to fear going forward. Even in light of the OECD Pillar II initiatives around a global minimum tax rate.
So that’s all good, and particularly because Mauritius still meets the main functions for being the gateway to Africa. As anyone who has done business in Africa knows, structuring via the right jurisdiction is not primarily about tax. It’s about asset protection, currency risk, and minimising exchange control complications, with tax an important nice-to-have. Mauritius, with its strong banking infrastructure, currency flexibility, and lack of exchange controls ticks all of these boxes.
Ok so tax isn’t the be-all and end-all, but won’t businesses still prefer a low tax jurisdiction like the UAE?
Definitely yes, so we need to better tell the story of the valid BEPS-proof methods to get a very low effective tax rate in Mauritius. We go through the main options below.
Mauritian Partial Exemption Regime
Firstly, there’s the Partial Exemption Regime. In our view this is the least interesting option, it exempts 80% of certain income streams from tax, resulting in a 3% rate on:
- Foreign-source dividends;
- Interest income;
- Profits of a permanent establishment;
- Income from collective investment schemes and reinsurance;
- Income from ship and aircraft leasing; and
- Income from international fibre capacity.
A nice easy exemption then, but clearly of limited application. And where are foreign royalties for instance? A worrying omission which may one day be addressed.
Mauritius Tax Holidays
Secondly, Mauritius has a very broad range of generous tax holidays, 19 in total. For larger groups, wanting to hold, support or fund their African operations from a Mauritian holding company, the global headquarter administration or global treasury regimes are attractive. Other key tax holidays, which apply for five or eight years (in addition to the beneficial rates for export activities and freeport manufacturing) include:
- Global legal advisory activities;
- Overseas family office;
- Innovation-driven or high-tech activities related to IP development in Mauritius;
- E-commerce platform activities;
- Peer-to-peer lending;
- Tertiary education campus; and
- Manufacture of nutraceutical, pharmaceutical or medical products.
Mauritius double taxation relief
Finally, Mauritius has a very generous double taxation relief system – foreign tax credits are not subject to a limitation, and can be mixed. I.e., set off against other taxable foreign income in the same year. Also, where foreign dividends are earned, the Mauritian recipient can claim credit not only in respect of the withholding tax suffered, but also on the corporate tax suffered on the profits out of which the dividends were paid! This is particularly relevant for Mauritian companies holding African subsidiaries, which are almost always subject to high tax. Thus can often lead to 0% tax payable in Mauritius.
Clearly, there are many ways to achieve a low effective tax rate. But how do you decide which option is best for your company or your clients? Well, we at Regan van Rooy have designed an app to help. The Mauritian Tax Calculator is an easy-to-use smart questionnaire. It identifies what opportunities exist to optimise your company’s tax position, and which is the best option for you.
Please contact us to discuss further or click here to arrange a call with one of our team.
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.