Changes afoot in Mauritius – a new policy on CIGA and the PRGF takes effect

On 17 January 2022, the Mauritian Financial Services Commission (FSC) released a policy communication regarding the enhanced economic substance requirements for Global Business licence (“GBL”) companies.

As you know, previously all GBL’s were required to satisfy the general Mauritian substance requirements (which require the usual, i.e. at least two Mauritian resident directors, a Mauritian registered office, Mauritian bank account and audited financials), as well as the enhanced substance requirements as per the Mauritian Financial Services Act. The enhanced substance requirements meant that a GBL was required at all times to be able to prove that:

• It is managed and controlled from Mauritius;
• It is administered by a management company located in Mauritius; and
• The core income-generating activities (“CIGA”) of the entity are carried out from Mauritius.

There has been no clear guidance as to what constitutes CIGA and the satisfaction of the requirements has always been specific to the business. However, some of the basic requirements that the FSC generally considers include:

• Employment: the entity must be able to provide that it has reasonably employed suitable personnel to carry out the CIGA of the entity; and
• The entity is incurring minimum expenditure appropriate for its level of activities.

According to the proposed new policy, which is effective from 1 January 2022, only GBLs that benefit or intend to benefit from a “preferential tax advantage” in Mauritius, would be required to show that their CIGA are or would be carried out from Mauritius.

So, what is a “preferential tax benefit”?  Basically, it is where a GBL takes advantage of one or more of the various Mauritian tax holidays or the partial exemption regime.  Thus the CIGA requirements will then only not apply where the GBL is paying tax in Mauritius at the headline tax rate of 15%. In particular, the CIGA requirement is not a condition of applying for foreign tax credits.

Therefore, for GBL’s which do not make use of a tax holiday in Mauritius and do not use the partial exemption regime, proving economic substance in Mauritius has been made slightly easier.

However, as we always tell our clients – if you’re worried about substance in Mauritius, likely you’re worried about the wrong thing!   In today’s post-BEPS and TP-heavy world, sufficient substance in Mauritius will always be required from the other jurisdictions involved (i.e. the higher tax jurisdictions where connected parties transacting with the Mauritian entity reside) to ensure the Mauritian entity is not regarded as tax resident elsewhere (in particular if South Africa could argue it is effectively managed from there), and to ensure the transfer pricing analysis is respected.

So beware, likely you still need to worry about Mauritian substance.

The Portable Retirement Gratuity Fund (“PRGF”)

Oh the dreaded PRGF!  The mandatory introduction of the PRGF contributions from 1 January 2022 by all Mauritian employers with eligible employees will result in an additional 4,5% cost for employers in respect of these employees. Together with the CSG (which was introduced in 2021) Mauritian employers now find themselves with hefty monthly employee contributions to pay.

The PRGF was introduced in 2019 along with the Workers’ Rights Act. Prior to the introduction of the PRGF, employers were required to pay a lump sum amount to their employees on retirement or death, which resulted in many complications, including the fact that the last employer of a retired or deceased employee was liable to pay the employee the full lump sum. In addition, an employee was not able to receive a gratuity that reflected their entire working period where they changed employers during their careers.

The introduction of the PRGF was intended to remedy this and requires employers to make a monthly contribution to the PRGF fund of 4,5% of the employees’ monthly salary (which is administered by the Mauritian Revenue Authority) instead of paying the lump sum. In the event of retirement or death, the MRA will then distribute the accumulated fund in respect of relevant employee to that employee or the employee’s beneficiaries in the event of death.  Where the accumulated PRGF fund of the employee upon his retirement or death is less than the lump sum gratuity computed according to the specified formula, the employer will be required to pay a “top-up” to make up for this shortfall.

There are certain exclusions from the PRGF, including where an employee is a member of a private pension scheme or an employee who earns a basic monthly salary in excess of MUR 200 000. Employees who fall within one of these exclusions from the PRGF will still be entitled to the lump sum retirement gratuity as mentioned previously.

In addition to the monthly contributions to be made going forward, the employer must also pay for the past services of its eligible employees who were in their employ from 1 January 2020 in the following instances:

• the eligible employee is terminated;
• the eligible employee retires; or
• the eligible employee dies.

Where the employee is terminated or the employee retires/dies, the PRGF contributions for past services should cover the period between the date of commencement of the employee’s employment and 1 January 2022.

It is not clear as to the period to cover when an employee resigns, however, based on our interpretation we are of the view that the contribution for past services should cover the period between 1 January 2020 (when the PRGF came into force) and 01 January 2022 (when contributions become mandatory).

These mandatory contributions along with the contributions for past service may have a big impact on businesses. Taking into account the effects of the Covid pandemic, 2022 may prove to be another tough year for businesses.

If you would like to discuss this in more detail and how it would impact your business, please do contact us.