Just in! Clarity on the Mauritian partial exemption in relation to interest income has been provided by the Assessment Review Committee (“ARC”) ruling in the Alteo Energy case. This decision can have a pretty big impact on companies hoping to benefit from the effective 3% tax rate in respect of interest income.
In a previous newsletter, Changes afoot in Mauritius – a new policy on CIGA and the PRGF takes effect, we briefly discussed core income generating activities in relation to substance requirements for Global Business Licence companies.
First off, what is the partial exemption?
In Mauritius, companies can qualify for the 80% partial exemption regime (“PER”) whereby 80% of particular income streams are regarded as tax exempt, resulting in an effective 3% tax rate. This applies in relation to the following income streams: foreign dividends; interest income (the Mauritian Revenue Authority (“MRA”) argue the exemption only applies to interest which is “core” to the entity’s business); profits of a foreign permanent establishment of a Mauritian resident company; amongst others.
What impact does this ruling have on the PER?
The ARC has decided in favour of the MRA, as they have now confirmed that the PER may only be claimed by companies in respect of interest income, where the interest earned is a result of the company’s core income generating activity.
The ARC set out that while the core income generating activity being carried out in Mauritius is an important factor, it is not enough on its own to qualify for the PER. The interest income must be based on the substance of the activities of the company, which must also satisfy three conditions, as follows:
- The core income generating activity must be carried out in Mauritius;
- An adequate number of suitable qualified persons must be employed (whether directly or indirectly) to conduct said core income generating activity; and
- A minimum expenditure must be incurred that is proportionate to the company’s level of activities generating the interest income.
In terms of the core income generating activity, activities must include but are not limited to, “Agreeing funding terms, setting the terms and duration of any financing, monitoring and revising any agreements and managing any risks.” All of these conditions must exist within the core income generating activity and must necessarily relate to the substance of the company. In the Alteo Energy case, as the company’s substance of activity is the production of electricity and not provision of loans, the interest income was therefore not derived in relation to the substance of activities of the company.
As a concluding note, we can say that the eligibility for the 80% exemption on the interest income would depend on whether such income is derived from a company’s principal business activities and is not incidental, that is, activities that are central to the main operations of the company; and is deemed as the profit-centre for the company.
While the clarity is helpful, the downside is that many companies may no longer benefit from the PER in respect of interest income. Where companies do not meet the conditions allowing for the exemption, their tax liability will increase to the rate of 15%, potentially also suffering penalties and interest.
It is important to note that a 21-day window exists in which an appeal may be submitted by Alteo Energy. Keep your eyes peeled for updates as this discussion may not be over just yet.
If you would like to discuss how these changes may impact you, contact us today.