MAURITIUS: STILL AN INVESTOR’S PARADISE?
Author: Caoilfhionn Van Der Walt
Mauritius finds itself increasingly under pressure from the OECD and elsewhere to close its low tax regimes. Some are questioning whether Mauritius is living up to its promise as an investor paradise. This article explores the recent changes to the GBC regime and the recent hike in personal taxes.
Mauritius has been in the tax news a lot recently and mainly it has been bad news ? first we had the end of the Category 2 Global Business Company (GBC2) and deemed credit regime, then the new substance requirements and the new controlled foreign company rules. Then, in 2020, various double taxation agreements were cancelled or ratification was delayed and, to top it all off, the July 2020 budget speech ushered in a 500% increase in the ?solidarity levy?, a type of personal tax applying to higher earners, as well as a new uncapped national insurance type levy.
And, as a final nail in the coffin, in May 2020 the EU Commission announced their intention to include Mauritius on its blacklist for financial centres with perceived weaknesses in anti-money-laundering controls, with the inclusion effective from October.
What more could go wrong? No wonder the Jersey Business was sponsoring articles referring to the ?end of Mauritius?. But is Mauritius really no longer a valid finance centre or offshore holding jurisdiction?
Here we explore the background to the changes, what has actually happened and conclude that Mauritius is actually more attractive than ever.
What are the changes?
Corporate tax changes
The 2018 Budget speech introduced a seismic shift in the Mauritian tax landscape by announcing the abolishment of both the GBC2 regime and the deemed tax credit regime. These regimes had previously been the bedrock of Mauritius? attractiveness as a holding company jurisdiction. A GBC2 was a specific type of entity for offshore activities that was exempt from all Mauritian tax and, under the deemed credit rules that applied to most other Mauritian entities, 80% of the headline tax of 15% was deemed to be a foreign tax credit, resulting in an effective 3% tax rate.
From 1 July 2021 neither the GBC2 nor the deemed credit will exist. GBC1 licences issued on or before 16 October 2017 will remain valid until 30 June 2021, and such entities will be allowed to claim the deemed tax credit until then. However, from 1 July 2021 the normal 15% Mauritian tax rate will ordinarily apply.
New substance and CFC rules
From July 2019, GBCs have been required to satisfy new Mauritian substance requirements (in addition to the general requirements such as two local directors and a local bank account) by meeting the following two tests:
GBCs must carry out their core income generating activities (CIGAs) in or from Mauritius.
GBCs must incur a minimum level of expenditure and employ directly or indirectly an adequate number of qualified persons.
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 which it subsequently deleted, and it showed expenditure of at least USD12 000 per annum. 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 annual licence fees, management company costs as an agent to the company, any corporate secretary costs, employee costs, directors’ fees, rent, utilities, tax advisor fees and audit fees.
In addition, GBCs 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 controlled foreign company (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 EUR750 000 per annum.
The CFC rules will not apply where:
The accounting profits amount to less than 10% of operating costs (excluding the cost of goods sold) outside the CFC?s country of residence
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 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 where the significant people functions, relevant to its assets and risks, are carried out and instrumental in generating the income of the CFC.
Increase in personal tax
Mauritius taxes individuals at a rate of 10% on annual taxable income up to MUR650 000, and at 15% on annual taxable income over MUR650 000, with various tax-free allowances available. The solidarity levy was introduced in Mauritius in 2017. This applied at a rate of 5% on all ?leviable income? in excess of MUR3.5 million and applied in addition to the standard 10/15% tax on chargeable income. Leviable income is defined as the chargeable income of the individual plus dividends from a resident company or distributions from a resident trust. This meant that an individual was taxed at a rate of 10/15% on all chargeable income up to MUR3.5 million and at a rate of 20% (i.e. the income tax rate plus the solidarity levy) thereafter.
With effect from 1 July 2020, the solidarity levy increased to 25% (a five-fold increase!) and applies from a reduced threshold of MUR3 million. However, it is subject to a cap of 10% of total income, so provided the total salary is at least MUR5 million the solidarity levy only applies at 10%, meaning a top tax rate of 25%.
As the cap only kicks in at MUR5 million (i.e. the point where 10% of the total salary (MUR500 000) is less than 25% of the portion over MUR3 million (MUR5 million less MUR3 million ? 25% = i.e. again MUR500 000), this means that salaries between MUR3 million and MUR5 million are disproportionately impacted, and the top tax rate for such individuals will be 40% on certain income (i.e. 15% plus 25% solidarity level where the cap does not apply), which is a significant increase for Mauritius.
In addition to the solidarity levy changes, changes were also made to the Mauritius national pension fund. The current pension fund has been replaced with a new system, the Contribution Sociale Generalis?e (CSG), with effect from 1 September 2020.
For employees earning more than MUR50 000 per month, the contribution will be levied at a rate of 3% for employees and 6% for employers, as an uncapped contribution on an employee’s total basic salary. As very little is obtained through this ?pension? this is effectively another form of taxation, and the cumulative impact of the increased solidarity levy and the pension fund contribution amendments results in a very significant tax cost increase for individuals in Mauritius.
Why did these changes arise?
The corporate tax changes and new substance and CFC rules are largely as a response to pressure from the EU and OECD who saw the GBC2 regime and the deemed foreign credit as ?harmful tax practices?, and who specifically recommended that Mauritius introduce additional substance requirements as well as CFC rules.
As a result of these changes, Mauritius is no longer regarded as an uncooperative tax jurisdiction, which is a welcome development. The individual tax increases appear to be linked to COVID-19, and the stated intention is that the solidarity levy increases will be temporary, although only time will tell.
This sounds like bad news ? is Mauritius now a high tax jurisdiction?
In short, no. Mauritius is still highly attractive from a tax perspective. Although the headline rate is indeed 15% in Mauritius, there are some very generous reliefs to avail of which mean that, particularly for a group with meaningful operations around Africa, the likely effective tax rate will still be close to 3%. This is due to three specific relief regimes.
Partial exemption regime
To ?replace? the deemed tax credit, an 80% partial exemption is available on certain specified foreign-source income, resulting again in an effective tax rate of 3%. This applies in respect of:
Profits of a permanent establishment
Income derived by a closed investment scheme (CIS), closed-end fund, CIS manager, CIS administrator, investment adviser or asset manager, or from reinsurance
Income derived by companies engaged in ship and aircraft leasing and certain aviation advisory services
Income derived from leasing and provision of international fibre capacity
Double taxation relief
Mauritius has a very generous double taxation relief system ? foreign tax credits are not subject to limitation, and can be mixed, i.e. set off against other taxable foreign income with no restrictions.
In addition, in practice foreign tax credits can often be claimed even where the foreign tax was levied in contravention of a double taxation agreement (unlike in South Africa). Further, when a Mauritian company receives a foreign dividend, double tax relief is also available in respect of the corporate tax suffered on the profits out of which the dividend was paid. Therefore if the Mauritian company receives dividends from high tax countries, i.e. anywhere in Africa, substance double taxation relief will be available.
We note that while credits can be pooled, i.e. excess credits on one foreign income stream can be set off against the tax on another foreign income stream, excess credits cannot be carried forward.
Mauritius also offers 19 generous tax holidays that result in a total exemption of corporate tax for a period of either five or eight years. Of particular relevance for larger groups is the global headquarter administration licence regime. This applies for eight years to a Mauritian business which conducts head office and support functions to at least three related entities. The holiday is subject to a number of conditions including that the company must have a physical office in Mauritius, employ at least 10 professional staff and incur an annual expenditure of MUR5 million.
A number of other tax holidays are available as follows:
Global treasury or legal advisory activities
Overseas family office
Income arising from an investment by a non-citizen who has invested at least USD25 million in Mauritius
Innovation-driven activities related to IP development in Mauritius
Project development or project financing for developing infrastructure in special economic zones
e-commerce platform activities
The exploitation of ocean water for air conditioning
Tertiary education campus
Manufacture of nutraceutical products
Manufacture of pharmaceutical products or medical devices
Sheltered farming scheme projects
Manufacture of automotive parts
The more things change the more they remain the same. This is certainly true in the case of Mauritius. Although the deemed credit, i.e. a steady 3% effective tax rate, is now gone there are many options to ensure that a low effective tax rate can apply going forward, particularly for a group with substantive operations across Africa. Mauritius still works!
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This article first appeared on Jan/Feb 2021 edition of Taxtalk