History
Mauritius has always been one of the most attractive financial centers in the Indian Ocean. Mauritius offers investors numerous advantages including a substantial network of treaties and double-taxation agreements and a headline tax rate of 15%, making it the gateway for trading and routing funds into Africa and India. With the inception of Deemed Foreign Tax Credit (“DFTC”) mechanism, companies holding a Global Business Category 1 (“GBL1”), now replaced by Global Business Licence (“GBL”) companies, could claim 80% of the Mauritius tax charge as a deemed foreign tax credit making its effective tax rate very competitive.
However, with pressure mounting globally to combat Base Erosion and Profit Shifting (“BEPS”), the Organization for Economic Co-operation and Development’s (“OCED”) initiated 15 Action plans to tackle this issue. One among the results of such action plan was the classification of DFTC regime as harmful tax practice. Therefore, in a view to conform to OECD BEPS initiative, the Finance Act 2018 abolished the DFTC regime effective as from 01 January 2019 and the rate of tax for both domestic companies and GBCs was harmonised at 15%. For GBC companies incorporated before 16 October 2017 to ensure a smooth transition into this new framework, a grandfathering provision was introduced. Companies issued with a GBL1 license on or before the aforementioned date, could apply the DFTC regime up to 30 June 2021.
Partial Exemption
On the same wavelength and in a view to maintain its competitiveness in attracting investors, a partial exemption (“PE”) tax regime of 80% was introduced for specific types of income upon satisfying certain predefined substance requirements. These new regulations will be applicable for GBL companies incorporated on or after 17 October 2017.
Under the PE tax regime, a GBL Company can claim 80% partial exemption on certain qualifying income streams. Such income streams include, foreign source dividends, interest income, income derived by companies engaged in ship and aircraft leasing, profit attributable to a foreign permanent establishment.
Upon its announcement, shadow of doubts surrounded the partial exemption. The prescribed conditions were ambiguous leading investors and tax payers to uncertainty about the application of the partial exemption. With the lapsing of the grandfathering period and coercion from adviser, the Mauritius Revenue Authority (“MRA”) issued a statement of practice to shed light on the criteria applicable for PE tax regime. The predefined requirements were clarified with more emphasis laid on the proving the GBL its substance in Mauritius and more specifications given on core generating income activities (“CIGA”) which qualifies for the PE tax regimes. The requirements also stress on the fact that through directly or indirectly employment, there is an adequate number of suitably qualified person to conduct the CIGA. Also, A GBL should incur a minimum level of local expenditure proportionate to its level of activities.
These predefined requirements should be assessed on a case-by-case basis before concluding on the eligibility of PE tax regime. Documenting supporting evidence are essential to substantiate a partial exemption claim and therefore important to seek advice for managing such tax risk.
The application of the partial exemption is set out in the Income Tax Regulations 1996 (“ITR”). Based on the PE tax regime, 80% of the qualifying income is exempt from taxation. This exemption triggers a corresponding non allowance of expenses directly attributable to that exempt income. The ITR stipulates that where the percentage of exempt income compared to the total income is greater than 10%, then expenditure and losses should be allocated between the exempt income and the taxable income based on a percentage of the total income.
Contributed by –
Jeetun Heman
Tax Supervisor – Mazars
*The views expressed are personal.
