In this first article on Mauritius, we look at the issue of ‘substance’ and why it is responsible for the most significant tax reforms to the Global Business Company (GBC) regime since the inception of the Mauritius International Finance Centre.
The world continues to evolve and nations are becoming increasingly connected. Domestic tax laws have not kept pace with the evolution of global commerce, not least the challenges of an increasingly digital economy where products and services can be provided through the Internet.
As a result, the Organisation for Economic Co-operation and Development’s (OECD) instigated the Base Erosion and Profit Shifting (BEPS) project, which aims to realign taxation with economic substance and value creation, while preventing double taxation.
The recommendations arising from the BEPS Actions is fundamentally changing the tax landscape. The intention is to align taxation to economic substance and value creation by putting in place stronger measures to ensure that a company is real and tax resident in a particular jurisdiction and that profit generating activity is located in that jurisdiction.
Countries worldwide are introducing substance requirements in their tax regimes and thousands of tax treaties have, and will be, amended. Multinational enterprises (MNEs) and financial institutions such as asset managers, pension funds, collective investment schemes and sovereign wealth funds will need to identify how the new requirements will impact on their structures.
Mauritius is one of over 100 countries and jurisdictions that are collaborating on the implementation of the BEPS project. It joined the BEPS Inclusive Framework, which commits signatories to implementing the minimum standards put forward by the OECD on harmful tax practices, tax treaty abuse, country-by-country reporting, and dispute resolution mechanisms.
Mauritius has also signed the OECD’s Multilateral Convention to transpose BEPS recommendations into tax treaties worldwide. Mauritius will include 23 of its existing bilateral tax treaties as being “covered” by the Convention. For the remaining treaties, Mauritius will enter into discussions bilaterally with the respective treaty partners to implement the BEPS minimum standards at latest by the end of 2018.
In order to comply with these international commitments, on 9 August the Mauritian parliament approved the Finance (Miscellaneous Provisions) Bill, which provides for proposed changes to the tax regime for corporations with global business licences.
As of 1 January 2019, the Deemed (80%) Foreign Tax Credit (DFTC) regime available to companies holding a Category 1 Global Business Licence will be abolished and the rate of tax for both domestic companies and Global Business Companies (GBCs) will be harmonised at 15%.
In its place, an 80% Partial Exemption Regime will be introduced for certain income streams, subject to pre-defined substance requirements. Existing GBC1 companies, where licenses were issued on or before 16 October 2017, will be grandfathered until 30 June 2021. Licenses issued after 16 October 2017 will be grandfathered until 31 December 2018
Also effective from 1 January 2019, the Category 2 Global Business Licence (GBC2) will be abolished. Existing GBC2 companies, where licences were issued on or before 16 October 2017, will be grandfathered until 30 June 2021. Licences issued after 16 October 2017 will be grandfathered until 31 December 2018. After 31 December 2018 or 30 June 2021 as applicable, GBC2 licences will lapse and companies will need to comply with the prescribed requirements of the GBL as issued by the Mauritius Financial Services Commission (FSC).
A new licence, termed a Global Business Licence (GBL), will be mandatory if a foreign-controlled company wishes to conduct its business principally outside Mauritius or with such category of persons as may be specified by the FSC.
The new Partial Exemption Regime, based on 80% of the relevant income and applicable to GBL and domestic companies, will be effective from 1 January 2019 and will apply to:
- Foreign-source dividends derived by a company;
- Interest derived from overseas by a company other than a bank;
- Profit attributable to a permanent establishment of a resident company in a foreign country;
- Foreign-source income derived by a collective investment scheme (CIS), closed-end fund, CIS manager, CIS administrator, investment adviser or asset manager, licensed or approved by the Financial Services Commission; and
- Income derived from overseas by companies engaged in ship and aircraft leasing.
Where a company has claimed the partial exemption, no credit for foreign taxes in the form of actual tax credit, underlying tax credit and tax sparing credit will be available. The definition of foreign-source income has been changed to “income which is not derived from Mauritius”.
A GBL holder will be required to carry out its income generating activities in or from Mauritius though the direct and indirect employment of suitably qualified persons and should incur a minimum level of expenditure in accordance with its level of activities. It is also mandatory for the holder of a GBL to be managed and controlled from Mauritius and administered by a company holding a Management Licence from the FSC.
When determining whether the conduct of business is managed and controlled from Mauritius, the FSC will also take into consideration whether:
- A corporation has at least two directors, resident in Mauritius, who are appropriately qualified and of sufficient calibre to exercise independence of mind and judgment;
- A corporation maintains at all times its principal bank account in Mauritius;
- A corporation keeps and maintains, at all times, its accounting records at its registered office in Mauritius;
- A corporation prepares and audits its statutory financial statements in Mauritius;
- A corporation provides for meetings of directors, to include at least two directors from Mauritius;
- A corporation that is authorised as a collective investment scheme, closed end-fund or external pension scheme, is administered from Mauritius.
Mauritius has built a solid reputation of being a jurisdiction of substance internationally. Supported by its legislative framework and financial services infrastructure, Mauritius offers an ideal platform for investments around the globe, with a focus on Africa and Asia.
Sovereign Mauritius (Trust) Company holds a Management Licence from the FSC and offers a comprehensive corporate services package, which includes forming new corporate structures, reorganising existing structures and repatriating earnings.
We also offer the necessary expertise in administering and managing companies, including company law, board procedures, director responsibilities and shareholder relations, and financial and corporate compliance requirements.
We further provide the administrative support to maximise opportunities and achieve long-term sustainability, from full back-office solutions to assistance with tax and regulatory compliance. This includes accountancy, human resources, pensions, insurance, obtaining local licences and permits, executive relocation and specialist tax advice.