The revised South Africa-Mauritius double tax treaty was ratified by Mauritius and entered into force on 28 May 2015. It replaces the previous 1996 treaty and will apply to taxable income as of 1 January 2016.
The new treaty reflects changes in the tax policies of the two countries and international best practice. The principal changes include a revised test for dual residence for persons other than individuals; withholding taxes on interest and royalties; capital gains tax; removal of tax sparing provision; and assistance in tax collection.
Renegotiations were started in 2009, primarily to curb perceived abuse under the existing treaty, and the two countries signed the new tax treaty in May 2013. It was ratified by the South African parliament that September but the Mauritian government sought further clarification as to how the new treaty would be applied, particularly in respect of the corporate dual residency test.
Under the previous treaty, a company with dual residency was deemed to be resident in the country in which its place of effective management was situated. Under the new tie-breaker test, the exclusive state of residence of the company is to be decided by mutual agreement between South African Revenue Service (SARS) and the Mauritius Revenue Authority (MRA) on a case-by-case basis.
In order to provide greater certainty to companies that may be affected by the change, South Africa and Mauritius signed a memorandum of understanding (MoU) on 22 May, which draws on the guidance provided in commentaries to the OECD and UN Model Tax Conventions, as well as the OECD’s ongoing Base Erosion and Profit Shifting (BEPS) initiative work, to set out the factors that the two competent authorities will take into account in deciding the country of residence. These include:
- The place where the meetings of the entity’s board of directors or equivalent body are usually held;
- The place where the entity’s chief executive officer and other senior executives usually carry on their activities;
- The place where the senior day-to-day management of the entity is carried on;
- The place where the entity’s headquarters are located;
- The national laws governing the legal status of the entity;
- The place where the entity’s accounting records are kept.
The previous treaty stated that interest and royalties were taxable only in the country of residence. Under the new treaty, interest will be subject to a withholding tax of 10% and royalties 5%, both at source.
Tax on dividends have been reduced from 15% to 10% where the beneficial owner is a company which holds less than 10% of the capital of the company paying the dividends. Capital gains tax will be applicable on shares deriving more than 50% of their value from immoveable property only.
The “furnishing of services by an enterprise through employees” and “performance of professional services or other activities of an independent character” will now fall within the scope of permanent establishment.
A tax sparing provision that was included in the previous treaty has been removed. This provided that a foreign company could claim a credit to reflect any tax breaks or holidays to which it would have been entitled if operating domestically.
With an extensive network of tax treaties with African countries, low tax rates and no exchange controls, Mauritius has been a popular intermediary holding company jurisdiction. The new “mutual agreement procedure” as a tie-breaker test has therefore created considerable uncertainty for multi-nationals that have Mauritian companies in their group structures.