Complying with the new Tax & SPV regimes in Mauritius
Mauritius has continued to strengthen its reputation as an attractive domicile for locating and structuring funds, facilitated by a sophisticated regulatory framework, efficient fund structures and service providers.
In recent months, Mauritius has continued to innovate in order to retain its role as an international #nancial centre of substance and as a hub for cross-border investment between India, Africa and the rest of the world.
In line with this objective, are two notable regulatory updates for financial services: the Partial Exemption Regime (PER) and to broaden its product offering, new criteria for its Special Purpose Fund (SPF) regime. Taken together, these are significant moves towards portraying Mauritius as a "substance jurisdiction" within the financial services community.
Partial Exemption Regime
Mauritius has undertaken major reforms since 2018, in order to enhance its competitiveness as well as ensuring transparency in line with the standards of the Organisation for Economic Co-operation and Development (OECD). Aligned with the OECD's initiatives to crack down on base erosion profit shifting, Mauritius has introduced a new tax regime that increases the eligibility requirements for companies claiming tax reliefs. The new regime has been approved by the OECD and the EU.
From January 2019, the Deemed Foreign Tax Credit (DFTC) regime has been abolished and replaced by the Partial Exemption Regime (PER). This allows 80% tax exemption on income streams of business corporations, companies engaged in ship, aircraft leasing, reinsurance and reinsurance brokering activities, leasing and provision of internal fibre capacity, sale, financing arrangement, asset management of aircraft and its spare parts and aviation advisory services. The PER is also available of foreign source dividend, interest income from limited sources including that through a Peer-to Peer lending platform and income received from a Permanent Establishment (PE).
There are three types of income subject to PER of relevance to financial services companies dependent on their corporate structures. These are foreign source dividend, interest, income derived by a Collective Investment Scheme (CIS), closed-ended fund, CIS manager, CIS adviser or CIS asset manager.
Service providers have an important role to play in helping financial services companies to navigate through the complex and challenging process of claiming the PER, which requires three key conditions to be met " substance conditions"; each qualifying income will be subject to differing conditions.
As far as the substance conditions are concerned for financial services, they are first, required to assess if the company's core income generating activities (CIGA) are being carried out from Mauritius or are outsourced. The outsourcing should happen within Mauritius to take advantage of the PER. The second is the employment test, which involves checking if the company directly or indirectly employs an adequate number of suitably qualified and experienced individuals that carry out the core income generating activities. The third condition is the expenditure test, which requires companies to have the appropriate documentary evidence to verify local expenditure. While no limit is prescribed, it will depend on the level of activities carried out compared with other similar structures.
The transition to the new PER regime requires an annual in-depth assessment of a company's eligibility to qualify based on the prevailing tax regulations, guidelines issued and informal discussion with the Revenue Authority. It is therefore important for companies to proactively manage tax risks on an ongoing basis and to ensure they have appropriate documentary evidence in place to support the three substance tests and the eligibility to PER.
New Special Purpose Fund Rules
The second update of note in recent months in Mauritius, is the Financial Services Commission's (FSC) new criteria for a SPF regime. These new rules are designed to provide further flexibility and easy access to new markets.
The SPF was first introduced in 2013 under the Financial Services (Special Purpose Fund) Rules 2013. It was designed for funds that conduct investments solely in countries that did not have tax arrangements with Mauritius. However, due to its limited applicability in its original form, the SPF did not find the hoped for traction in the mainstream fund market. As such the FSC has repealed the 2013 rules which have now been replaced by the Financial Services (Special Purpose Fund) Rules 2021 (2021 Rules), which came into force on March 6, 2021.
The 2021 Rules set out certain obligations of an SPF which state that it must:
- offer its shares, solely by way of private placements, to expert investors with competency, significant experience and knowledge of fund investment;
- have a maximum of 50 investors and a minimum subscription of $100,000 per investor;
- prepare and file audited financial statements with the FSC within six months of its financial year-end; and
- at all times, be managed by a Collective Investment Scheme (CIS) manager and administered by a CIS administrator.
In addition to the above, the SPF, its CIS manager and its CIS administrator must carry out their relevant core income-generating activities from Mauritius, by (a) employing (directly or indirectly) an adequate number of suitably qualified persons to conduct their core income-generating activities and (b) incurring expenditure proportionate to the level of such activities.
To remedy aspects of the narrow applicability of the 2013 rules, the new 2021 rules do not set specific criteria for a scheme to be categorised as an SPF. Instead, they give the FSC the power to use its discretion to grant such authorisation and to impose conditions that it may deem fit on an authorised SPF.
Although the SPF has been significantly overhauled since its predecessor, it is important to note that it still remains a tax-exempt vehicle under the Mauritian Income Tax Act 1998 and as such all interest, rents, royalties, compensation, and other amounts paid by an SPF to a non-resident continue to be considered as exempt income. The SPF broadens Mauritius' offering to introduce a flexible, multi-purpose and tax-exempt vehicle to international investors.
These recent regulatory changes not only support Mauritius' competitiveness as a financial services hub and fund domicile but are also indicative of the regulator's commitment to innovation and support for a thriving financial services ecosystem.
By Mahesh Doorgakant, FCA, managing director, Mauritius and Santosh Gujadhur, managing director, Mauritius at Apex Group
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“First published on Thomson Reuters Regulatory Intelligence on June 7, 2021.