Mauritius issues new rules on substance for GBL and other related changes

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1 19 October 2018 Global Tax Alert Mauritius issues new rules on substance for GBL and other related changes NEW! EY Tax News Update: Global Edition EY s new Tax News Update: Global Edition is a free, personalized subscription service that allows you to receive EY Global Tax Alerts, newsletters, events, and thought leadership published across all areas of tax. Access more information about the tool and registration here. Also available is our EY Global Tax Alert Library on ey.com. Executive summary Mauritius recently made some major changes in the regulatory and income tax aspects of the Global Business sector to address harmful tax practices as required under Action 5 of the OECD 1 BEPS 2 project. As reported in the EY Global Tax Alert, Mauritius proposes changes to tax regime for corporations with global business licenses and banking institutions, dated 5 July 2018, a single licensing regime will apply as from 1 January 2019 so that the Financial Service Commission (FSC) will no longer issue a Category 1 Global Business License (GBL1) or Category 2 Global Business License (GBL2), as the case may be, under the Financial Services Act (FSA). Companies will receive a GBL license. This Alert summarizes the key developments with respect to the recent changes: Substance requirements for GBL companies The FSC has issued a circular letter to clarify the minimum level of expenditure and employment for certain categories of licensees. Prerequisites for partial exemption rules for companies Regulations have been issued on the conditions a Mauritian resident company must satisfy: they are consistent with the BEPS Action 5 and apply to all Mauritian resident companies.

2 2 Global Tax Alert Changes to certain exempt income Such changes are aimed at removing exemptions that are specific to GBL1 and GBL2 companies. In some cases, like trading profits on sale of shares, the exemption has been extended to all persons. The amendments to the Foreign Tax Credit (FTC) Regulations are in respect of the presumed foreign tax. Certain amendments correct the anomalies of the changes by the Finance (Miscellaneous Provisions) Act 2018 (FMPA 2018). Detailed discussion Circular letter dated 12 October 2018 In its circular letter dated 12 October 2018, the FSC clarified the new substance requirements with respect to the changes made by the FMPA 2018 to the FSA: the amended version of section 71(3)(a) of the FSA provides that a company with a Global Business License is required at all times to carry out its core income generating activities in, or from, Mauritius by: a. Employing either directly or indirectly, a reasonable number of suitable qualified persons to carry out the core activities. b. Having a minimum level of expenditure (MLE) which is proportionate to its level of activities. The FSC will consider the nature and level of the core income generating activities to assess whether a GBL company satisfies the above requirements. In terms of the requirement on employees, the person may be employed by a Management Company. Furthermore, the FSC will assess on a case by case basis whether: (a) the entity has a reasonable number of suitable qualified persons; and (b) its expenses are proportionate with its level of activities. In making this assessment, the FSC will refer to the guidelines in the table below: Category Non-Financial Investment holding (excluding IP rights) MLE in US$ Minimum employment Any turnover level or assets 12,000 No minimum Non-investment Holding Annual turnover is less than US$100m 15,000 1 Annual turnover is more than US$100m 15,000 2 Financial CIS Manager/Asset Manager If asset under management is less than US$100m 30,000 1 If asset under management is between US$100m and US$500m 30,000 2 If asset under management is more than US$500m 30,000 3 Institutions like leasing and credit finance Annual turnover is less than US$50m 100,000 1 Annual turnover is between US$50m and US$100m 100,000 2 Annual turnover is more than US$100m 100,000 3

3 Global Tax Alert 3 Category Insurers MLE in US$ Minimum employment Annual gross premium is less than US$50m 100,000 1 Annual gross premium is between US$50m and US$100m 100,000 2 Annual gross premium is more than US$100m 100,000 3 Intermediaries like investment adviser, insurance broker and insurance agent Any level of turnover or assets 30,000 1 Financial institutions other than the above Any level of turnover or assets 25,000 1 In the context of a group, the above guidelines will apply at the group level. The circular letter specifically provides that in its assessment on whether the core income generating activities are in Mauritius, the FSC will consider the use of technology by the GBL company. Substance requirements for partial exemption rules Income Tax (Amendment No. 2) Regulations 2018 were issued to address the conditions relating to the partial exemption rules on foreign dividend income, foreign interest and ship and aircraft leasing activities. These requirements apply to all Mauritian resident companies, irrespective of their legal status. Foreign dividend income The company should comply with its filing obligations under the Companies Act or the FSA and should have adequate financial resources for holding and managing share participations. Foreign interest income The company should carry out its income generating activities in Mauritius and employ directly or indirectly suitably qualified persons to conduct its core income generating activities in Mauritius. Furthermore, the company should incur a minimum level of expenditure proportionate to its level of activities. For this purpose, core income generating activities include agreeing to funding terms, setting the terms and duration of any financing, monitoring and revising any agreements, as well as managing any risks. Ship and aircraft leasing The company should carry out its income generating activities in Mauritius and employ directly or indirectly suitably qualified persons to conduct its core income generating activities in Mauritius. Furthermore, the company should incur a minimum level of expenditure proportionate to its level of activities. For this purpose, core income generating activities include agreeing to funding terms, identifying and acquiring assets to be leased, setting the terms and durations of any leasing, monitoring and revising any agreements, as well as managing any risks. Changes to exempt income Dividends in kind, other than shares, are no longer exempt for dividend distributions between Global Business corporations: distributions made by a company whose license has been issued on or before 16 October 2017 have been grandfathered up to 30 June 2021.

4 4 Global Tax Alert Interest income on call and deposit account with Mauritian banks received by GBL1 companies are no longer exempt: interest income of a company whose license has been issued on or before 16 October 2017 has been grandfathered up to 30 June % of interest income of a Mauritian resident company, other than a bank, shall be exempt from tax: the exemption is subject to the substance requirements discussed above. Royalties to nonresidents by any company insofar as the royalties are paid out of foreign-sourced income are exempt from tax. The exemption on trading profits on securities is being extended to any person and also includes profits on sale of debt obligations. The exemption on trading profits on sale of gold, silver or platinum, held for at least six months will also apply to any person. The partial exemption introduced by the FMPA 2018 for CIS, close end fund, CIS manager, CIS administrator, investment adviser or asset manager, as the case may be, applies to the income earned in the ordinary course of business. The restriction on overseas income has also been removed in connection with income derived by shipping and aircraft leasing companies. Foreign tax credit (FTC) mechanism The presumed foreign tax of 80% will no longer apply as from 1 January 2019: GBL1 companies whose license was issued before 16 October 2017 will be able to benefit from the presumed foreign tax on all their foreign-sourced income up to 30 June The grandfathering provisions do not apply to the following: Intellectual property assets acquired from a related party after 16 October 2017 Intellectual property assets acquired from an unrelated party, or to such newly created intellectual property, after 30 June 2018 Income on specified assets acquired, or projects started, after 31 December 2018, as may be determined by the Mauritius Revenue Authority A Mauritian resident company will be allowed to adopt the FTC system instead of the partial exemption if it wishes. The choice is between the various income streams in question and may be changed from one year to another. Endnotes 1. Organisation for Economic Co-operation and Development. 2. Base Erosion and Profit Shifting.

5 Global Tax Alert 5 For additional information with respect to this Alert, please contact the following: Ernst & Young (Mauritius), Ebene Ryaad Owodally ryaad.owodally@mu.ey.com Assad Khoosee assad.khoosee@mu.ey.com Ernst & Young Advisory Services (Pty) Ltd., Africa ITS Leader, Johannesburg Marius Leivestad marius.leivestad@za.ey.com Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London Rendani Neluvhalani rendani.mabel.neluvhalani@uk.ey.com Byron Thomas bthomas4@uk.ey.com Ernst & Young LLP, Pan African Tax Desk, New York Dele A. Olaogun dele.olaogun@ey.com

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