Global Business: New substance requirements

Transcription

1 Global Business: New substance requirements

2 Introduction of Specific Substance Requirements Following the enactment of the Finance (Miscellaneous Provisions) Act 2018 ( FA 2018 ) and in line with the Organisation for Economic Co-operation and Development ( OECD ) recommendations, the Financial Services Commission ( FSC ) has provided indicative guidelines, in the form of Circular Letter CL , for substance requirement for the different legal entities composing the new global business framework. These guidelines are designed to comply with OECD directives and to enable investors and entrepreneurs to leverage and utilise the Mauritius International Financial Centre ( MIFC ). These set out increased substance requirements that build on the existing framework that enabled Global Business Companies ( s ) to satisfy at least one out of six potential requirements to display substance of entities incorporated in Mauritius. The previous requirements were broad and did not contain specific minimum employment levels, however, the new requirements require s to employ, either directly or indirectly, a reasonable number of suitably qualified persons to carry out the core activities and to demonstrate a minimum level of expenditure, which is proportionate to its level of activities. While the new substance requirements place more requirements on demonstrable substance in Mauritius, the statements in the Circular Letter that these are indicative requirements and the fact that assessments will be conducted on a case by case basis introduce a degree of vagueness that will hopefully be clarified in the near future. The inclusion of indirect employees, i.e. management company employees, will be a matter of relief for clients not wishing to incur unnecessary extra expense in ensuring compliance with substance requirements. Safyr Utilis will continue to monitor developments as they unfold and you are welcome to discuss any questions that you may have with your Administration team. The changes for each entity incorporated post 16 October 2017 will be applicable as from 1st Jan Otherwise, grandfathering provisions for companies incorporated prior to 16 October 2017 will apply until 30 June

3 Global Business Companies The licensing framework for global businesses is being overhauled and unified into a single regime - the global business licence ( GBL ). In order to qualify for the GBL, an entity will have to carry out its core income generating activities in Mauritius by: (a) (b) (c) (d) employing, either directly or indirectly, a reasonable number of suitably qualified persons to carry out the core activities; having a minimum level of expenditure, which is proportionate to its level of activities; Being centrally managed and controlled in Mauritius; and Being administered by a management company. It is to be noted that points a) and b) above are the new requirements. The FSC will assess whether an entity meets the substance requirements on a case by case basis but provides some indicative guidelines as follows. With respect to licensees that are part of a Group, the FSC will assess the new enhanced substance requirements at Group level. Indicative guideline on substance requirements for Global Business Licences Tax implications A tax rate of 15% is applicable. Partial Exemption is available upon meeting substance requirements leading to an effective tax rate of 3% on foreign dividends, foreign interest and income from a permanent establishment. In addition, the following income sources will continue to benefit from the 3% tax rate: CIS funds. Minimum Annual Expenditure (USD) Non-financial Minimum Employment in Mauritius (Direct or Indirect) Investment Holding (excluding IP 12,000 No minimum employment specified rights) 1 Non-Investment Holding 15,000 If annual turnover is : Less than USD 100m : minimum 1 More than USD 100m : minimum 2 CIS Manager/ Asset Manager Minimum Annual Expenditure (USD) Financial Minimum Employment in Mauritius (Direct or Indirect) 1 s holding IP Rights will be required to demonstrate that they have incurred expenditure in Mauritius which is proportionate to the research and development of the relevant IP Rights. 2 E.g. Insurance, Leasing, Credit Finance 3 E.g. Investment Adviser, Insurance Broker, Insurance Agent Institutions Intermediaries Others If assets under management are : Less than USD 100m : minimum 1 Between USD 100m and USD 500m : minimum 2 More than USD 500m : minimum 3 If annual turnover is : Less than USD 50m : minimum 1 Between USD 50m and USD 100m : minimum 2 More than USD 100m : minimum 3 For Insurers If annual gross premium is : Less than USD 50m : minimum 1 Between USD 50m and USD 100m : minimum 2 More than USD 100m : minimum 3 2

4 Tax implications The place of effective management and control ( POEM ) of an Authorised company must be outside Mauritius. This concept is broadly similar to that of a Category 2 Global Business Licence company ( GBL2 ) in that: 1. Its shares are controlled by a non-mauritian citizen; and 2. Its business must be principally outside Mauritius. As was the case with GBL2 companies, an Auhorised company must have a registered agent, which is a management company, and its records must be maintained in Mauritius. This type of entity is restricted from participating in the following business activities: Banking; Financial services; Collective Investment Scheme ( CIS ) or Collective Investment Fund ( CIF ); Trusteeship services, or management company services. The proposed business activity must not be detrimental to Mauritius. Companies holding a GBL2, incorporated post 16 October 2017 will be able to convert into an Authorised company without incurring any processing and annual fees up to 31 December As a result of having its POEM outside Mauritius, the foreign income of an Authorised company should not be subject to tax in Mauritius. Any incidental income generated in Mauritius may be taxable at 15%. 3

5 In a subsequent Circular Letter (CL151018), the FSC has provided an indicative list as to what would construe the core income generating activities for different funds-related licences, as described in the table below. As all of the licences listed below are only attributed to licence holders, they are equally expected to abide by the new substance requirements described on page 3. The FSC will assess these on a case by case basis but provides some indicative guidelines as follows. With respect to licensees that are part of a Group, the FSC will assess the new enhanced substance requirements at Group level. Type of Licence Collective Investment Scheme Closed-end Fund CIS Manager CIS Administrator Investment Adviser or Asset Manager Indicative Core Income Generation Activities Investment of funds in portfolios of securities, or other financial assets, real property or nonfinancial assets; diversification of risks; redemption on the request of the holder Investment of funds collected from sophisticated investors, in portfolios of securities, or in other financial or non-financial assets, or real property Management of a Collective Investment Scheme; taking decisions on the holding and selling of investments; calculating risks and reserves; taking decisions on currency or interest fluctuations and hedging positions; and preparing relevant regulatory or other reports for government authorities and investors Providing services with respect to the operations and administrative affairs of a collective investment scheme including accounting, valuation or reporting services Advise, guide or recommend other persons, or hold himself out to advise, guide or recommend other persons, whether personally or through printed materials or by other means, to enter into securities transactions; Manage or hold himself out to manage, under a mandate, whether discretionary or not, portfolios of securities; Give advice on corporate finance advisory matters concerning securities transactions 4

6 in Mauritius In order to qualify for tax holidays under the Second Schedule of the Act, the licensees for each of the categories below shall have 1. a physical office; 2. a minimum number of employees resident in Mauritius, and 3. incur a minimum amount of annual operating expenditure in Mauritius or have assets under their management as specified below Global Headquarters Administration Incur an annual expenditure of MUR 5 million Employ at least 10 professionals with at least 2 at managerial positions 8-year tax holiday Global Treasury Activities Overseas Family Office (Single) Incur an annual expenditure of MUR 2 million Employ at least 4 professionals with at least 1 at managerial position 5-year tax holiday Assets under management > MUR 5 million Employ at least 1 professionals 5-year tax holiday Global Legal Advisory Services Overseas Family Office (Multiple) Employ at least 5 lawyers 5-year tax holiday Assets under management > MUR 5 million per family Employ at least 3 professionals 5-year tax holiday 5

7 (Amendments) Regulations In adhering to the OCED s recommendations, Mauritius has changed its taxing mechanism in respect of foreign sourced income. It is phasing out its 80% deemed foreign tax credit provision which yielded an overall 3% tax rate on foreign sourced income by companies holding a Category 1 licence. However, in order to remain competitive as an IFC, the overall effect of the proposed changes still seeks to favour foreign investments through the new GBL framework. Income Source Tax treatment Upon meeting Conditions Conditions Definition of substance Foreign Dividend 80% exemption of total income attributable to this source. a) The dividend has not been allowed as a deduction in the country of source; and b) The company satisfies the conditions relating to the substance of its activities prescribed. 1. The company complies with its filing obligations under the Companies Act or the Financial Services Act; and 2. Has adequate resources for holding and managing share participations. Amendments Other considerations Interest 1 80% exemption of total income attributable to this source. a) Must not be engaged in banking activities; and b) Satisfies the substance conditions. 1. Carries out its core income generating activities 2 in Mauritius; 2. Employs directly or indirectly an adequate number of suitably qualified persons to conduct its core income generating activities; and 3. Incurs a minimum expenditure proportionate to its level of activities. Income from Permanent Establishment 80% exemption of total income attributable to this source. Profit must be attributable to a permanent establishment which a resident company has in a foreign country. N/A Income by collective investment scheme (CIS) and other, 80% exemption of total income attributable to this source. 1. Income must be derived from closed end fund, CIS manager, CIS administrator, investment adviser or asset manager licensed or approved by the FSC; and 2. Substance conditions must be met. The substance conditions are set out by the FSC. Please refer to the table on page 4 Ship and Aircraft Leasing 80% exemption of total income attributable to this source. Must meet substance conditions. 1. Core income generating activities 3 are carried out in Mauritius; 2. Employs directly or indirectly an adequate number of suitably qualified persons to conduct its core income generating activities; and 3. Incurs a minimum expenditure proportionate to its level of activities. 1 Previously only applied to interest relating to call deposit accounts held with banking instructions BUT now includes all interest 2 Include agreeing funding terms, setting the terms and duration of any financing, monitoring and revising any agreements and managing any risks 3 Include agreeing funding terms, identifying and acquiring assets to be leased, setting the terms and duration of any leasing and monitoring and revising any agreements and managing any risks 6

8 Amendments Other considerations Other tax considerations Transitional provisions Whilst the legislation has been amended for these new rules, there is also provision for transition whereby companies incorporated before 16 October 2017 holding a global business licence will continue to benefit from the 80% deemed foreign tax credit up to 30 June Other beneficial provisions may also continue to apply. Royalties Previously, royalties payable to a non-resident were exempt if they were paid either by a trust or by a company holding a GBL out of its foreign source income. From 1 January 2019, only royalties payable to a non-resident by a company out of its foreign source income will be exempt. Whilst the exemption no longer applies to trusts, it now applies to all companies including domestic companies. Administration As the deemed foreign tax credit will no longer apply, taxpayers will have a choice of whether to compute their foreign tax credit either by reference to all their non-exempt foreign income or on a source-by-source basis. Regardless, they will be required to provide evidence of the foreign tax suffered. 7

9 Disclaimer The information presented does not constitute and should not be construed as accounting, legal or tax advice. It is intended to provide an overview. We recommend that your accounting, legal or tax expert be consulted for any specific advice which you may require in light thereof SAFYR UTILIS Regulated by the Financial Services Commission of Mauritius and accredited with the Chartered Institute of Taxation (UK) as Chartered Tax Adviser

10 Contact Us Mauritius office 7 th Floor, Tower 1, NeXTeracom Cybercity Ebène Republic of Mauritius South Africa office 116 Oxford Road, Melrose Johannesburg Republic of South Africa contact@syul.mu