OECD Certifies Mauritius As Now Less A Tax Haven

Tax regime in Mauritius has officially been declared harmless for Mauritius. This is coming from a report released by the Organisation for Economic Cooperation and Development (OECD) on harmful tax practices across various jurisdictions. This news particularly significant international businesses desiring to migrate to Mauritius, amidst the crisis of review of tax treaties by the Mauritian government recently. In a simple sentence, Mauritius is, more or less, no longer a tax haven for foreign companies.

Here Is Why

The report pointed out that the Mauritian “Partial Tax Exemption Regime”, which was introduced in 2018 to replace the harmful “Global Business Licence Regime” is not harmful.
The OECD is a foremost global organisation that is notable for fighting international tax evasion across countries.
The organisation introduced in 2015, Base Erosion and Profit Shifting (BEPS) framework, which aims, among other things, to tackle international tax avoidance, which is facilitated by the shifting of profits from high paying tax jurisdictions to low paying tax jurisdictions.
Since coming into operation the BEPS Project has criticized repressive tax regimes across the world.
Mauritius had been before now badly booked for having harmful tax regimes.

A Look What Just Changed In Mauritius

Under the former regimes operating in Mauritius, the Global Business Licence Category 1 (GBL 1), for instance, granted Holding Companies in Mauritius certain treaty benefits benefits, including an 80% deemed foreign tax credit, which reduced the effective tax rate of such companies from 15% to 3%. Global Business Licence Category 2 (GBL 2) companies granted tax exemption to companies. This literally made Mauritius a tax haven for foreign companies.
By that structure, foreign companies as well as businesses operational in Mauritius profited simply setting up Mauritian Holding Companies with little or no economic substance in Mauritius. By doing so, such companies effectively reduced their effective tax rates to a large extent because of the favourable tax regime in Mauritius.

These countries have mutual tax agreements with Mauritius through which several foreign companies could previously claim enormous benefits

But All That Has Just Changed

To take care of that, Mauritius discarded the GBL Regimes in 2018, introducing a Partial Exemption Regime. This new regime provided for an 80% tax exemption on specified passive income of Global Business Corporations (GBCs) in Mauritius.
Consequently, under this regime tax credit is preferred to an exemption because it saves tax on dollar per dollar basis, as against tax savings at the effective tax rate.
Hence, with this new regime, GBCs paid some tax in Mauritius on their global income.
This is what OECD has considered in declaring the Mauritian Partial Exemption Regime not harmful. OECD noted that this new regime effectively meets with the OECD’s standards.

Another Key Feature In the New Partial Exemption Regime Is Requirement of Substance

Under this feature, companies in Mauritius must meet the substance requirements to enjoy the 80% exemption.
Some of these requirements include that a GBC, for instance, must at all times, do its major income generating activities in, or from Mauritius, that is they must employ (either directly or indirectly) a reasonable number of suitably qualified in Mauritius persons to carry out the core activities.
Again , the GBC is expected to have a minimum level of expenditure proportionate to its level of activities to benefit from the new tax regime.

Again, the Mauritian government recently announced that the Mauritian tax laws would be amended to stipulate conditions that must be satisfied where a company seeking to enjoy the Partial Exemption Regime outsources its core income generating activities.

These conditions include that:

The Company must demonstrate adequate monitoring of the outsourced activities, the outsourced activities must be conducted in Mauritius; and
The economic substance of service providers must not be counted multiple times by different companies when evidencing their own substance in Mauritius.

However, these changes have not been passed into law yet.

The Implication of This

The fallout of this move will be that many of the structures currently set up in Mauritius and claiming treaty benefits on the basis that they have tax residency certificate may now have to take a look at the structures again.

So, many of the Mauritius structures may get challenged in Mauritius itself and several existing structures will be forced to increase the substance requirements within Mauritius for them to continue getting the tax benefits, experts said.

In simple terms, the consequence of not being considered tax resident in Mauritius is that the company would not benefit from the numerous tax advantages that obtainable from running its business in Mauritius. So, it is not a case of claim benefit from Mauritius, but do business in your home country. You have to manage your business in Mauritius before you claim the benefits.

Mauritius is a tax treaty jurisdiction and has so far concluded more than 42 tax treaties which are in force with the countries listed above.

Again, businesses that have always relied on Mauritius for tax planning purposes should now begin to seek relevant professional advice. This is because there may be an urgent need to restructure their Mauritian entities to ensure that they meet up with the new substance requirements.

Charles Rapulu Udoh

Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world.

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