In September this year, pioneer fintech startup in Nigeria, Paga, announced that it was done doing business with the island of Mauritius and had relocated to the UK. Part of the startup’s reasons is that Mauritius is no longer a tax haven, and has been declared so by the Organisation for Economic Cooperation and Development (OECD). However, it seems that Paga is not alone. India, which used to record the highest foreign direct investment (from any country) from Mauritius is reporting a major shift in foreign investors’ preferred offshore territories. According to a new report, investors are going through Cayman Islands more now (instead of Mauritius and Singapore) in order to invest in India, even though Cayman Islands does not have a double taxation treaty with India (Mauritius has). 

The east African country of Mauritius, which till last year contributed the second highest FDI inflows to India, was behind Cayman Islands, with FDI inflows worth $2.1 billion coming from Cayman Islands in first half of 2020 alone. Only Singapore ($8.3 billion) and US (7.12 billion) were ahead. This British overseas territory is now the third most preferred source of investments into India — it was 7th in FY19 and 5th in FY20.

“Unlike most countries, the Cayman Islands doesn’t have corporate tax, making it an ideal place for multinational corporations to base subsidiary entities to shield some or all of their incomes from taxation. In addition to having no corporate tax, the Cayman Islands impose no direct taxes, whatsoever on residents. They have no income tax, no property taxes, no capital gains taxes, no payroll taxes, and no withholding tax,” said Amit Jindal, co-founder, Felix advisory.

“The lower cost of operations and lower compliance requirements makes Cayman Islands more attractive. There has been dip in FDI inflows from Mauritius & Singapore and Cayman Islands with lower operating cost is increasingly replacing the same. Increasing regulations and cost of operations in Singapore and grey listing of Mauritius is an additional factor leading to investments being routed through Cayman Islands. Increase by nearly 300 per cent of FDI from Cayman Islands would keep the taxman in India on their toes,” says Divakar Vijayasarathy, Founder and Managing Partner, DVS Advisors LLP.

A Look At What Changed For Mauritius

Mauritius Tax Rules Have Changed For International Companies Using The Country As Their Headquarters In Order To Benefit From Low Tax

• Under the former regimes operational in Mauritius, the Global Business Licence Category 1 (GBL 1), for instance, granted Holding Companies (majority of which were foreign companies with their headquarters in Mauritius) certain tax benefits, including an 80% foreign tax credit, which reduced the effective tax rate of such companies from 15% to 3%. This was also the case with Global Business Licence Category 2 (GBL 2) which granted tax exemption to companies.
• By that structure, foreign companies as well as businesses operational in Mauritius profited simply by 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.
• To take care of that, Mauritius discarded the GBL Regimes in 2018, introducing a Partial Exemption Regime for Global Business Corporations (GBCs) operating in the country. This new regime provided for an 80% tax exemption on specified passive income of the GBC companies in Mauritius. To put it differently, since companies in Mauritius are generally taxed at 15%, the 80% tax exemption means that GBC companies have a tax liability of only 20% of the original 15%, meaning that they’re suffering a maximum effective tax rate of 3%.

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• However to benefit from the 80% tax exemption under the new partial exemption regime, foreign companies must meet the requirement of substance.
• Under the substance feature, companies in Mauritius must further meet certain requirements to enjoy the 80% tax exemption.
• Some of these requirements include that a GBC company must prove that it is centrally managed and controlled in Mauritius.
• In determining what operations of a company are centrally managed and controlled, the Financial Services Commission in Mauritius usually considers whether the company meets at least one of the following criteria:

a) The company has or shall have office premises in Mauritius.

b) The company employs or shall employ on a full-time basis, at the administrative/technical level, at least one person who shall be resident in Mauritius.

c) The company’s constitution contains a clause whereby all disputes arising out of the constitution shall be resolved by way of arbitration in Mauritius.

d) The company holds, or is expected to hold, within the next 12 months, assets (excluding cash held in a bank account or shares/interests in another corporation holding a Global Business Licence) that are worth at least 100,000 United States dollars (USD) in Mauritius.

e) The company’s shares are listed on a securities exchange licensed by the Commission.

f) The company has, or is expected to have, a yearly expenditure in Mauritius that can be reasonably expected from any similar corporation that is controlled and managed from Mauritius.

In practice therefore, a South African company, for instance, may have its board of directors in Mauritius while it is managed from South Africa. In this case, the authorities could say the company is not eligible for tax residency. They will now look at the substance on the ground in Mauritius.

This, therefore, partly explains why investors are choosing elsewhere to invest from. Mauritius is simply now less of a place of free tax, and this has been confirmed by the Organisation for Economic Cooperation and Development (OECD).

The Implication of This

The fallout of this move will be that many of the structures 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.

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 are obtainable from doing 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.

The Bottom Line

All these, nevertheless, do not mean that Mauritius no longer continues to hold the best business environment and tax regime in Africa. In terms of ease of doing business, Mauritius ranks first in Africa, and 13th in the world, ahead of countries like Australia, Germany, Canada, China, Netherlands, Belgium or Hungary. 

The country also ranks first as the most innovative country in Africa and 52nd in the world according to the World Innovation Index. Globally, the Mauritian capital, Port Louis, is the 9th economy in terms of the quality of institutions and the dynamism of the markets. 

Charles Rapulu Udoh

Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer