It has been more than six years since Mauritius initiated comprehensive offshore legislation. Over the years scepticism has thawed away as a number of positive developments began to unfold. From the outset Mauritius had the necessary characteristics to position itself as a business hub to service the region. The island's solid economic base, along with its natural comparative advantages of geography and time zone, as well as its rich human resource base and network of tax treaties have been and continue to be at the basis of the success of the Mauritius offshore centre.

The offshore sector's progress over the past few years has established a sound base for the development of offshore business services in the new millennium. Whilst Mauritius launched its offshore sector in the early nineties by becoming progressively a niche channel for inward investment in India, the country is now gradually diversifying into new markets by focusing on China, South East Asia, and more strongly on the southern and eastern African market, especially South Africa.

Simultaneously, Mauritius is also aiming to enhance the range of products and type of services offered to the investment community worldwide. Emphasis is now being laid on introducing innovative legislation, investment vehicles and high technology in building a competitive edge in the offshore industry. This is in line with the overall and on-going government strategy on making Mauritius a full-fledged business and financial hub in the Indian Ocean region.

THE OFFSHORE SECTOR SET UP

As from 1992, the offshore sector operated in a conducive regulatory and fiscal environment. Offshore banking which constituted the first phase in the establishment of comprehensive international financial services in Mauritius, started off in 1989 when the first Offshore Banking Unit (OBU) was licensed. At that time exchange controls being still in force, OBUs were allowed to operate in a restriction free environment and were thus exempt from the rigidities of exchange control. It was only in 1992 that a comprehensive legislative framework for non-banking offshore business activities was introduced. As a result, the Mauritius Offshore Business Activities Authority (MOBAA) was set up to act as the regulatory and licensing body for all non-banking offshore business activities. The fiscal regime provided attractive features to the investment community through the network of double taxation agreements and local incentives. As from 1 July 1998, offshore companies are liable to a uniform tax rate of 15% as provided for under the Income Tax Act 1995. The new fiscal regime aims at facilitating the extension of the treaty network as well as creating a level playing field for the offshore and onshore sectors, thus integrating the offshore sector with the domestic economy.

TAX PLANNING OPPORTUNITIES

Mauritius has focused the development of its offshore centre on the use of its growing network of double taxation avoidance agreements for structuring investment operations abroad. Many multinational corporations have used Mauritius to route their investments into emerging regions such as India, China and Pakistan.

So far Mauritius has ratified 24 tax treaties and is party to a series of treaties under negotiation. The treaties currently in force are with Belgium, Botswana, France, Germany, India, Indonesia, Italy, Kuwait, Luxembourg, Madagascar, Malaysia, Mozambique, Namibia, Oman, Pakistan, People's Republic of China, Singapore, South Africa, Sri Lanka, Swaziland, Sweden, Thailand, UK and Zimbabwe. Two treaties, namely with Lesotho and Russia, await ratification.

DIVERSIFYING THE BUSINESS BASE

From the outset, offshore business in Mauritius has been essentially focused on inward investment into India. It is estimated that a total of US$7bn to US$8bn worth of funds have been invested into India through Mauritius, thus representing 32% of India's total Foreign Direct Investment (FDI) inflows and Foreign Institutional Investors (FII) investments to date. The channelling of investments into India through Mauritius provided the initial and necessary boost to propel the offshore sector. As a result Mauritian professionals have quickly grasped the specificities of the "Indian" market and consequently have acquired the necessary skills in the field of international business.

Over the past two years Mauritius has been focusing its efforts on targeting the South African market. The gradual relaxation of exchange control measures in South Africa has triggered significant interest from South African based enterprises to set up their business operations in Mauritius. As a result Mauritius is increasingly becoming an attractive location for captive insurance business and operational headquarters for multinational group operations. Mauritius' geographic location, low-cost professional skills, political stability and its membership of the SADC enhance the Island's attractiveness as an important offshore jurisdiction for South African investments. So far some 600 offshore companies have been set up for outward and inward investments from and into South Africa. Furthermore, an important number of South African companies established in other offshore jurisdictions are relocating their business operations to Mauritius.

The outbound investment opportunities for South African businesses are tremendous under the Mauritius offshore regime. Financial activities such as trade financing, leasing operations, loan syndication, equity financing, asset securitisation and other structured financing operations are apt to be carried out through Mauritius.

Mauritius' extensive tax treaty network, particularly with African and Asian countries offers South African residents the opportunity to route their investments into those regions via Mauritius. Tax efficient structures with commercial substance can be set up in Mauritius to service the needs of South African outbound investments.

The "South African Business" is highly encouraged as the spin-off effects for the Mauritian economy are indeed interesting: employment and the creation and development of high value-added services such as banking, treasury operations, accountancy, law and insurance. It is also a unique centre for South African businesses in terms of proximity, cost of operations and a conducive environment for "substance building".

DEVELOPING A FULL-SERVICE CENTRE

Mauritius is definitely emerging as a full-service centre for the African and Indian Ocean region. As globalisation, new technology, stiffer competition among offshore centres and the increasing onslaught from the developed nations on the "tax haven" status of certain jurisdictions, become the major forces defining the environment in which offshore players will have to respond, Mauritius has already embarked on a strategy-building exercise to face the numerous challenges ahead. The major challenge for Mauritius is to diversify and deepen its competitive base by creating new skills and technological proficiencies that will allow the country to position itself to provide high value-added services in the region and beyond.

In this context, a Financial Services Park will soon be set up and legislation will be introduced for sophisticated products such as aircraft registration and financing. Mauritius has recently enhanced the framework for captive insurance business and already a number of reputable captive managers have established their presence on the Island. Procedures for the granting of visas, work and residence permits have been streamlined further, and an offshore business channel is now in operation at the airport so as to expedite the entry formalities of investors.

Mauritius is now a strategic offshore financial services centre for the region and beyond. Growing freeport activities and a Stock Exchange open to foreign investors are positioning Mauritius as a successful business and financial hub in the next millennium.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to iofch@mondaq.com