On 9 November 2012 the Deputy Prime Minister and Minister of
Finance in Mauritius, Hon. Xavier Luc Duval, delivered his speech
on the Budget for the year 2013. One clear objective mentioned in
the speech is for Mauritius to act as a "catalyst for
investment." However, it is debatable whether the
Minister's announcement, at the same time that new commercial
substance requirements are to be introduced for GBC 1 companies,
will be seen as a positive move by foreign investors.
A Mauritius GBC 1 company is an offshore global business company
defined in terms of the Financial Services Act 2007. This company
is treated as tax resident in Mauritius, but is classified as a
Category 1 Global Business Company, engaged in international
business, and is entitled to an effective three per cent (3 %)
income tax rate in Mauritius on its foreign income.
The advantage of setting up a GBC1 company in Mauritius as opposed
to a tax haven is, amongst others, that the company has access to
Mauritius's network of tax treaties, which can be combined with
a low effective tax rate in Mauritius as well as the fact that the
GBC 1 Company is not subject to capital gains tax. As a result of
these advantages, many multinationals have chosen to set up a GBC 1
Company as part of their international structures.
At present, a GBC 1 company is required to demonstrate that its
central management and control is from within Mauritius. The
company must have two local Mauritius directors and must have its
Board meetings in Mauritius. In practice, of course, depending on
the company's functions, it is often necessary for the company
to have more Mauritian-based substance than this, in order for it
to conduct its business and be recognised by treaty partners as
being tax resident in Mauritius. For pure holding companies,
however, generally very little commercial substance in Mauritius
may be required.
In the recent Budget Speech, it was announced that the new
"commercial substance" test will be introduced in the
2013 tax year. Although no specific reasons for this change have
been provided, this is possibly as a result of the recent talks
between the Mauritian and Indian tax authorities over abuse of the
double tax treaty. The Indian authorities have raised concerns
relating to the double taxation avoidance agreement and are seeking
a review to curb the risks of round tripping of investments.
As of now, no further explanation has yet been given on what the
substance requirements will look like.
From a practical point of view, the new commercial substance
requirement will have an impact on the GBC 1's tax residence
status in Mauritius. In order for GBC 1 Companies to be considered
tax resident in Mauritius, which is a requirement to take advantage
of Mauritius's tax treaties, they must apply for an annual tax
residence certificate. What is expected is that the tax residence
certificates will only be issued to GBC 1 Companies upon compliance
with commercial substance requirements. Furthermore, upon issue of
the tax residence certificate, a service fee will be charged.
Consequently, the effects of the new commercial substance test will
affect existing structures applying for their annual tax residence
certificates in 2013, as well as new investors.
Webber Wentzel is keeping an eye on these changes. Once the
Minister has provided some clarity on the new substance
requirements, you will hear about it from us.
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.