By K. C. Li Kwong Wing, B. Sc. (ECON), Managing Director,
Since the enactment of legislation in 1992 for the introduction of offshore business activities in Mauritius, Government has consistently upgraded the legislative framework to keep it up to date with competing jurisdictions and remain in the forefront in meeting the changing needs of the offshore industry.
During 1997, the following innovative changes have been brought to the Mauritius Offshore Business Activities Act 1992, the Offshore Trusts Act 1992, The International Companies Act 1994 and the Income Tax Act 1995.
Offshore Trust
The Offshore Trusts Act 1992 and Income Tax Act 1995 have been amended through the Finance Act 1997 to remove anomalies in the tax treatment of trusts and beneficiaries.
Offshore Trusts structured to be resident of Mauritius for double taxation treaty benefits will be liable to income tax on its chargeable income at the rate of 15%. But this 15% rate can effectively be reduced to 1.5% owing to very generous foreign tax credits (explained later). Distribution to non-resident beneficiaries of tax-resident offshore trust is taxed at 15%.
On the other hand, Offshore Trusts that do not need to avail of the benefits of Double Taxation Treaties (i.e. non-resident offshore trusts) will be tax exempt.
Distribution to non-resident beneficiaries of a non-resident offshore trust will also be tax exempt.
Foreign Tax Credit
All offshore companies registered as from 1st July 1998 will be taxed at 15%. Prior to 1st July 1998, offshore companies can elect to pay tax on their chargeable income at a rate of 0 to 35% and therefore become liable to their chosen income tax rate for good.
All companies registered and in operation before 1 July 1998 will continue to benefit from the old tax regime i.e. 0 to 35% option.
1996 saw the coming into force of the Income Tax (Foreign Tax Credit) Regulations which allow for a foreign tax credit on the foreign source income and for a credit to be given in respect of foreign dividend withholding tax for underlying tax charged on the profits out of which the dividend is paid.
In 1997, in order to mitigate further the effect of the flat rate of 15% on new offshore companies, Government has provided that they could offset up to 90% (previously 80%) of the Mauritius tax rate (of 15%) from their tax liability as the amount of foreign tax presumed to be paid. Hence, the effective maximum rate of tax which the offshore company has to pay on foreign source income, is 1.5%.
Conversion
Formerly, an offshore company was allowed to convert into an international company but not vice versa. New legislation has now provided for the possibility of converting an International Company to an Offshore Company.
Redemption of shares
Mauritius Offshore Business Activities (Companies) (Amendment) Regulations 1997 now make provision for offshore investment companies to redeem ordinary shares or preference shares not only at the option of shareholders but also at the option of the company.
Indemnity for Directors, Officers & Auditors
The 1997 Regulations disapply the provision of Section 114 of Companies Act 1984 otherwise applicable to Offshore Companies and introduce the possibility for them to undertake insurance cover against its directors' or officers' liabilities arising in the exercise of their functions. This provision will encourage Offshore Management Companies to obtain other independent, high calibre and proficient Directors to join the boards of Offshore Companies.
Share Capital Reduction
Under the 1997 Regulations, Sections 62, 63 and 64 of the Companies Act 1984 are disapplied. The aim of the amendment is to provide to offshore companies the possibility for reducing their share capital without going to the expense and delays resulting from applying Sections 62, 63 and 64. These provisions of the Companies Act 1984 were considered to be not only time consuming and expensive but also irrelevant for Offshore Companies which do not deal with local residents.
Henceforth, a company wishing to reduce its capital will no longer be required to apply to the court for a confirmation order nor does it have to have the order published in two local newspapers.
Consequently, a company can reduce its capital where it satisfies the margin of solvency test as laid down by the Regulations.
Debentures Issue
Under the 1997 Regulations, Offshore Companies issuing debentures will no longer be governed by the provisions of Section 74 of the Companies Act 1984, which provides, inter alia, that, where a company issues or agrees to issue debentures of the same class to more than 25 persons, the company shall, before issuing any of the debentures, sign an agency deed and appoint debenture-holders' representative.
Furthermore, the non-applicability of this Section removes the requirement that a contract or indenture for the issue of debenture has to be governed by Mauritian law. This acted as a serious disincentive to the use of the offshore companies as international investors are generally unfamiliar with Mauritian law. Consequently, it may be difficult to market international notes. This Section has now been disapplied to enable the parties to the debenture deed to choose freely the applicable laws, to which their deed will be submitted. Thus, it is now possible for Mauritius Offshore Companies to make substantial bond issues which will be marketable to, for example, American institutional investors, as the contract for the issue can be governed by New York or [QQ]English law.
Offshore Investment Companies
Under the 1997 Regulations, Sections 37 to 47 of the Companies Act 1984 are no longer applicable to offshore companies. These provisions relate, inter alia, to the applicability of the prospectus Sections of the Companies Act 1984 to the Mauritius issuing offshore companies.
It was vital that these provisions be made non-applicable to an offshore investment company and generally to any other offshore company, unless:
- it applies for listing on the Mauritius Stock Exchange,
- it proposes to invite the public in Mauritius to subscribe to, to deposit money with, or to lend money to the company.
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.
