The Mauritius Revenue Authority on 27th January 2021 released a statement on income subject to partial exemption intended to provide clarifications to tax payers and practitioners on the application of partial exemption on specific income following amendments brought to the Second Schedule of the Income Tax Act by the Finance Act 2018 and to the Income Tax Regulations 1996 by Government Notice 127 of 2018.
- Exemption provision
Sub-Part B and Sub-Part C of the Second Schedule to the Income Tax Act provides for exemption of some categories of income. Such exemption is applicable to companies subject to their satisfying the prescribed conditions as contained in number 4 and 5 below.
2. Income subject to partial exemption
a) 80% of the following income is exempt for tax purposes:
Foreign source dividend derived by accompany provided that it has not been allowed as a deduction in the country of source and conditions as per Regulation 23D (1) of the Income Tax Regulations 1996 are satisfied;
b) Interest derived by a company other than:A bank referred to in section 44C
(i) A non-bank deposit taking institution
(ii) A money changer
(iii) A foreign exchange dealer
(iv) An insurance company
(v) A leasing company
(vi) A company providing factoring, hire purchase facilities, or credit sales facilities
c) Income derived by a collective investment scheme (CIS), closed end fund, CIS manager, CIS administrator, investment adviser or asset manager, as the case maybe.
d) Income derived by companies engaged in ship and aircraft leasing
e) Income derived by a company from reinsurance and reinsurance brokering activities
f) Income derived by a company from leasing and provision of international fiber capacity
g) Income derived by a company from the sale, financing arrangement, asset management of aircraft and its spare parts and aviation advisory services related thereto
h) Interest derived by a person from money lent through a Peer-to-Peer Lending platform
i) Profit attributable to a permanent establishment which a resident company has in a foreign country
Conditions for eligibility to partial exemption on dividend income
According to Section 23D(l) of the Income Tax Regulations 1996, the exemption of 80% of foreign source dividend income shall be granted provided that the company:
- Complies with its filing obligations under the Companies Act or the Financial Services Act
- Has adequate resources for holding and managing share participations.
For pure equity holding companies which only hold equity participations and earn only dividends and capital gains, they must respect all applicable corporate law filing requirements in order to meet the substantial activities requirement, and they should be able to show that they have the human resources and premises for holding and managing share participations. In other words, for pure equity holding companies, consideration should still be given as to whether there is sufficient presence in Mauritius and whether good governance is adequate.
Conditions for eligibility to partial exemption on specified categories of income other than Dividend
According to Section 23D (1) of the Income Tax Regulations 1996, the exemption of 80% of items as specified in section 2(b) to 2(g) above shall be granted provided that the company:
(i) Carries out its core income generating activities (CIGA) in Mauritius;
(ii) Employs, directly or indirectly, an adequate number of suitably qualified persons to conduct its core income generating activities
(iii) Incurs a minimum expenditure proportionate to its level of activities.
In order to qualify for partial exemption on the specified categories of income other than dividend, all the above three conditions must be satisfied.
Condition 1: Company carries out its CIGA in Mauritius
Given that the expression “core income generating activities” (CIGA) is not specifically defined in the Income Tax Act, we need to have recourse to the ordinary dictionary meaning. CIGA are ‘essential activities carried out that generate the income of the company’.
In fact, core business activities are those that are central to the main operations of a business organization, where the core earnings of the company are derived from. The non-core activities are those that are only incidental to the company’s operations. Identification of non-core business is not fixed across businesses, but it will depend on the nature and type of business.
In a simple comparison, a core business is strategic in nature and focuses on the improvement of customer value. It is also deemed as the ‘profit-center’ of the company. A non-core business, on the other hand, does not have a strategic view. It is not concerned with the primary functions of the company and it certainly does not qualify as a profit center for the company.
Condition 2: Company employs, directly or indirectly, an adequate number of suitably qualified persons to conduct its CIGA
The company must employ an appropriate number of suitably qualified staff to carry out only the core business as defined above. In other words, the employees must have the appropriate level of knowledge and skills to undertake the CIGA and their roles and duties must include tasks relating to that core business.
The term “adequate” is not defined and therefore has its ordinary meaning. The dictionary defines “adequate” as “Enough or satisfactory for a particular purpose”. What is adequate for each company will depend on the particular circumstance of the company and its business activity. Therefore, the number of staff must be sufficient in relation to the nature and level of activities involved in the company’s core business.
Outsourcing of core income generating activities is permitted but any such activities outsourced should be carried out within Mauritius. In order to benefit from partial exemption a company that hires a service provider in Mauritius to carry out its core income generating activities must be able to demonstrate that it has adequate supervision of the outsourced activities and that there is no double or multiple counting if the services are provided by the service provider to more than one company.
Condition 3: Company incurs a minimum expenditure proportionate to its level of activities
There must be expenses which are incurred for the purpose of carrying out the CIGA and those expenses must be sufficient in relation to the nature and level of those activities. A company will have to ensure that it maintains and retains appropriate records to demonstrate the adequacy of the resources utilized and expenditure incurred.
How Can We Help
At Valsen Fiduciaries Group, our experienced staff, combined with our global network, allow us to provide the ongoing support you need – wherever you need it, at home and abroad, whatever the size of your organisation. We are at your disposal to help you further clarify and understand the MRA Statement of Guidance on Income Subject to Partial Exemption. Please contact us through [email protected] or +248 2 525 217