A new clause in Mauritius income tax law poses headache to Indian investors

Experts believe the SOP will make it more difficult to obtain a TRC from the Mauritian authorities

Mauritius has amended its Income Tax Act and inserted a clause for determining the place of effective management. This makes it difficult to establish residency in the country and poses a new headache to Indian private equity as well as portfolio investors putting money into the country.  

The Mauritius Revenue Authority (MRA) issued a Statement of Practice (SOP) on November 28, with regard to Section 73A of the Income Tax Act on place of effective management. The place of effective management is part of the international best practices, aimed at ensuring that sufficient economic activity happens in a particular country. 

Experts believe the SOP will make it more difficult to obtain a tax residency certificate (TRC) from the Mauritian authorities.

Currently, Mauritius issues a TRC to firms incorporated and operating in Mauritius, based on a few criteria such as whether the company is managed by a board in Mauritius and whether bank accounts and books of account are maintained in Mauritius.

According to experts, MRA is relatively one of the more liberal authorities as its interest lies in getting more companies to use the country’s jurisdiction. Typically, most professional service providers easily get TRCs for companies that they service. This may change soon.

“There is subjectivity on what is meant by strategic decisions on core income generating activity. For instance, if I decide to lend at the Mauritius level and that decision is taken in India, is that a strategic decision or a non-strategic one?” asked Rajesh Gandhi, partner, Deloitte India.

According to the SOP, for any Mauritian company, which wants to be considered a tax resident in Mauritius, all its strategic decisions relating to its core income generating activities should be taken in that country. 

Depending on the business activities of the company, it may have income-generating activities in more than one country. 

Additionally, the majority of the board of director’s meetings should be held in Mauritius or its executive management must be regularly exercised in Mauritius.

Another concern is that even the Indian tax authorities may ask Indian companies and/or investors to prove that critical decisions pertaining to a particular investment or divestment have actually been made in Mauritius.

“A concern is that any other tax authority can demand if the criteria laid out by the MRA has been satisfied. All investors through Mauritius will need to gear up for this new regime,” said Hitesh Gajaria, partner and head (tax), KPMG India.

A Mauritian incorporated company that considers its place of effective management to be outside Mauritius should assess the tax implications in the country where its place of effective management is situated. 

A recent global tax alert put out by EY, observes: “The other country may have a tax treaty with Mauritius: in such a case, it is possible for both Mauritius and another country to tax the profits of the company. Any Mauritian sourced income may be subject to double taxation.”

In some situations, said experts, this may even lead to a tussle between Indian and Mauritius tax authorities on what constitutes its place of effective management, and whose ruling should prevail.

Experts believe that the conditions laid out by the SOP can be met. “The new SOP gives due weightage to all relevant facts and circumstances. This includes impact and use of information and communication technology. It also gives due consideration to whether strategic decisions, majority of board meetings or executive management are in Mauritius,” said Gajaria.

“SOP refers to decision making and not the place of such income earning activities. We do not foresee any practical challenge on the place of board meetings being in Mauritius. The fact that the requirement is for a majority of board meetings to be in Mauritius implies that the tax residence of a company would not be jeopardised, if for example, it is compelled to have a board meeting outside Mauritius for commercial reasons,” added EY’s tax report.

 

Implications of new regulation

• Mauritian-controlled entities should not generally be affected by this SOP
• Companies incorporated in Mauritius will need to assess SOP impact 
• This assessment should not be confined to companies that hold global business licenses 
• Robust procedures will need to be implemented to address challenges from any foreign authority
• Company with POEM outside Mauritius should assess tax implications where POEM is situated 
• If the other country has tax treaty with Mauritius, it is possible for both countries to tax the company’s profits 

                                                     Source: Global Tax Alert report, EY