Author: Moore Stephens
Mauritius has been a popular location for international investors.One of the main reasons is the favourable tax conditions prevailing in Mauritius, including:
- a vast array of treaties with various countries avoiding double taxation
- the absence of capital gains tax
- a low effective company tax rate
- no withholding taxes on interest, dividends, royalties
A tax treaty has been in place between South Africa and Mauritius since 1997. In addition, South African investors have used Mauritius as a means of investing in other countries with which Mauritius has treaties, most notably other African countries. Similarly, international investors from other countries that have tax treaties with Mauritius have used the latter’s jurisdiction to invest in South Africa. South Africa entered into a new treaty with Mauritius on 17 May 2013, which will bring about some notable changes for both South African and international investors.
The new treaty is still to be approved by Parliament and published in the Government Gazette in terms of section 108 of the Income Tax Act No. 58 of 1962 (the Act). The treaty also still needs to be ratified by Mauritius. It is expected the treaty will take effect as from 1 January 2015.
South African Investors
With regard to the determination of tax residency, and specifically the tie-breaker rule that applies in cases where both Mauritius and South Africa claim that a particular company is a tax resident in their respective jurisdictions, the treaty has been considerably changed.In such instances, the company will, for the purposes of the treaty, be regarded as only being resident in the country in which that company has its place of effective management.
The new treaty provides that where a company is a resident of both states, “the competent authorities of the Contracting States shall by mutual agreement endeavour to settle the question and determine the mode of application of the Agreement to such person”. It further also provides that in “the absence of such agreement such person shall be considered to be outside the scope of the Agreement”.
It is possible that for treaty purposes, a Mauritian incorporated company could find itself no longer being a tax resident of Mauritius, but a tax resident of South Africa, should Mauritius and South Africa agree upon this. This might transpire despite the fact that the company may have attempted to arrange its affairs in such a way that its place of effective management is in Mauritius. The treaty is silent on what principles will be applied by the two countries in coming to any such agreement. The administrative process involved in reaching such agreement is also not spelt out, and whether the company will be allowed to make representations.
If no agreement is reached between Mauritius and South Africa, the treaty will be null and void, and the company, as a dual resident, will be subject to tax in both South Africa and Mauritius. Even though the company could potentially claim relief in terms of section 6 quat of the Act, it is likely it would end up paying more tax than it would have otherwise. Should the South African Revenue Service (SARS) believe that a Mauritian company is effectively managed in South Africa and therefore a resident in terms of domestic law, SARS will tax that company in South Africa, irrespective of whether Mauritius agrees that the company is resident in South Africa or not.
International investors investing in South Africa via Mauritius will also be affected.According to the current treaty, a Mauritian tax resident company holding shares in a South African subsidiary will not be subject to capital gains tax on the disposal of such shares, despite the fact that the South African subsidiary holds immovable property and the sale of the shares indirectly constitutes a sale of that immovable property. According to the new treaty, Mauritian companies holding shares in South African subsidiaries, the shares of which derive more than half their value from immovable property, may now be taxed in South Africa on the gains arising from a disposal of those shares.
Another important change is the provision for withholding tax on interest and royalties. Under the current treaty,interest and royalties paid by South African subsidiaries to their Mauritian holding company would only be taxed in Mauritius, as long as the Mauritian company is the beneficial owner, and subject to certain other exceptions. The new treaty makes provision for South Africa to withhold tax on interest and royalty payments disbursed by South African subsidiaries to a Mauritian holding company. Tax on interest and royalties will be limited to 10% and 5% respectively.
With regard to dividends, the current treaty stipulates that South Africa can only tax dividends at a maximum rate of 5% where the Mauritian company holds at least 10% of the shares in the South African subsidiary. The maximum rate of 10% applies to all remaining cases. The new treaty also provides for a maximum rate of 5% where the Mauritian company holds at least 10% of the shares in the South African subsidiary, but the maximum rate for all other cases has been increased to 15%, which is equivalent to South Africa’s current dividends tax rate. The aforementioned also applies to the extent that Mauritius imposes withholding taxes on dividends, royalties and interest, but Mauritius generally does not impose such taxes (except under limited circumstances).
It seems at least one reason for South Africa entering into the new treaty is to steer away investment in Africa via Mauritius, and to redirect it to South Africa. This would encourage international investors to establish South Africa for company headquarters. SARS and National Treasury would favour South Africa as the base for international investment in other African countries. It remains to be seen whether their efforts will have the desired consequence.