On the 27th January 2021, a new practice note (SP 22/21) dealing with income subject to partial exemption was issued by the Mauritius Revenue Authority (“MRA”).
SP 22/21 provides clarifications to taxpayers and practitioners on the application of partial exemption on specific income following amendments brought to the Second Schedule to the Income Tax Act by the Finance Act 2018 and the Income Tax Regulations 1996 by the Government Notice 127 of 2018.
Learn about the new practice note issued by the MRA on partial income exemption and how it applies to your company here.
1. Income Subject To Partial Exemption
80% of the following income is exempt for tax purposes:
1. Foreign source dividend derived by a company if it has not been allowed as a deduction in the country of source and provided that conditions as per Regulation 23D (1) of the income tax regulations 1996 are satisfied. (see below for the conditions as per Regulation 23D (1))
2. Interest derived by a company other than:
-bank referred to in section 44C
-non-bank deposit taking institution
-foreign exchange dealer
-company providing factoring, hire purchase facilities or credit sales facilities
3. income derived by a collective investment scheme, closed end fund, CIS manager, CIS administrator, investment advisor or asset manager, as the case may be
4. income derived by companies engaged in ship and aircraft leasing
5. income derived by a company from reinsurance brokering activities
6. income derived by a company from leasing and provision of international fibre capacity
7. income from sale, financing arrangement, asset management of aircraft and its spare parts and aviation advisory services related thereto;
8. interest derived by a person from money lent through a Peer-to-Peer lending platform
9. profit attributable to a permanent establishment which a resident company has in a foreign country.
2. Exemption Provision
Sub Part B (Dividends, Interest and royalty) and Sub Part C (Miscellaneous) 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 prescribed conditions. We shall cover these prescribed conditions below.
3. Conditions For Eligibility To Partial Exemption on Dividend Income
According to Regulation 23D (1) of the Income Tax Regulations 1996, the exemption of 80% of foreign source dividend income shall be granted provided that the company –
(i) complies with its filing obligations under the Companies Act or the Financial Services Act; and
(ii) 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.
4. Conditions For Eligibility To Partial Exemption on Specified Categories of Income Other Than Dividend
According to Regulation 23D (1) of the Income Tax Regulations 1996, the exemption of 80% of items as specified in section 3(ii) to 3(vii) 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.
Note: All 3 conditions must be satisfied in order to benefit from the partial exemption.
4.1. Explanatory Note on Condition 1: CIGA
The MRA provides that CIGA is not expressly defined in the Income Tax Act. Therefore, the dictionary meaning should be used. CIGA as per its dictionary meaning are ‘essential activities carried out that generate the income of the company’.
Core business activities are those that are central to the main operations of a business organisation and where the core earnings of the company are derived from. A core business is strategic in nature and focuses on the improvement of customer value. It is deemed as the “profit-centre” of the company.
On the other hand, non-core activities are those that are only incidental to the company’s operations. It does not have a strategic view and it is not concerned with the primary functions of the company and it certainly does not qualify as a profit centre for the company.
4.2. Explanatory Note on Condition 2: Employs, Directly or Indirectly, An Adequate Number of Suitably Qualified Persons To Conduct its CIGA
The MRA provides that 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.
The term adequate is not defined and therefore its dictionary meaning is to be used. In the dictionary “adequate” is defined as “enough or satisfactory for a particular purpose”. Therefore, the adequate number of employees will depend on the nature and particular circumstances of each company.
Outsourcing of core business generating activities is permitted by any such activities outsourced should be carried out within Mauritius. In order to benefit from partial exemption, a company that outsources CIGA must be able to demonstrate that it has adequate supervision of the outsourced activities. It must also be able to show that there is no double or multiple counting if the services outsourced, are provided to more than one company.
4.3. Explanatory Note on Condition 3: Minimum Expenditure Proportionate To its Level of Activities
The MRA provides that the company will have to ensure that it maintains and retains appropriate records to demonstrate the adequacy of the resources utilized and the expenditure incurred.
The company must also show that these expenses were incurred for the purpose of carrying out CIGA and these expenses must be sufficient in relation to the nature and level of those activities.
5. Partial Exemption on Interest Income
The practice note has a separate section specifically on partial exemption on interest income.
CIGA for substance requirements in respect to interest income is defined. The definition can be found at Regulation 23D (2b) of the Income Tax Regulations 1996 and is as follows:
“core income generating activities includes, for the purpose of –
Item 7(b) of Sub-part B of Part II of the Second Schedule to the Act, agreeing funding terms, settling the terms and duration of any financing, monitoring, and revising any agreements and managing any risks.”
The practice note makes clear that not all businesses are eligible for the partial exemption. Partial exemption on interest income can be claimed by either:
1. A company which carries out only money lending business (other than banks and other companies listed in paragraph 1 subparagraph (2) (see above) )
or otherwise provides debt finance to a related party or a third party, or otherwise invests in debt instruments and generate interest income therefrom and its CIGA comprises solely to “agreeing funding terms, settling the terms and duration of any financing, monitoring, and revising any agreements and managing any risks.”
2. A company which carries out multiple core activities and one of those core activities relate to money lending or provision of debt finance or alternatively investment in debt instruments and in respect of such activities the CIGA comprising of “agreeing funding terms, settling the terms and duration of any financing, monitoring, and revising any agreements and managing any risks” are carried out in Mauritius.
The word ‘includes’ has been used in order to allow for some flexibility for companies with multiple core activities. However, another important condition to satisfy is that to benefit from the partial exemption on interest income, companies need to carry out their CIGA in Mauritius.
6. Distinction Between “Credit Bail”/Hire Purchase/Leasing and A Money Lending Business
The interest income derived by all businesses cannot be treated in the same manner to benefit from partial exemption. There is a legal distinction between a credit-bail contract and a loan which stems from the “passation du titre de propriete”
Therefore, the practice note makes clear that companies engaged in providing finance such as leasing finance or providing hire purchase facilities are NOT making loans. This also explains the rationale behind GN 295 of 2020 excluding interest income earned from such activities from the partial exemption regime.
For those companies not including in the partial exemption regime, income received would be treated as part of gross income falling under Section 10(1)(b) of the Income Tax Act. However, it may still be characterized in financial statements as “interest income” for accounting purposes.
7. Private Financing Companies
These are companies which provide funds/loans to related entities within the same group and receive interest from those entities. Such interest would benefit from the exemption referred under item 7 of Part II Sub-Part B of the Second Schedule to the Income Tax Act provided that the company can establish that its “interest income” is generated from its CIGA carried out in Mauritius and it satisfies the criteria under Regulation 23D (2) of the Income Tax Regulations 1996. (see above)
8. Insurance Companies
The net income of an insurance company is ascertained by Regulation 17 of the Income Tax Regulations 1996 and for such purpose “insurance” in relation to a business means insurance or guarantee against loss, damage or risk of any kind.
As the core business activities of insurance companies are to provide insurance services, it follows that granting loans and receiving interest will fall outside the scope of the exemption applicable on interest under item 7 of Part II Sub Part B of the Second Schedule to the Income Tax Act.
However, a partial exemption of 80% is available on income derived by a company from re-insurance and re-insurance brokering activities provided that all conditions provided for in paragraph 4 (see above) is satisfied.
According to Regulation 23D of the Income Tax Regulations 1996, “core income generating activities” for the reinsurance business includes predicting and calculating risks, reinsuring against risks, administrating clients’ cell, providing related services, preparing regulatory reports and providing clients technical advice in respect of reinsurance of liabilities.
9. Interest From Bank Derived by Businesses
The applicability of partial exemption will vary from case-to-case in relation to companies who have deposited their surplus funds in a bank. Interest earned from the bank deposits by a company which is already entitled to a partial exemption on income derived from its main business will qualify for exemption if that company can establish that the bank interest income received is intimately connected with its main business.