Any unfavourable change in the Mauritius- India DTAA treaty will call for a dramatic change in our global business sector. This sector seriously needs to look for further fresh opportunities. This new opportunity seems to be ‘Africa’, which is a land of opportunities and challenges.
Mauritius has already signed DTAAs with some 16 African countries and has cemented its position as the ideal platform for investment in Africa following the recently ratifying the revised South Africa – Mauritius DTAA in May 2015, with the treaty becoming effective as from 01 January 2016. The new treaty will replace the current 1996 treaty with South Africa.
In essence, the salient points of the revision are the following:
- Change to the treatment of dual-resident entities
- Change in tax treatment of capital gains
- Change in withholding tax rates on dividends, interests and royalties
The key changes brought by the new DTA compared to the previous 1996 DTA have been summarized in the table below:
The current (1996) treaty provides that where a company can be deemed tax resident of both Mauritius and South Africa, that company will for the purposes of the treaty be regarded to be resident where it has its place of effective management.
The revised treaty provides that where a company is a resident of both states, the competent authorities of the contracting states shall by mutual agreement settle the question and determine the mode of application of the Agreement.
The problem that arises is that a Mauritian incorporated company could find itself no longer tax resident in Mauritius, for treaty purposes, but a tax resident in South Africa should Mauritius and South Africa agree on it. If no agreement can be reached between the 2 countries, the treaty will simply not apply, and the company taxed in both countries.
Until May 2015, there was a lack of clarity and this had led the competent authorities to enter into a Memorandum of Understanding (“MOU”) which spells the determining factors in reaching their decision.
The MoU sets forth factors that will be considered by the competent authorities in determining the State of Residence in the case of a dual resident company. The factors are set out below:
- Where the meetings of the person’s board of directors or equivalent body are usually held;
- Where the CEO and other senior executives usually carry on their activities;
- Where the senior day to day management of the person is carried on;
- Where the person’s headquarters are located;
- Which country’s laws govern the legal status of the person;
- Where its accounting records are kept;
- Any factors listed in the OECD Commentary (Article 4, paragraph 3), as may be amended by the OECD/BEPS Action 6 final report; and
- Any such other factors that may be identified and agreed upon by the Competent Authorities in determining the residency of the person.
In respect of dividends, the 1996 treaty provides 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. In all other situations, the maximum rate is 15%. The New treaty provides for a maximum rate of 5% where the Mauritian company holds at least 10% of the shares, but in all other situations, the maximum rate has been reduced to 10%.
For example: USD 100,000 in dividends is paid by a subsidiary to its holding company. The withholding tax held by authorities of the country, where the company paying the dividends is resident, will amount to:
- Nil if the GBL type company paying the dividends is resident in Mauritius.
- If the company paying the dividends is resident of South Africa
- USD 5,000 (5%) as tax if the Mauritian resident is a company which holds at least 10% of the capital of the South African company paying the dividends.
- USD 10,000 (10%) in all other cases.
Interest and Royalties
Another important change is the provision for withholding tax on interest and royalties. The 1996 treaty dictates that interest and royalties paid by South African subsidiaries to their Mauritian holding company would only be taced in Mauritius, provided that the Mauritian company is beneficial owner.
The new treaty makes provision for South Africa to withhold tax on interest and royalty payments made by South African subsidiaries to a Mauritian holding company. Tax rate on interest will be limited to 10% and tax on royalties will be 5%.
For example: A South African resident is paying USD 10,000 in interest to a Mauritian lender, with the current treaty South African authorities are not able to impose any withholding tax on the interest paid. However with the new treaty, South African authorities can impose up to 10% in withholding tax to the gross amount of the interest, which would amount to USD 1,000.
Mauritius does not currently impose tax on interest paid by GBL1 and GBL2 companies.
The above means that Mauritian authorities do not impose withholding tax to interest paid by a GBL type company resident in Mauritius to a South African lender.
For example: Royalties arising from a South African company, destined to a Mauritian resident beneficial owner shall be taxed at a maximum of 5% of the gross amount of the royalties.
Capital Gains tax
Under the 1996 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 the South African subsidiary holds immovable property and the shares indirectly constitutes a sale of that immovable property. Under the new treaty, Mauritian companies holding shares in South African subsidiaries, the shares of which derive more than 50% of their value from immovable property, may now be taxed in South Africa on the gains arising from the shares.
However, GBL type companies are exempt from withholding capital gain tax from Mauritian authorities.