This story is from June 13, 2017

Mauritius tweaks rules for global biz licensees

Mauritius tweaks rules for global biz licensees
Mumbai: Mauritius Prime Minister Pravind Kumar Jugnauth (who also holds the finance ministry portfolio) has proposed in his budget speech on June 8 to strengthen the ‘substance’ norms for entities operating under Category 1, Global Business Licence. These entities are referred to as GBC-1 companies.
Foreign portfolio investors (FPIs), offshore funds and other entities that invest in India via the Mauritius route will now have to satisfy any two of the secondary (or additional) substance conditions instead of just one to prove they have adequate commercial substance in Mauritius and are not just shell companies or post-box entities (see graphic).

Mauritius-based entities engaged in investment activities typically opt for a GBC-1 licence as this enables them to take advantage of tax treaties entered into by Mauritius. A major chunk of India’s foreign direct investments (FDI) flow in from such companies. During 2016-17, Mauritius was the top source of FDI into India, with inflows of Rs 1,05,587 crore (or 33% of total inflows).
GBC-1 companies were always required to be ‘controlled and managed’ in Mauritius. For this, they were mandatorily required to have at least two Mauritius-resident directors who had relevant qualification and experience and were actively involved in the control and management of the company, the principal bank account was to be in Mauritius, and accounts were required to be kept and audited in Mauritius.
Subsequently, the Financial Services Commission in Mauritius required GBC-1 companies to meet by January 1, 2015 any one of the additional substance conditions — an office in Mauritius, an administrative full-time employee, resolution of disputes arising out of the constitution of the company (akin to the Memorandum and Articles of Association under Indian law) via arbitration, holding of assets (other than cash and securities) of $100,000, listing on a recognised stock exchange or having reasonable yearly expenditure. These companies, according to the budget proposal, will have to meet any two of these additional substance conditions.

However, tax experts are not unduly concerned with the requirement of meeting one more additional substance condition. “Enhancing the substance requirement should not impose much burden on the GBC-1 companies as many large investment-holding companies were anyway complying with at least two or three of these conditions. However, if Mauritius increases tax on GBC-1 companies, it may become less competitive than its peer jurisdictions like Singapore. Currently, GBC-1 companies are taxed at 15% with a deemed foreign tax credit of 80%, which makes the effective tax rate 3%,” says Shefali Goradia, partner, BMR & Associates.
Daksha Baxi, ED, Khaitan & Co, adds, “The increased substance test requirement will help the Mauritius-based investor who is claiming benefits under the India-Mauritius tax treaty. It would help during the transition period (April 1, 2017 up to March 31, 2019) to meet the limitation of benefit (LoB) clause in the amended tax treaty. Further, it would be useful to prove commercial substance and aid reasoning under India’s general anti-avoidance rules (GAAR).”
Under the amended India-Mauritius treaty, during the transition period, capital gains arising from sale of Indian securities will be taxed at 50% of India’s domestic tax rate. However, this concession would not be available to companies that were set up primarily for tax treaty abuse or to shell companies.
While referring to the challenges being faced by financial services industry from the international community, the OECD and the European Union, Mauritius PM Pravind Kumar Jugnauth said his country would gear up to face these challenges and ensure adherence to international requirements. “We are also taking measures to further enhance the reputation of Mauritius as a jurisdiction of substance. Currently, a GBC-1 company must fulfil at least one of six criteria established by the Financial Services Commission (FSC) to demonstrate substance. They will henceforth be required to fulfil at least two of the criteria — thus making the guidelines more stringent on the substance requirement,” he stated
“We will also reform our tax regime for global business companies so that it evolves and meets the new international requirements,” he added in his speech.
India appreciated in speech
Referring to the $500-million financial support from India in his budget speech, Mauritius PM Jugnauth said, “Let me highlight that this year again we are getting an exceptional financial support from the GoI (government of India) to implement several key development projects and programmes.” The line of credit of $500 million, bearing an annual interest rate of 1.8%, will be made available to the SBM (Mauritius) Infrastructure Development Company for investment in redeemable preference shares. These shares will be issued by PSUs implementing infrastructure projects and will have a redemption period of 20 years, with an initial grace period of seven years, his speech stated.
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About the Author
Lubna Kably

Lubna Kably is a senior editor, who focuses on various policies and legislation. In particular, she writes extensively on immigration and tax policies. The Indian diaspora is the largest in the world; through her articles she demystifies the immigration-policy related developments in select countries for outbound students, job aspirants and employees. She also analyses the impact of Income-tax and GST related developments for individuals and business entities.

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