April 21, 2022
Mauritius amends income tax regulations regarding 80% income exemption for investment dealers and defining specialized software and systems
The Income Tax (Amendment) Regulations 2022 (ITR 2022) amended the Income Tax Regulations 1996 on 6 April 2022, as published in Government Notice No. 77 of 2022.
The amendments address: (i) the conditions for an 80% income exemption for licensed corporate investment dealers; and (ii) the nature of the specialized software and systems for the purposes of the double deduction introduced in 2021.
Conditions for 80% exempt income
Under the 2021/2022 Budget, 80% of the income of a licensed corporate investment dealer is exempt from income tax. The exemption only applies if the company satisfies the prescribed conditions. The overarching condition is that the company must have its core income generating activities (CIGA) in Mauritius. In the context of an investment dealer, this is consistent with the activities which lead to a company being classified as an investment dealer under section 29 of the Securities Act.
Section 38(ao)(ii)(B)(IV) of the Finance (Miscellaneous Provisions) Act 2021 (FMPA 2021) amended item 41(a) of Sub-part C of Part II of the Second Schedule to the Act so that 80% of the income of an investment dealer licensed by the Financial Services Commission (FSC) is exempt from income tax if it satisfied the prescribed conditions as from the year of assessment 2022/2023.
For an investment dealer, the CIGA are as follows:
Acting as an intermediary in the execution of securities transactions on behalf of other persons; trading in securities as principal for own account with the intention of reselling these securities to the public; underwriting or distributing securities on behalf of an issuer or a holder of securities.
The regulations were also amended to correct certain incorrect cross-referencing to the Income Tax Act (the Act).
The Income Tax (Amendment of Schedule)(No. 2) Regulations 2020 effectively reclassifies the sequential orders of a number of exempt income, as depicted in the below table.
Regulation 3(a) and (b)(iii) to (vi) of ITR 22 has updated the principal regulations to reflect the correct item in Sub-part C of Part II of the Second Schedule to the Act and it is for this reason that the effective date of this change is the year of assessment 2020/2021, the year ended 31 December for a company with a basis year that is consistent with the calendar year.
Specialized software and systems: qualifying expenses for extra deduction
Section 38(o) of the FMPA 2021 introduced section 65B in the Act to enable a company to benefit from a double deduction on any expenditure on the acquisition of "specialized software and systems." The new section 65B(3) of the Act specifically provides that the term "specialized software and systems" would be prescribed. The extra deduction applies as from 1 July 2021.
The regulation on the definition of "specialized software and systems" was awaited for by the business community considering that the law specifically provides that the definition would be prescribed. The specific exclusion of certain expenses in that definition should also assist companies in understanding the types of expenses that do not qualify for the double deduction. Considering the inherent dynamism of the Information Communication and Technology sector, the need to have adequate documentation is of significant importance. Such documentation should provide the maximum particulars on the nature of the software and systems.
Further regulations may be issued on the characteristics of any specialized software and systems.
New regulation 23P
The new regulation broadly provides the following: (i) the amount eligible for the extra deduction; (ii) timing of expenditure; (iii) use of the software; (iv) the components of the software; (v) cases where software is considered as specialized software (positive list); and (vi) cases where a software is not considered as a software (negative list).
The new regulations provide that the specialized software shall: (i) be acquired on or after 1 July 2021; (b) be used in business for income producing activities; and (ii) have a lifetime exceeding one year.
The term software comprises the following:
The eligible deduction shall be in respect of the cost of:
The expenses qualifying for the extra deduction must exceed Rs100,000, with a maximum of Rs100 million in any year.
The positive list
Specialized software shall include software used in relation to:
The negative list
Qualifying expenditure for the double deduction does not include expenditure on:
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Mauritius), Ebene
Ernst & Young Société d'Avocats, Pan African Tax – Transfer Pricing Desk, Paris
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
Ernst & Young LLP (United States), Pan African Tax Desk, New York