04 February 2025 Mauritius Supreme Court reverses Assessment Review Committee decision to hold 80% of company's interest income was tax-exempt
On 31 January 2025, the Supreme Court (SC or Court) of Mauritius overturned an Assessment Review Committee (ARC) decision in favor of the Mauritius Revenue Authority (MRA) and ruled that a company is eligible to treat 80% of its interest income as exempt, even though the company's principal activity was the production and sale of electricity, and its interest income was incidental. The Court's judgment confirms a policy objective underlying the scope of an Income Tax Act provision referred to in "item 7" (item 7 of Sub-Part B of Part II of the Second Schedule to the Income Tax Act) and Income Tax Regulation 23D (2), which were introduced as a result of Action 5 of the Organisation for Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) Project on Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance. The SC concluded that the respondents had misinterpreted item 7 and Regulation 23D (2), had strained the language of Regulation 23D (2) and had incorrectly added a condition requiring that the interest income must be derived from the company's core investment generation activities (CIGA). Further, the SC confirmed that, under Regulation 23D (2), the word "includes" should be interpreted as a word of extension to encompass the ordinary natural meaning of CIGA. The SC concluded that the relevant provisions of the law are clear and unambiguous and that there is no restriction on the nature of the business activities, except for the financial institutions referred to in sub-item (a) of item 7. The SC further confirmed that the ARC erred in reading more into the law than what has been expressly provided and concluded that the ARC's approach was confusing. It is not yet known whether the respondents will appeal to the Judicial Committee of the Privy Council. A number of cases currently pending at the ARC level involve the 80% interest exemption and had opted to follow the outcome of this SC judgment. The CIGA relevant to these cases are in Mauritius and have not been disputed by the MRA. This Alert summarizes the salient points of the judgment and is also relevant in the context of companies with Global Business Licenses under the Financial Services Act (FSA) in Mauritius. The primary objective of the change in law was to abolish regimes that were found to have potentially harmful features, as outlined in the 1998 Report titled, Harmful Tax Competition: An Emerging Global Issue, which is referred to in Chapter 3 of Action 5 of the OECD/G20 BEPS Project. The two main features found to be harmful were the low effective tax rate and the non-availability of the presumed foreign tax (PFT) to most domestic companies. The essence of Action 5 is to align taxation with substance by ensuring that taxable profits can no longer be artificially shifted away from the countries where value is created. The PFT used to apply to corporations holding a Category 1 Global Business License (GBL1) under the FSA or a bank carrying out Segment B banking activities where no documentary evidence was available to substantiate the foreign tax. At the same time, foreign-source income included all transactions with nonresidents, GBL1 companies, and companies holding Category 2 GBLs under the FSA. PFT grandfathering provisions were available until 30 June 2021 to any company with a GBL1 issued prior to 16 October 2017. With effect from 1 January 2019, a company having its CIGA in Mauritius was eligible to treat 80% of its interest income as exempt, providing all the following conditions were satisfied:
With regard to the CIGA in the context of interest income, the Regulations issued on 16 August 2019 provided that the definition of CIGA includes "agreeing funding terms, setting terms and duration of any financing, monitoring and revising any agreements, and managing any risks." The matter at issue in the appellant's case was whether it could treat 80% of its interest income as exempt, given that its main activity is the production and sale of electricity, and the interest income was incidental to this activity. Because the appellant is located in Mauritius, the question of whether its CIGA was in Mauritius does not arise and this was not disputed. For the sake of completeness, the interest exemption also applies to interest income of a nonresident company with a permanent establishment in Mauritius. The SC ruled that (1) Regulation 23D was clear and unambiguous, (2) the ARC incorrectly agreed with the interpretation of the MRA, and (3) the ARC's approach was confusing when it added an additional condition to those provided under Regulation 23D (2). The MRA misinterpreted the term CIGA in the context of the interest exemption and insisted that a company does not qualify for the exemption if it is not engaged in the activities referred to in the Regulations. The MRA's interpretation also meant that not all interest income qualified for the exemption if, for example, the company is not engaged in agreeing the funding terms. The SC agreed with the appellant's view that neither the ITA nor the ITR imposed a restriction on the type of business that could benefit from the interest exemption, except for the financial institutions referred to in sub-item (a) of item 7. It is interesting to note that the SC is of the view that the reference to "agreeing funding terms, setting terms and duration of any financing, monitoring and revising any agreements, and managing any risks" eliminates all doubts involving the scope of the exemption. One of the conditions prescribed in Regulation 23D (2) requires that a company "incur[s] a minimum expenditure proportionate to its level of activities and employs, directly or indirectly, an adequate number of suitably qualified persons to conduct its CIGA." The prescribed conditions are interrelated so that compliance with the matching concept would automatically imply that the conditions are satisfied, as long as the CIGA is in Mauritius. The SC has emphasized that whenever there is uncertainty regarding a specific fiscal law or when two interpretations are possible, a decision favorable to the taxpayer should prevail. This "in dubio pro tributario" principle therefore underscores that ambiguities in tax laws should not be disadvantageous to taxpayers. The SC did not have to resort to this principle given the clear and unambiguous provisions of the law and regulations. The SC also examined the Hansard (i.e., Mauritius National Assembly) and the Annex to the 2018 budget to comprehend the intention of the legislature. The parliamentary speech delivered by the then-Finance Minister aimed at harmonizing the fiscal regime for both domestic and companies with a GBL. This included requirements that GBLs comply with enhanced substance conditions. In alignment with these objectives, neither the ITA nor the ITR intended to impose ring-fencing or to segregate the tax principles of certain types of businesses but instead to harmonize them. The SC highlighted this significant point when addressing the ambiguity in the legislation. Based on the SC's interpretation, the interest exemption will apply once the company satisfies the prescribed conditions, even if the company was not in a position to negotiate the terms and conditions of the financial assets. This interpretation implies that there is parity in the tax treatment of a company's interest income. Consider, for example, that bank interest also qualifies for exemption. In light of the SC's decision, the MRA could review its position in cases where an arrangement has been introduced before the change in law — for example, if the loan agreement has been executed before the introduction of the interest exemption. Companies that have not applied the 80% exemption on their interest income may consider submitting a revised tax return for the prior years, if the relevant conditions are satisfied. Such companies should bear in mind that the tax return will then be deemed to be submitted on the date the amended tax return is submitted and the MRA may conduct an in-depth audit. In its Statement of Practice SP 22/21 (SOP), the MRA advised that only companies whose main activity is lending money are eligible to apply the 80% exemption on interest income, except for certain types of companies such as banks, non-bank deposit-taking institutions, and money changers, among others. The MRA may consider revising the SOP to reflect the interpretation of the SC. It is also worth noting that the SOP is only binding on the MRA, so that any party can choose to depart from the SOP.
Document ID: 2025-0394 | ||||||
