Executive summary

The Judicial Committee of the Privy Council (JCPC) released its judgment in Alteo Energy Ltd., et al. v. Director-General, Mauritius Revenue Authority (Alteo) on 30 June 2026. The Mauritius Revenue Authority (MRA) had appealed the decision of the Supreme Court, issued on 31 January 2025, which overturned the ruling issued by the Assessment Review Committee (ARC) of 24 October 2023 which had found that Alteo "utterly misunderstood the Purport of Item 7-Sub-part B-Part II-Second Schedule of the Income Tax Act."

The JCPC's judgment on the scope of the exempt interest under item 7 (Item 7) of Sub-part B of Part II of the Second Schedule to the Income Tax Act (the Act) is a welcome development but not surprising, considering the straightforward nature of the issue involved.

The JCPC confirms the interpretation that Alteo is entitled to the interest exemption and that whether Alteo is predominantly engaged in the production of electricity is not material, in that the interest was an insignificant proportion of its total income.

The JCPC's conclusion is based on a "broader view" under which Alteo's eligibility for the interest exemption is determined based on the following:

• It is appropriate to understand Alteo's whole operation and not just the activities required to generate the interest income in the present case (the narrower view).
• The fact that Alteo's activities were carried out in Mauritius implies that the outcome will not be influenced by either "broader view" or "narrower view."
• The broader view is consistent with the fact that Item 7 requires that Alteo satisfy the conditions relating to the substance of its activities. This view also takes into account the conditions relating to employees and expenses.
• In the case of Alteo, the manpower and related expenses in the context of the loans "are of doubtful relevance" because the interest income is incidental to the company's trading income.
• The JCPC further stated that "it makes more sense to consider whether the activities [that] generates the company's revenueare located in Mauritius."
• The requirement for employees and proportionate expenses was genuinely met on basis that Alteo employed a number of suitably qualified persons and incurred the related expenses.

Facts of the case

Alteo is engaged in the production of electricity from bagasse and coal.

Alteo's income from the sale of electricity totaled 817,200,269 Mauritian rupee (Rs) for the year ended 30 June 2019 (FY 2019), and its total interest income for FY 2019 amounted to Rs 2,151,623.

Alteo's interest income was not received from its surplus funds so that it was incidental to its main business activity.

Alteo treated 80% of its interest income as exempt.

The total interest income of Rs 2,151,623 was time-apportioned, given that the exemption was effective as from January 2019. The interest income eligible for the purposes of exemption was thus computed at Rs 1,075,811 (half of the total amount of Rs 2,151,623).

Out of the total Rs 1,075,811 interest income, the exempt portion of Alteo's interest income was computed at Rs 860,649 (80% of Rs 1,075,811).

On 29 June 2020, the MRA issued an assessment to Alteo asserting that Alteo's interest income was incidental income that did not relate to its core business operations.

Alteo objected to the assessment and the MRA Objections, Appeals, Dispute Resolutions Department (OADRD) did not agree to with Alteo's interpretation, despite that Alteo carried its core income-generating activities (CIGA) in Mauritius. On 26 July 2021, the OADRD of the MRA maintained the view that the interest exemption has to be derived from the core activities of the company.

Approaches adopted by the various appellate bodies

The ARC's approach

Alteo lodged its representations to the ARC on 19 August 2021 and effectively reiterated its grounds of objection.

The ARC discarded the fact that the CIGA of the company has always been in Mauritius and expressly mentioned that Alteo placed emphasis "on the CIGA of the Applicant as if this is the condition that will determine whether the Company will get the exemption or not."

The ARC's asserted that legislative intent required one of the three conditions relating to the substance of a company's activities to include activities related to the production of the interest income and these activities "must necessarily exist in the Core Income Generating Activity of the Company."

ARC also considered mandatory the activities referred to in Regulation 23D of the Income Tax Regulations 1996 (Regulation 23), which mirrors the MRA's interpretation in its statement of practice.

The Supreme Court's approach

The Supreme Court (SC) found no ambiguity regarding the categories of companies eligible for the interest exemption — it applied to any company, except to the list of excluded companies such as an insurance company. The SC also stated that there was no restriction on the nature and business activities of the company.

The SC further considered the intention of the legislature and stated it was evident that a new single fiscal regime was to be applied to both offshore and local companies. The SC elaborated at length on the interpretation of the verb "includes" in Regulation 23D(2)(a) and highlighted that that CIGA should include both the ordinary and natural meaning as well as the enlarged statutory meaning.

The JCPC's approach

The JCPC considered the background to the legislation and referred to the 1998 report issued by the Organisation for Economic Co-operation and Development (OCED) on "Harmful Tax Competition: An Emerging Global Issue" as the starting point. The JCPC referred to paragraph 72 of Action 5 of the OECD/G20 project on Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance in connection with other regimes under which the substantial activity requirement should establish a link between the income qualifying for the benefits and the core activities necessary to earn the income.

The JCPC is of the view that the SC incorrectly interpreted the term "income" for the purposes of CIGA as the income of Alteo as a whole for three reasons. First, Regulation 23D(2) relates to the exempt interest under item 7 and should be read as focusing only on activities that generate exemptible interest income, because other types of income are irrelevant to determining whether the exemption applies. Second, this interpretation ensures that the exemption complies with the substantial activity requirement by linking exempt interest income to the core activities that produce that income, rather than to any other income the company may earn. Third, the phrase "core income generating activities" is used consistently across multiple tax exemption provisions, indicating that its meaning depends on the specific category of exempt income involved rather than encompassing all income generally.

The MRA interpreted the reference to conditions relating to the substance of the company's activities as the core activities of the company. The JCPC disagreed and stated that the law does not require the activities that generate the interest income to be the core business activities of the company, central to its operations. The JCPC further explained that the substantial activity requirement does not justify imposing a condition that the core business activities must include money lending or similar activities. The JCPC reinforced its interpretation with the passage at paragraph 72 of the OECD BEPS Action 5 Report.

The JCPC expressly stated that the scope of item 7 is not qualified and the exemption does not, for instance, refer to income derived by companies engaged in money lending or in the provision of debt finance or investment in debt instruments.

In considering the activities listed in Regulation 23D(2), the JCPC examined why the regulation refers to activities such as agreeing funding terms and setting the terms and duration of any financing. The JCPC suggested that the listing financing-related activities may be aimed at companies with financing as their main business and that such companies may treat their interest income as exempt if the relevant conditions are met. The JCPC stated that regardless of why the specified activities were included in the regulation, they should not be interpreted requiring the related or similar activities to form part of Alteo's core business activities.

In its application of Regulation 23D to the facts in Alteo, the JCPC favored a broader view on the basis that it fits better with the approach of focusing on the substance of the company's activities and with the second and third conditions in Regulation 23D(2)(a). The JCPC also stated that in the case of Alteo, the number of employees and expenses incurred in making the loans are of doubtful relevance. Furthermore, the JCPC stated that it makes more sense to consider whether the activities that generate all the company's revenue are located in Mauritius. For the sake of completeness, the JCPC stated that, even under the narrower view, the exemption would apply because the relevant focus would be on the activities directly connected to earning the interest income and whether those activities satisfied the CIGA requirement.

Concluding remarks

This is a landmark judgment from the JCPC that provides clear, unambiguous language on the scope of the interest exemption.

Understanding CIGA: Starting point based on practical example

CIGA in the context of interest income depends on the nature of the interest income and is not influenced by the principal activity of the company. Interest income may be the result of a number of investments that depend on the company's financial strategy. It may include interest income on placements with financial institutions, Treasury Bills or listed debentures, as well as interest income from convertible bonds.

CIGA in the context of Alteo

Alteo is entitled to the interest exemption even in the absence of prescribed conditions, given that no question ever arose regarding the misalignment between the taxing jurisdiction and the jurisdiction where value was created. In the case of Alteo, its employees and other authorized representatives also performed non-CIGA in Mauritius.

Recognition of business realties

The JCPC's approach takes into account business realities and is consistent with OECD/G20 BEPS Action 5 Report. It is important to remember that the three conditions referred to in Regulation 23D(2) of the Income Tax Regulations are interrelated and the degree of human intervention and expenses may vary significantly.

Foreign interest income

An incorrect interpretation and application of CIGA could imply that certain foreign interest income might not be eligible for the exemption. There might be compelling business reasons for certain activities to be executed by nonresident service providers where the interest income is foreign sourced. Here too, the extent of the CIGA and non-CIGA may vary. In such cases, the decision-making process and executory aspects of the arrangements may well be the CIGA, though such activities are not specifically referred to in the list of activities.

The MRA's interpretation

The MRA should consider revisiting its interpretation, including in TR 249, in the light of this judgment and the MRA's written position that the activities listed in Regulation 23D(2)(b) are mandatory.

Impact of Action 5

In the context of OECD/G20 BEPS Action 5, the core activities identified for non-intellectual property regimes — such as headquarter, distribution and service center, financing or leasing, fund management and shipping regimes — are examples that reflect business realities. Artificial Intelligence will almost certainly automate some CIGA and non-CIGA.

Interaction of CIGA with financial statements

Compliance with the matching concept generally supports satisfaction of the expense and employment conditions. Otherwise, the company's financial statements might not present a true and fair view.

Comparison with exemption on foreign permanent establishment

The outcome of the JCPC's approach is consistent with the rule that 80% of the interest income attributable to a foreign permanent establishment is exempt, regardless of the type of activities performed by the Mauritian resident company and its foreign permanent establishment. This should not be viewed as an unintended consequence, because the taxing right remains aligned with the jurisdiction where value is created.

Parity of treatment

The JCPC's judgment should promote parity in the corporate tax treatment of interest income, consistent with the factors affecting CIGA and non-CIGA.