Introduction

This article analyses the tax ruling issued by the Assessment Review Committee (“ARC”) on 28 June 2024 in the case of Godolphin Ltd (the “Company”). The ruling has provided significant insight into the interpretation of the substance requirements necessary for claiming partial exemption on interest income under Mauritius law. The case highlights key issues surrounding such exemption of a company holding a Global Business Licence, the conditions relating to the substance of its activities, in particular the Core Income Generating Activities (“CIGA”) requirement, and the employment criteria with respect to CIGA under the Income Tax Regulations 1996 of Mauritius (“ITR”).

 

Background

The Company redomiciled to Mauritius from the British Virgin Islands in 2019. It was granted a Global Business Licence by the Financial Services Commission of Mauritius. It had advanced loans totaling ZAR 75,000,000 to its subsidiary, Extrupet Pty Ltd (“EPL”), a company registered in South Africa, and derived interest income on these loans for the Year of Assessment (“YOA”) 2020/2021 and YOA 2021/2022. The Mauritius Revenue Authority (“MRA”) disallowed the partial exemption claimed by the Company on this interest income, amounting to USD 362,590 for YOA 2020/2021 and USD 278,054 for YOA 2021/2022. The disallowance was based on the MRA's determination that the Company did not meet the requirement relating to the employment of suitably qualified persons to conduct its CIGA  as stipulated under Regulation 23D of the ITR.

Following the MRA's decision, the Company filed a Notice of Objections, which was upheld by the Appeals & Dispute Resolution Department of the MRA.  The Company then appealed to the ARC.

 

The Core Issue

The central issue in the appeal was whether the Company met the substance requirements in Mauritius, specifically employment criteria for conducting its CIGA, which are essential for qualifying for the partial exemption on interest income.

 

Analysis by the ARC

The partial exemption claimed by the Company was pursuant to the Second Schedule of the Income Tax Act 1995 (as amended) of Mauritius (“ITA”) allowing a company to be partially exempted if it satisfies the conditions relating to the substance of its activities as prescribed.  The Statement of Practice 22/21 (“SOP”) issued by the MRA stipulates that all conditions under Regulation 23D (2) (a) of the ITR must be fulfilled to qualify for partial exemption and failure to satisfy even one condition will disqualify a taxpayer from benefitting from the partial exemption regime. The conditions under Regulation 23D (2) (a) are that the taxpayer must:

1. carry out its core income generating activities in Mauritius;
2. employ, directly or indirectly, an adequate number of suitably qualified persons to conduct its core income generating activities; and
3. incur a minimum expenditure proportionate to its level of activities.

 

Regulation 23D (2)(b) states that “core income generating activities” under Regulation 23D (2) (a) includes: “agreeing funding terms, setting the terms and duration of any financing, monitoring and revising any agreements, and managing any risks.”.

The ARC’s analysis centered on the interpretation of Regulations 23D (2) (a) (i) and 23D (2) (a) (ii) of the ITR, particularly the requirement that a taxpayer must conduct its CIGA from Mauritius and must employ a sufficient number of suitably qualified persons in Mauritius to conduct its CIGA.

 The ARC endorsing the proposition of SOP upheld that the number of qualified persons required under Regulation 23D (2) (a) (ii) is to be assessed on a case-by-case basis, depending on the nature and extent of the CIGA being conducted.

The Company, in its capacity as applicant, argued before the ARC that it fulfilled the employment requirement through its Mauritian management company, St Lawrence Management Limited (“SLML”), which provided two resident directors and three employees (a manager, a team leader, and a senior staff), all residing in Mauritius. The Company further contended that the tasks were outsourced to two companies in the U.K., that is Navroh (UK) Ltd (“Navroh”) and Nean Wealth Advisors (UK) Limited (“Nean”), as evidenced by various invoices produced by the Company, but those tasks were merely administrative and did not constitute CIGA of the Company.

However, the MRA raised objections, noting that part of the CIGA related to the loans advanced to EPL was conducted outside Mauritius, with 40% of the tasks being performed abroad. Moreover, invoices indicated that significant CIGA were being carried out by the two foreign entities, thereby undermining the Company’s claim of compliance with the employment requirement in Mauritius. The involvement of the two foreign entities in the Company’s core income generating activities that is the granting of the loans to EPL confirmed that the Company, despite having retained the services of a management company in Mauritius, did not employ directly or indirectly an adequate number of suitably qualified persons to conduct its core income generating activities in Mauritius.

 

Decision

The ARC upheld the MRA’s initial assessment, concluding that the Applicant did not meet the employment criteria necessary for the partial exemption. The ARC emphasized that the invoices submitted as evidence demonstrated that the CIGA were largely conducted outside Mauritius. It was noted that the reliance on SLML for routine directorship and administrative services was insufficient to meet the substance requirements, as the core functions were outsourced to foreign companies. The ARC noted that there was a sustained attempt by the Company to undermine the tasks carried out by the two foreign companies while overstretching the tasks carried out by SLML while all evidence before it showed the contrary. Large amounts were paid to the UK companies for their services provided to the Company which the ARC found to be crucial to the activities of the Company whilst on the other hand smaller amounts were charged by SLML for their services which the ARC found to be only administrative and routine in nature.

The ARC also highlighted the following words of caution of the SOP with respect to “double or multiple counting”:

“In order to benefit from partial exemption, a company that hires a service provider in Mauritius to carry out its core income generating activities must be able to demonstrate that it has adequate supervision of the outsourced activities and that there is no double or multiple counting if the services are provided by the service provider to more than one company.”

The ARC was not satisfied that the services of the three staff members of the Company were sufficient to qualify as “adequate” although they were degree holders. The ARC highlighted that, although indirect employment is permissible, SLML would have been expected to charge the Company for the duties performed by the three indirect employees. This may have been based, for instance, on the number of hours they dedicated to manage the activities of the Company, as was done by Nean, or on any other appropriate basis. However, SLML invoiced standard fees for duties of a routine nature, as opposed to duties expected of an investment holding company which were invoiced by the two U.K companies.

The ARC pointed out that both directors of the Company were only directors who have been “provided” by SLML as part of the Service Agreement between the Company and SLML and also there is no indication in the Service Agreement that SLML will carry out the duties pertaining to the Company’s investment holding activities. The Service Agreement merely stated that SLML will “provide and pay an adequate staff and shall provide domiciliation facilities suitable to be the registered office for the Company and for efficiently performing its functions as secretary, registrar and administrator of the Company…”.

The SOP, in line with Regulation 23D which uses the word “indirectly”, allows the outsourcing of core functions, i.e. similar functions which Nean and Navroh have invoiced for. However, such activities must be carried out within Mauritius, as stated in the SOP.

The appeal of the present case was disallowed as the Company failed to meet the employment criteria under Section 23D (2) (a) (ii) of the ITR which resulted in the disallowance of the partial exemption on interest income. The ARC pointed out that the Company’s attempt to minimise the role of the foreign entities and highlight SLML’s contributions did not alter the fact that substantive CIGA were not carried out in Mauritius.

 

Conclusion

This ruling emphasizes the importance of demonstrating that the CIGA of a company are genuinely conducted in Mauritius, particularly through the employment of suitably qualified persons. The decision suggests that mere administrative support or directorship services provided by a local management company may not suffice to meet the substance requirements for partial exemption. Invoices and service agreements will be scrutinized to ensure that substantive activities are conducted within Mauritius, and that the employment criteria is met.  As highlighted by the ARC, the applicable legislation, as cited above, has adopted a principles-based approach as opposed to a prescriptive rules-based approach. As such, the responsibility is on a taxpayer to establish that the specific measures that have been implemented do align with the principles of the legislation.

This case serves as a critical reminder for companies operating under a Global Business Licence in Mauritius to carefully consider their operational structures and ensure compliance with the substance requirements to avoid disputes with the tax authorities.