1 Mauritius Double Avoidance Taxation Treaties A comparative Analysis. Contents 1 Scope of analysis 1.1 Double tax treaties under review 1.2 Articles under review 2 Summary of Mauritius tax law and Luxembourg tax law 2.1 Mauritius income tax law 2.2 Luxembourg income tax law Taxation of dividends Taxation of interests Taxation of royalties Taxation of capital gains Investment funds in Luxembourg 3 Analysis of the DTTs 3.1 Luxembourg - Mauritius DTT Dividends Interests Royalties Capital gains Relevant issue 3.2 Mauritius - India and Mauritius - Malaysia Dividends Interest / Royalties / Capital gains 3.3 Mauritius - EU countries DTTs UK France Italy Germany 3.4 Mauritius - non-eu countries DTTs Singapore China Indonesia South Africa 4 Conclusion
2 1 Scope of analysis 1.1 Double tax treaties under review We have analysed the double tax treaties (hereinafter "DTT") provided to us, which are as follows: Mauritius - Luxembourg Mauritius Singapore Mauritius - China Mauritius Indonesia Mauritius India Mauritius - Malaysia Mauritius - South Africa Mauritius - UK Mauritius - France Mauritius - Italy Mauritius - Germany In order to make an efficient analysis of those DTTs, we have made a comparison with DTT concluded with Luxembourg. Luxembourg has concluded DTT with all countries forming part of the European Union. Except for India and Malaysia, Luxembourg has concluded DTT with all the countries being part of the analysis. \ 1.2 Articles under review A structure of investment is generally implemented when dividends, interests, royalties and capital gains may be repatriated to the investors at an acceptable and efficient tax rate. We have consequently analysed the articles of the DTTs, which concern the dividends (generally article 10), the interests (generally article 11), the royalties (generally article 12) and the capital gains (generally article 13). To complete the analysis of such articles, reference has necessarily been made to the articles, which concern the elimination of double taxation (generally article 23).
3 Report Mauritius DTT modified.doc - 14 August 2002 In addition, the governments of the two countries concerned have sometimes signed a protocol forming part of the DTT. Generally, protocols grant a more favourable regime than the one agreed in the original DTT, especially in terms of dividends, interests and capital gains.
4 Summary of Mauritius tax law and Luxembourg tax law Basically, we have analyzed the advantages the DTTs concluded by Mauritius and by Luxembourg could provide. It should be noted that in specific cases, the domestic law could be more advantageous. As a general principle, DTTs cannot create a tax, which is not provided by the domestic law of the contracting States. Consequently, Luxembourg law applies whenever it provides for a more advantageous tax regime than the DTT. We have assumed this principle is of application in Mauritius. We will consequently give a brief summary of the Mauritian law and the Luxembourg tax law, especially in terms of dividends, interests, royalties and capital gains. 2.1 Mauritius income tax law In general, companies carrying on business in Mauritius are subject to tax on local and foreign source income. The rate applicable to those companies is 25%. There are no capital gains taxes in Mauritius. There are no withholding taxes: on dividends paid to a resident or a non-resident; on interests paid by an offshore company to non-residents or by a Mauritius bank to a non-resident bank (other companies to non-resident companies: 25%); on royalties paid by an offshore company to non-residents (other companies to nonresident companies: 25%). on capital gains; There are tax incentive companies, which enjoy a tax rate of 15%. These are called Category 1 Global Business license (hereafter "GBL1"). We understand that those companies may benefit from the double tax treaties, which
5 A GBL1 company is entitled to claim tax credit relief for the foreign tax withheld on the foreign source income against Mauritius tax. The foreign tax credit, which is allowed will be either the amount of foreign tax which has been charged and supported by written evidence; or in the absence of written evidence showing the amount of foreign tax charged, the amount of foreign tax will be presumed to be equal to 90% (80% as from 2003) of the Mauritius tax chargeable. The maximum credit is the lower of the actual amount of foreign tax withheld or 80% of the Mauritius tax. In the case of a dividend being paid to a GBL1 company holding at least 5% of the share capital of the company paying the dividend, tax credit can also be claimed on the foreign tax charged on the income out of which the dividend was paid i.e. the underlying tax. The relief for foreign tax is claimed when computing the annual tax of the company. Dividends received by an offshore company are tax free. 2.2 Luxembourg income tax law Taxation of dividends Taxation of dividends received Dividends received by a Luxembourg company that do not qualify for participation exemption are taxed at full corporation tax rate (i.e. 30,38%). Those dividends can however be 50% exempt (i.e. subject to a 15% effective tax rate) if they are paid by: a fully taxable resident company with a share capital; a foreign company with a share capital that is subject to a tax comparable to Luxembourg income tax (i.e. at least 15% applied on a similar basis) and that resides in a treaty country; an EU company in the sense of the parent-subsidiary directive, i.e. subject to corporate income tax rate (not necessarily at a rate comparable to Luxembourg corporate income tax rate). When the company qualifies for participation exemption, dividends may be exempt if the subsidiary that pays the dividends is a fully taxable resident company with a share capital, or an EU subsidiary in the sense of the parentsubsidiary directive, or a foreign subsidiary subject to an income tax rate comparable to Luxembourg corporate income tax on a similar basis, in practice generally an effective minimum income tax of 15%. The Luxembourg company must hold at least 10% of the share capital of the subsidiary or the acquisition price must be of a minimum of There is also minimum detention period of 12 months at the date at which the dividend is allocated or the company commits to hold the minimum shareholding for an uninterrupted period of 12 months at least. Report Mauritius DTT modified.doc - 14 August 2002
6 Taxation of dividends paid Generally, dividends paid by a Luxembourg company are subject to a withholding tax of 20%. There is no withholding on dividends distributed by a fully taxable Luxembourg company if the recipient is a fully taxable resident company with a share capital, a Luxembourg branch of company resident in another EU member State or in a treaty country, or an EU subsidiary in the sense of the parent-subsidiary directive. The Luxembourg company must hold at least 10% of the share capital of the subsidiary or the acquisition price must be of a minimum of There is also a minimum detention period of 12 months at the date at which the dividend is allocated Taxation of interests Interests received by a Luxembourg company are taxed at normal corporate tax rate, i.e %. Interests paid by a Luxembourg company are not subject to a withholding tax Taxation of royalties Royalties paid by a Luxembourg company are subject to a withholding tax of 10%. Royalties received by a Luxembourg company are included in the taxable basis of the company and are taxed at normal corporate income tax rate, i.e % Taxation of capital gains Capital gains realized by a company, which do not qualify for participation exemption are taxed at normal corporate income tax rate, i.e %. Capital gains realized by a company, which qualify for participation exemption are exempted from corporate income tax in Luxembourg. The subsidiary should be a fully taxable resident company with a share capital, or an EU subsidiary in the sense of the parent-subsidiary directive, or a foreign subsidiary subject to an income tax rate comparable to Luxembourg corporate income tax on a similar basis, in practice generally an effective minimum income tax of 15%. The Luxembourg Company must hold at least 10% of the share capital of the subsidiary or the acquisition price must be of a minimum of There is also minimum detention period of 12 months at the date at which the capital gain is realized or the company commits to hold the minimum shareholding for an uninterrupted period of 12 months at least.
7 2.2.5 Investment funds in Luxembourg In the course of recent years Luxembourg has established a leading position throughout Europe as a location for international investment funds. Significant factors in this success were EU directives liberalising the marketing of investment funds. In the past decade Luxembourg has extended its reputation as a location for investment funds beyond European borders in developing a range of highly competitive services in connection with the management of investment funds. The Luxembourg legislation is very flexible as regards to the legal form of the funds. Luxembourg funds can be set up as mutual funds or as investment companies with fixed or variable capital. Mutual funds do not have legal personality themselves and are accordingly not subject to Luxembourg income or net worth tax. Although investment companies operating as public limited companies with fixed or variable capital are basically resident taxpayers, they are specifically exempt from income and net worth tax. Foreign investors are not subject to income tax in Luxembourg. There is no withholding tax on distributions paid by investment funds. Investment funds are subject to only two taxes: contribution tax (flat amount of approx. 1,250) and an annual subscription tax (generally 0.06% on net assets and 0.01% on net assets for private investment funds). The ECOFIN Counsel has adopted a new directive on investment funds (so-called UCUS III) on March 4, The directive aims at extending the scale of products in which mutual funds may invest. Particularly, the directive allows a fund to invest in another funds so as to constitute structures called "funds of funds". Luxembourg investment funds used to have a Mauritian subsidiary to invest in India so as to benefit from the Mauritius-India DTT. The directive UCITS III has modified the rules regarding the detention of a subsidiary by an investment fund so that the structure of investment to India via Mauritius cannot exist anymore as such. The structure "funds of funds" may be a good alternative as a Luxembourg investment fund may invest in another fund located in Mauritius, which would invest in India so that the benefit from the double tax treaties is still efficient. Report Mauritius DTT rnodified.doc - 14 August 2002
8 In our opinion Mauritian authorities might take advantage out of the development of an investment funds platform in Mauritius, under the condition that these Funds would be treaty protected. Analysis of the DTTs In the present section, we have indicated possible structures to be implemented. Those are not exhaustive; many structures could be envisaged taking advantages of DTTs Mauritius has concluded. Please bear in mind that Luxembourg domestic law should generally be applied each time it is more advantageous than the DTT. We assume the same applies in Mauritius. 3.1 Luxembourg - Mauritius DTT Dividends From a Luxembourg point of view, the DTT is advantageous as dividends paid by a Luxembourg company to a Mauritius company cannot benefit from the Luxembourg participation exemption and are consequently subject to the Luxembourg WHT of 20%. By application of the DTT, the WHT on dividends distributed by a Luxembourg company to a Mauritius company may be reduced to 10% or 5%, instead of 20% as foreseen in domestic law. From a Mauritius point of view, the Mauritius domestic tax law is more advantageous than the DTT, as there is no withholding tax on dividends paid by a Mauritian company to a Luxembourg company. Furthermore, if the Luxembourg participation exemption applies, the dividend income is tax exempt in Luxembourg Interests From a Luxembourg point of view, the DTT does not grant more benefits
9 than the domestic law, since there is no withholding tax on interest paid by a Luxembourg company to resident and non-resident companies. From a Mauritian point of view, the DTT can be advantageous when the Mauritian company, paying interests to a Luxembourg company is not an offshore company or a bank.
10 3.1.3 Royalties The DTT provides for no WHT on royalties paid (Luxembourg domestic tax law provides for a WHT of 10% on royalties) Capital gains The DTT does not grant more benefits than the domestic law, since there is nc withholding tax on capital gains realized on the sale of a Luxembourg or a Mauritius company. In a structure where a Mauritius parent company sells a Luxembourg company, there would be no WHT tax in Luxembourg and capital gains would be tax exempt in Mauritius. In a structure where a Luxembourg parent company sells a Mauritius company, there would be no WHT tax in Mauritius and capital gains would be tax exempt in Luxembourg in case the Luxembourg participation exemption applies Relevant issue Basically, all the benefits, which follow the application of the DTT and of the Luxembourg participation exemption will only be granted by the Luxembourg tax authorities if the Mauritian company is effectively taxed at a rate exceeding 15%. This point is particularly relevant in Luxembourg when applying the Luxembourg participation exemption. For the exemption of dividends, capital gains and liquidation proceeds received by a Luxembourg company, the foreign subsidiary must be subject to an effective minimum income tax rate of 15%. A GBL1 company is entitled to claim as tax credit the amount of foreign tax which has been charged, provided the foreign tax paid can be supported by written evidence. This situation does not raise any issue in Luxembourg as it can be proved that the income received by the Luxembourg company has already been subject to tax (at least 15%) in the foreign country. In the absence of written evidence showing the amount of foreign tax charged, the amount of foreign tax will be presumed to be equal to 90% (80% as from 2003) of the Mauritius tax chargeable. In that case, the effective income tax rate is 1,5% (3% as from 2003). From a Luxembourg point of view, this 1.5 % (or 3%) effective tax rate might give raise to an issue, and the Luxembourg tax authorities might challenge the application of the Luxembourg participation exemption. However please note that the validity of a Luxembourg-Mauritius structure should be appreciated on a case-by-case basis, as different elements should be taken into account.
11 Mauritius - India and Mauritius - Malaysia The Mauritian treaty network as under review includes two treaties with countries that have not concluded a treaty with Luxembourg. Li case of a structure implying a Luxembourg company and an Indian company or a Malaysian company, reference should be made to the domestic tax law of each country in order to determine the tax regime applicable on income flows. This might bring a very high tax burden. It may consequently be interesting to insert for instance a Mauritian company between a Luxembourg company and an Indian company so as to benefit from the advantages provided by the DTTs signed by Mauritius with India. Advantages should however be compared with the domestic tax law of India, which may provide for lower tax rates than the DTTs. Dividends We understand that Indian domestic tax law does not currently provide for any withholding tax on dividend distribution. Only an additional income tax of 10,2% would be due by the company paying the dividends. This tax regime is about to change and the new tax regime on dividends will provide for a withholding tax of 20%. Dividends distributed by an Indian subsidiary to its Luxembourg parent company should consequently be subject to a WHT tax of 20% in the next future. If the investment structure includes a Mauritius company, the global WHT rate should amount to 5% (India-Mauritius DTT: 5% (minimum shareholding of 10%) + Mauritius-Luxembourg: 0% (domestic law)). For comments on structures involving investment funds, please see section If an Indian company holds a Luxembourg company, dividends distributed will be subject to a WHT of 20%. If the investment structure includes a Mauritian company, the global WHT will amount to 5% (Luxembourg-Mauritius: 5% (if minimum shareholding of 10%) + 0% (domestic law)).
12 3.2.2 Interest / Royalties / Capital gains The Mauritius-India DTT could be interesting in terms of interest if a Mauritius bank grants a loan to its Indian subsidiary. In that case, there is no withholding tax on interests paid by an Indian company to a Mauritius bank. There is also no WHT on repatriation to the Luxembourg parent company of the Mauritius bank. The combination of the Mauritius-India DTT and the Mauritius-Luxembourg DTT allows a tax protection on capital gains. In a structure where a Luxembourg parent company holds a Mauritius company, which holds an Indian company, there will be no WHT on the sale of the Indian company (art 13 Mauritius-India DTT) and capital gains are not taxed in Mauritius (domestic law). Gains could be repatriated in Luxembourg through dividends without any WHT (Mauritius domestic law). 3.3 Mauritius - EU countries DTTs Basically, DTTs Mauritius has concluded with some EU countries seem to be more competitive than those concluded by Luxembourg with the same EU countries. DTTs Luxembourg has concluded with the UK, France, Italy and Germany have been in force for many years and since the Parent-Subsidiary Directive has been in force, the relationships between EU countries (and Luxembourg) are often more favourable than the DTTs concluded between EU countries and Mauritius. Consequently, we will not make any comparative analysis of EU DTTs Mauritius and Luxembourg have concluded, but only an analysis of the relevant elements of the Mauritius -EU countries DTTs. As Mauritius disposes of an efficient treaty network with Asia and Africa, EU countries could use Mauritius as a gateway to Asia and Africa UK For dividends distributed by a Mauritius company to its UK parent, the DTT provides for a WHT of 10% or 15% but there is no Mauritius WHT according to domestic tax law. The DTT is interesting when a Mauritius company pays interest to a UK bank, as there is no WHT. According to domestic tax law, there is no WHT only if an offshore company pays interest. The DTT reduces the WHT on royalties from 25% to 15% when the payer is a fully taxable Mauritius company.
13 3.3.2 France Same comments as above apply Italy Same comments as above apply Germany Same comments as above apply. 3.4 Mauritius - non-eu countries DTTs We have not analysed the domestic laws of Singapore, China, Indonesia and Soutl Africa. Please note that those domestic laws might provide for a more favourable taj regime on dividend, interest, royalties, and capital gains. Basically, DTTs Luxembourg has concluded with Singapore, China, Indonesia and Soutl Africa are less competitive than those Mauritius has concluded with the same countries. The interposition of a Mauritius Company between a company resident in the countries mentioned above and a Luxembourg company will generally reduce the WHT rates or dividend, interest and royalties Singapore The combination of the Mauritius-Singapore DTT and the Luxembourg- Singapore DTT is very efficient as there should be no WHT on dividend, interest and royalties paid. This is the case in a structure involving a Mauritius company interposed between the Luxembourg parent company and its Singapore subsidiary. Basically, dividends paid by the Singapore subsidiary to its Luxembourg parent company would be subject to a WHT of 5% (minimum participation of 10%) or 10% in other cases. If a Mauritius company is interposed, there will be no WHT (i.e. Singapore-Mauritius: 0% (DTT) + Mauritius-Luxembourg: 0% (domestic law)). The same argument applies for interest and royalties. With no Mauritius Company, interest and royalties paid by a Singapore subsidiary to its Luxembourg parent would be subject to a WHT of 10% (DTT). With the interposition of a Mauritius company, there is no WHT at all (Singapore-Mauritius: 0% (DTT) + Mauritius-Luxembourg: 0% (DTT)).
14 3.4.2 China The combination of the Mauritius-China DTT and the Luxembourg-China DTT could be interesting with respect to bank operations. If a Luxembourg bank grants a loan directly to a Chinese company, interest paid to the Luxembourg bank will be subject to a WHT of 10%. If a Mauritius bank is interposed between the bank and the company, there will be no WHT on interest paid (China-Mauritius Bank: 0% (DTT) + Mauritius bank-luxembourg bank: 0% (DTT)). As regards DTTs China has concluded with different countries, none of them include Hong Kong in their dispositions. Negotiations with Chinese authorities to modify the Mauritius-China DTT and to include Hong-Kong may provide Mauritius important competitive advantages Indonesia The interposition of a Mauritius company between a Luxembourg company and an Indonesian company may also be of use in the banking sector. The same structure as for China may document this South Africa There is no real advantage / disadvantage to combine the Mauritius-South Africa DTT and the Luxembourg-South Africa DTT, as both provide for the same tax regime: 5% or 15% WHT on dividends and no WHT on interest and royalties.
15 4 Conclusion Generally speaking, Mauritius has a very interesting and competitive DTT network, no only in comparison with Luxembourg DTTs. Structures contemplated in the presen report may also be used with other EU countries (as an alternative for Luxembourg) provided CFC rules are taken into consideration. In most of the structures we would however suggest to implement a Luxembourg holding company as an attractive investment centre. Its central situation within Europe, its political and social stability, good transport and communication links with other financial centres in Europe and its liberal attitude towards foreign capital inflow make Luxembourg the ideal place for a holding company. Most of the US conglomerates use a Luxembourg holding company in their investment structure. From that point of view, a Luxembourg holding - Mauritius company structure could be used as a gateway from the USA to Asia and Africa. In such a structure, Luxembourg could also be used as a holding of European companies together with a parallel structure with Asian and African countries via Mauritius. DTTs Mauritius has concluded with Asia are competitive. In that way, we would advise to develop DTTs with other Asian countries or extend the existing ones (e.g. to extend the DTT concluded with China to Hong Kong). Apart from the advantages of the DTTs concluded by Mauritius, the domestic law provides for very interesting elements. The tax credit system is an attractive provision of the Mauritius law for investors. The performance of all Luxembourg-Mauritius structures involving the Mauritian tax credit system should however be analysed on a case-by-case basis. The Luxembourg tax authorities would generally allow the application of the Luxembourg participation exemption if the Mauritian subsidiary is subject to tax of at least 15%. As the tax credit system in case of no underlying tax results in an effective tax rate of 3 to 4%, we would suggest verifying on a case-by-case basis with the Luxembourg tax authorities whether the contemplated structure does not raise any issue with regard to the application of the Luxembourg participation exemption. Mauritius might change some provisions of its domestic law in order to be even more attractive. Following the implementation of the new European directive UCITS III on investment funds, we would advise Mauritius to develop its legislation on investment funds so as to make them more attractive.
16 Mauritius used to be very attractive for Luxembourg investment funds wishing to invesl in India. The new directive UCITS III does not allow the Mauritian structure with a Mauritius company held by a Luxembourg investment fund anymore. This directive however includes the concept "funds of funds". The development of the Mauritius domestic law on investment funds and the protection of investment funds under treaty provisions would secure the transactions and consequently attract foreign investors in Mauritius.