Economic substance refers to a transaction that has a purpose besides the reduction of tax liability. The concept is used in the examination of tax shelters to see if they are abusing the tax laws.
Economic Substance Requirements In Mauritius
BELOW ARE THE ECONOMIC SUBSTANCES REQUIREMENTS IN MAURITIUS:
Stage 1 – Tax Residency Criteria in Mauritius
It is important to note that the definition of “tax residency” of companies has been amended in both 2018 and 2019.
Prior to 2018, a company incorporated in Mauritius or which has its Central Management and Control (CMC) in Mauritius would be considered a tax resident in Mauritius. Effective 01 July 2019, when a company’s CMC is outside Mauritius, the company will not be considered a tax resident of Mauritius, regardless of being incorporated in Mauritius.
This could subsequently jeopardise companies obtaining Tax Residency Certificates which would in turn prevent these companies from availing of treaty benefits.
Stage 2 – Imposition of substance requirements on Mauritius resident entities
Effective 01 January 2019, Mauritius replaced the deemed tax credit with the partial tax exemption, subject to grandfathering provisions.
To avail of the newly introduced partial exemption which is available on certain income streams such as dividend and interest income, companies are required to satisfy the substance requirements in Mauritius.
The substance requirement test can be split into two parts for better comprehension.
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— Number of hours of work dedicated to managing the activities of the company;
— Provide the name of the tax representative;
— Confirmation as to whether the CIGA are outsourced;
— Specify if the entity is a member of the MNE group with total
consolidated annual revenues in the preceding year of EUR 750million or more; and
— Whether the substance of the outsourcing provider (employees, expenditure and premises) is used multiple times by multiple primary entities that outsource to the same service provider.
Stage 3 – Monitoring mechanism for substance
The law has been amended to provide the local tax authority information, through changes in the tax returns, which would assist in determining whether the newly introduced substance requirements are satisfied. The main amendments made to the tax returns are on the next page:
Test 1: Substance requirements
In addition to certain substance requirements that global business companies are required to meet such as having at least two local directors on the board of the company and maintaining a principal bank account in Mauritius, global companies will also be required to, amongst others;
— Carry out their Core Income Generating Activities (CIGA) in or from Mauritius (refer to test 2 below); and
— Incur a minimum level of expenditure and employ directly or indirectly an adequate number of qualified persons.
Test 2: Core Income-Generating Activities
Activities which qualify as CIGA will depend on the business activity of a company. For example, CIGA for a company deriving interest income (excluding banks) would include agreeing funding terms, setting the terms and duration of any financing, as well as monitoring and revising any agreements and managing any risks in Mauritius.
What is the economic substance rule?
Economic substance is a doctrine in the tax law of the United States under which a transaction must have both a substantial purpose aside from the reduction of tax liability and an economic effect aside from the tax effect in order to qualify for any tax benefits.
How do I file an economic substance?
An entity is not required to meet the Economic Substance Test and file an Economic Substance Report for any financial period in which it has not earned income from a Relevant Activity or if it meets the conditions for being exempt. A Notification form will need to be submitted regardless.
What is economic substance classification?
In the context of business companies, “economic substance” means that companies must have adequate presence and/or carry on economic activities in the jurisdiction in which they are tax residents.