Which companies could be affected?

Under the measures, Mauritius would consider a company to constitute a CFC when that company is not tax resident in Mauritius and when more than 50% of the total participation rights in that company are held directly or indirectly by a Mauritian tax resident company or together with its associated enterprises (essentially representing a 25% interest in the capital structure, voting rights or entitlement to profits). In addition, any permanent establishment of a Mauritian tax resident company that exists outside of Mauritius would also constitute a CFC.

Associated Mauritian tax implications

When a Mauritian resident company conducts business through a CFC, and the Mauritius Director-General considers that the non-distributed income of that CFC arises from non-genuine arrangements that have been put in place for the essential purpose of obtaining a tax benefit, that income would be deemed to form part of the chargeable income of the Mauritius resident company.

An arrangement or a series of arrangements would be regarded as non-genuine to the extent that the CFC would not own the underlying assets or would not have undertaken the risks that generate all or part of its income if it were not controlled by a company when the significant people functions, as relevant to those assets and risks, are conducted and are instrumental in generating the controlled company’s income. A tax benefit in this instance means the avoidance or postponement of the liability to pay income tax or the reduction in the amount of tax. Accordingly, the income of the CFC would be determined in such manner as may be prescribed.

These rules would not apply to a CFC when in an income year:

• Accounting profits are not more than €750,000 (or the equivalent amount in MUR), and non-trading income is not more than €75,000;
• Accounting profits amount to less than 10% of the operating costs for the tax period. To this end, the operating costs would not include the cost of goods sold outside the country when the CFC is considered a tax resident and the payments are made to associated enterprises. It is not a requirement that the payments made to associated enterprises must only be in respect of the goods sold; or
• The tax rate in the country of tax residence of the CFC is more than 50% of the tax rate in Mauritius.

KPMG observation

What are the implications for South African taxpayers?

South African taxpayers with offshore structures that involve a Mauritian tax resident intermediary holding company that holds more than 50% of the total participation rights in a non-resident Mauritian company will now be subject to a “double layer” of CFC rules. Taxpayers need to consider any unintended tax leakage and additional tax compliance requirements. Compared to the South African CFC legislation, one difference is the requirement that a permanent establishment of a Mauritian company would also constitute a CFC.

South African taxpayers need to consider whether there may be an opportunity to use foreign tax credits (in the hands of the South African shareholder) in respect of tax payable in Mauritius resulting from this newly introduced CFC legislation.

Read a November 2019 report [PDF 98 KB] prepared by the KPMG member firm in South Africa