On 9 November 2012 the Deputy Prime Minister and Minister of Finance in Mauritius, Hon. Xavier Luc Duval, delivered his speech on the Budget for the year 2013. One clear objective mentioned in the speech is for Mauritius to act as a "catalyst for investment." However, it is debatable whether the Minister's announcement, at the same time that new commercial substance requirements are to be introduced for GBC 1 companies, will be seen as a positive move by foreign investors.

A Mauritius GBC 1 company is an offshore global business company defined in terms of the Financial Services Act 2007. This company is treated as tax resident in Mauritius, but is classified as a Category 1 Global Business Company, engaged in international business, and is entitled to an effective three per cent (3 %) income tax rate in Mauritius on its foreign income.

The advantage of setting up a GBC1 company in Mauritius as opposed to a tax haven is, amongst others, that the company has access to Mauritius's network of tax treaties, which can be combined with a low effective tax rate in Mauritius as well as the fact that the GBC 1 Company is not subject to capital gains tax. As a result of these advantages, many multinationals have chosen to set up a GBC 1 Company as part of their international structures.

At present, a GBC 1 company is required to demonstrate that its central management and control is from within Mauritius. The company must have two local Mauritius directors and must have its Board meetings in Mauritius. In practice, of course, depending on the company's functions, it is often necessary for the company to have more Mauritian-based substance than this, in order for it to conduct its business and be recognised by treaty partners as being tax resident in Mauritius. For pure holding companies, however, generally very little commercial substance in Mauritius may be required.

In the recent Budget Speech, it was announced that the new "commercial substance" test will be introduced in the 2013 tax year. Although no specific reasons for this change have been provided, this is possibly as a result of the recent talks between the Mauritian and Indian tax authorities over abuse of the double tax treaty. The Indian authorities have raised concerns relating to the double taxation avoidance agreement and are seeking a review to curb the risks of round tripping of investments.

As of now, no further explanation has yet been given on what the substance requirements will look like.

From a practical point of view, the new commercial substance requirement will have an impact on the GBC 1's tax residence status in Mauritius. In order for GBC 1 Companies to be considered tax resident in Mauritius, which is a requirement to take advantage of Mauritius's tax treaties, they must apply for an annual tax residence certificate. What is expected is that the tax residence certificates will only be issued to GBC 1 Companies upon compliance with commercial substance requirements. Furthermore, upon issue of the tax residence certificate, a service fee will be charged. Consequently, the effects of the new commercial substance test will affect existing structures applying for their annual tax residence certificates in 2013, as well as new investors.

Webber Wentzel is keeping an eye on these changes. Once the Minister has provided some clarity on the new substance requirements, you will hear about it from us.

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