A firm but fair regulatory environment is attracting investors into Mauritius. By Malcolm Moller

Mauritius is increasingly gaining international attention for investing into India and China due to its flexible and conducive regime for offshore business and the tax planning opportunities that can be obtained.

The local financial industry is regulated by the Financial Services Commission (FSC), which covers the jurisdictions previously overseen by the Stock Exchange Commission (securities), the Insurance Division of the Ministry of Economic Development Financial Services and Corporate Affairs (insurance), and the Mauritius Offshore Business Activities Authority (global business).

Mauritius is committed to developing and maintaining conditions that are conducive to attracting international business and is playing host to a growing number of significant investments into India, China and Africa. For example, the vast majority of foreign direct investment into India over the past decade has been channelled through Mauritius because of its tax treaty with India.

Qualified corporate entities
Under the Financial Services Development Act 2001 (FSD Act), corporate entities that are qualified to carry on global business activities from within Mauritius are defined as corporations holding either a Category 1 Global Business Licence (GBL 1), which are qualified to take protection of the double tax treaties to which Mauritius is a party if the corporation comes within the definition of a resident under the taxation laws of Mauritius, or corporations holding a Category 2 Global Business Licence (GBL 2), which are exempt from the provisions of the Income Tax Act and are declared as non-residents of Mauritius for tax purposes. Corporations in both categories may carry out the activities listed below and conduct business in foreign currency from within Mauritius with persons having no access to the international tax arrangements, all of whom are resident outside Mauritius.

Activities that may be carried out by GBL 1 entities are: aircraft financing and leasing; asset management; consultancy services; employment services; financial services; funds management; information and communication technologies; insurance; licensing and franchising; logistics and/or marketing; operational headquarters; pension funds; shipping and ship management; trading; and any other activity as may be approved by the FSC.

Activities that may be carried on by GBL 2 entities include: non-financial consultancy; IT services; logistics; marketing; shipping; ship management; non-financial trading; passive investment holding; one-off transactions using special-purpose vehicles (SPVs); and such other activities as may be approved by the FSC.

The GBL 2 provides greater flexibility for holding and managing private assets. However, holders are prohibited from raising capital from the public or to conduct any financial services, such as trustee services.

Anti-money laundering law
Mauritius reinforced its commitment to keep out the unscrupulous by enacting anti-money laundering legislation in 2003. The Financial Intelligence and Anti-Money Laundering Act 2003 (AMLA) complies with the recommendations of the Financial Action Task Force established by the G7 countries in 1989.

Mauritius has embraced the passage of the AMLA and its subsequent codes issued by the FSC.

According to the FSC: “These codes aim to preserve high standards of practice, the integrity of Mauritius as a reputable financial services centre and the minimum criteria to be followed by companies and market intermediaries to prevent the exploitation of the financial services industry in Mauritius.”

Compliance has not proved difficult for most client companies as Mauritius has always had a deep-seated ‘know your client culture’. It is important for all Mauritius-incorporated entities to establish and observe appropriately high standards of client identification and verification, record-keeping, internal reporting and employee training.

Many large blue-chip institutional clients have welcomed the opportunity to be subject to such standards of business conduct, which are clearly in line with their own high operating standards in the international marketplace and which underline the high standards being applied in Mauritius. The introduction of the AMLA and other regulations, bolstering up the supervision of qualified global business and tracking down financial criminals, takes money and expertise.

A paper published last August by the Commonwealth Secretariat, a group of 53 former members of the British Empire, estimated that from 2002 to 2005 the direct cost of new regulations for Mauritius was $40m (£20.18m), a big number indeed for a tiny island with a small budget.

Why Mauritius as an offshore jurisdiction?
The success of Mauritius in the region is not only the result of the current regulatory environment and extensive double taxation treaty network, but can be attributed to a variety of elements created by a supportive but responsible government-directed development programme and growing expertise that has been developing steadily since 1992.

The combination of all these positive attributes has produced impressive results. Mauritius has developed into an ideal jurisdiction through which large manufacturing groups in South East Asia can raise finance on the institutional markets, and is now increasingly used for debt and equity investment into China, while Mauritius SPVs are being used to provide debt finance to Singapore.

South African companies use Mauritius predominantly as a centre for group treasury operations, trade finance, international holding companies and cell captive insurance services. And India, which originally saw Mauritius primarily used for inbound investment, now uses Mauritius as a platform to coordinate outbound investment as Indian companies expand internationally.

For example, the primary benefit under the India-Mauritius tax treaty is that there is no capital gains tax in either India or Mauritius on the sale of the shares of the Indian company by a Mauritius company. Otherwise, the proceeds of a sale of shares in an Indian company are taxed in India, unless such shares are sold through a stock exchange.

Thus, the Mauritius approach to investing in India is very attractive indeed where the Indian company is the primary exit vehicle for investor liquidity and such exit is likely to be a private sale. However, to take advantage of the treaty, the investing entity must first meet certain basis requirements in order to avail itself of Mauritius tax residency status for purposes of the treaty, including:
– having two local directors approved by the FSC;
– holding company meetings chaired from Mauritius;
– and ensuring that financial activities of the company are channeled through its bank account in Mauritius.

A tax residency status certificate (issued by the Mauritius Revenue Authority) is sufficient evidence for India tax authorities to accept the status of residence as well as beneficial ownership according to Union of India v Azadi Bachao Andolan (2003).

Mauritius is an independent sovereign state (a republic), but maintains membership of the Commonwealth and the right of appeal to the Privy Council is preserved. Its reputation rests on sound regulation. There is sufficient oversight to ensure probity and accountability. Government does not dictate how the business of Mauritius companies must be carried on, which is left entirely to its management.

Mauritius has gained international recognition through the UN Forum for its regulation of its offshore sector due to the strong regulatory framework and due diligence practices. The regulatory environment in Mauritius is viewed as fair and sensible in international circles, and underscores the advantages of the selection of Mauritius as a jurisdiction for sophisticated structures required for international transactions.

Malcolm Moller is Mauritius managing partner at Appleby