Mauritius – SA double taxation avoidance treaty

Last year, a Mauritian delegation headed to South Africa to approve and ratify the agreement on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (“The Agreement”). The Agreement in itself had been previously signed by the Republic of Mauritius and the Republic of South Africa on the 17th of May 2013. It was expected to come into effect around the 1st of January 2015, once both countries had completed the necessary ratification procedures. Now that the necessary procedures are complete, the Agreement is will be ratified within the coming week, thus replacing the current Double Taxation Avoidance Agreement (“DTA”) between the two countries.

Historically, South Africa has had a tax treaty with Mauritius since 1997 (concluded in 1996) and South African investors have used Mauritius as a vehicle for investing in other countries with which Mauritius has numerous treaties. Similarly, international investors from other countries that have tax treaties with Mauritius have used Mauritius as an intermediary to invest in South Africa.

In addition to the new Agreement, the Mauritian Minister for Financial Services and Good Governance Roshi Bhadain and the South African Minister of Finance Nhlanhla Musa Nene, signed a Memorandum of Understanding covering:

  • The treatment of dual-resident entities
  • The tax treatment of capital gains, and
  • The proposal to withhold tax rates on dividends, interests and royalties

What are the Salient Features of the New Agreement?
A major change in respect of the new agreement concerns the determination of tax residency, and specifically the tie-breaker rule that applies in cases where both Mauritius and South Africa claim that a particular company is a tax resident in their respective jurisdictions.

The current treaty provides that where a company is a tax resident in both Mauritius and South Africa, that company will for purposes of the existing agreement be deemed as tax resident in the country where the company has its effective place of management.

In fact, Paragraph 3 of Article 4 of the Organisation for Co-orperation and Development (“OECD”) Model Tax Convention states that a non-individual:

 “..Shall be deemed to be a resident only of the State in which its place of effective management is situated.” [Highlight added]

The new treaty, on the other hand, introduced a shift from the place of effective management test to what is known as the Competent Authority Procedure. This new prcedure provides that where a company is a resident of both states, “the competent authorities of the Contracting States shall by mutual agreement endeavour to settle the question and determine the mode of application of the Agreement to such person“. It further also provides that in “the absence of such agreement such person shall be considered to be outside the scope of the Agreement“.

The OECD has explicitly sanctioned this option as an acceptable one, and recommends that the following factors be considered by the competent authorities of the countries involved, in making their determination:

  • the place where meetings of the company’s Board of Directors or equivalent body are usually held;
  • the place where the chief executive officer and other senior executives usually carry on their activities;
  • the place where the senior day to day management of the person is carried on;
  • the place where the person’s headquarters are located;
  • which country’s laws govern the legal status of that person;
  • where its accounting records are kept; and whether determining that the legal person is a resident of one of the contracting states but not for the other would carry the risk of an improper use of the provisions of the DTA.

In the context of South African treaties, this approach to resolving questions of residence for companies is certainly not new nor even very unusual. It is currently to be found in 13 of South Africa’s existing DTAs, including, in the African context, the treaties it concluded with Botswana, Nigeria and Uganda.

 

What does this mean for South African investors?

The new agreement stresses the importance for South African companies that wish to be treated as tax residents in either Mauritius or South Africa to ensure that they are not effectively managed in the other country instead.

If SARS contends that a Mauritian company is effectively managed in South Africa, but Mauritius does not believe this to be the case, then even under the existing DTA, a dispute between the two countries as to where the relevant taxpayer has its place of effective management will be triggered, which would need to be resolved by the competent authority process.

The problem that arises is that a Mauritian incorporated company could find itself being declared as no longer tax resident in Mauritius. This is so despite the fact that the company may have attempted to arrange its affairs in such a way that its place of effective management is in Mauritius.

In addition, should no agreement be reached between Mauritius and South Africa, the treaty will simply not apply, and the company, as a dual resident, will be subject to tax in both South Africa and Mauritius. Even though the company could potentially claim relief in terms of section 6 of the Act, it would probably end up paying more tax than it would have otherwise.

Effectively, if the South African Revenue Service (SARS) believes that a Mauritian company is effectively managed in South Africa and therefore a resident in terms of domestic law, SARS will tax that company in South Africa, whether Mauritius agrees that the company is resident in South Africa or not.