The recently announced new tax agreement with Mauritius is aimed at preventing tax avoidance and/or evasion by multinational corporations and will apply from 1 January 2016.
The treaty introduces Capital Gains Tax (where the disposed investments derive more than 50% of their value from immovable property) and will levy tax on interest (10%) and royalties earned (5%). The two countries aim to work together to determine the tax status of mutual companies and trusts and work together to collect outstanding taxes.
The main changes to the DTA relate to dual residence for persons other than individuals. In terms of the current (1996) DTA, where a person other than an individual (e.g. a company) is tax resident in both Mauritius and South Africa, the person will be deemed to be a resident of the state in which its place of effective management is situated. The new dual residence tie breaker does not refer to effective management, but provides that the competent authorities of the two states must “by mutual agreement endeavour to settle the question” and determine how the DTA will apply to such person.
A Mauritian incorporated company which is effectively managed in Mauritius will thus not be subject to the new dual residence tiebreaker and the same applies to a South African incorporated company which is effectively managed in South Africa.
There is no doubt that the new DTA will put Mauritian companies in a less beneficial position vis-à-vis South Africa as is currently the case. This is so specifically in the context of dual resident companies, loans to South African borrowers and investment in companies owning immovable property in South Africa. However, this does not necessarily mean that the use of Mauritian companies is no longer beneficial in international structures. Ironically, the amendments are not that negative for South African companies using Mauritius as a gateway for foreign investments. It does however make Mauritius less attractive as a portal for investment into South Africa, as it will no longer provide complete protection against the South African interest and royalty withholding taxes and against CGT on the disposal of shares in a company owning South African immovable property.
