Treaty Shopping Involving South Africa Tax Treaty with Mauritius

South African investors have used Mauritius as a vehicle for investing in other countries with which Mauritius has treaties. Likewise, international investors from other countries that have tax treaties with Mauritius have used Mauritius as an intermediary to invest in South Africa.

The first tax treaty between South Africa and Mauritius came into force in 1960, through the South Africa/United Kingdom tax treaty, which was extended to Mauritius. During that time, Mauritius was still a colony of the United Kingdom. It is important to note that even though Mauritius gained its independence from the UK in 1968, the above-mentioned tax treaty was still applicable to Mauritius until termination in 1997 with the coming into force of a new tax treaty in 1997 directly between South Africa and Mauritius. However South Africa signed a new treaty with Mauritius on 17 May 2013. The South African Parliament ratified the treaty on 10 October 2013. The treaty must similarly be ratified by Mauritian Authorities. Thereafter it has to be published in the Government Gazette in terms of section 108 of the Income Tax Act No 58 of 1962 (Act).

The main reason for the signing a new the treaty (hence forth “draft treaty”) was due to perceived “abuse” of the 1997 tax treaty and resultant erosion of the South African tax base. The World Bank and the International Finance Corporation have consistently ranked Mauritius as one of the best Sub-Saharan African countries in which to do business. The main drivers are that Mauritius:

• Is a member of SADC, WTO and COMESA.
• Has a vast network of treaties with countries. It is party to 35 double taxation agreements.
• has no capital gains tax.
• has a low corporate income tax rate at 15%, which translates into an effective tax rate of 3% after taking into account available credits. (GBL1 gets up 80% credit while GBL2 qualifies for exemption). 

The Mauritius/India Tax Treaty – Sale of Shares Taxable only in Shareholder Country

South African residents wishing to invest in India often take advantage of the Mauritius/India treaty by routing investments via Mauritius in order to gain tax advantages. In terms of the South Africa/India treaty (and most other treaties with India) capital gains derived from the sale of shares in a company may be taxed in the country in which the company whose shares are being sold is a resident (i.e. in India), and since India has a tax on capital gains the gain does not escape taxation. In short, where a South African company invests directly into India it will be subject to CGT on the sale of the shares in the Indian company. To avoid such taxation, South African investors route investments via Mauritius by setting up a GB1 company in Mauritius which takes advantage of the provisions in the Mauritius/India treaty, which provides that capital gains arising from the sale of shares are taxable only in the country of residence of the shareholder and not in the country of residence of the company whose shares are being sold. As a result, a company resident in Mauritius selling shares of an Indian company will not pay tax in India on the disposal of the Indian company’s shares. Since there is no capital gains tax in Mauritius, the gain will escape tax altogether. The capital gain can then be repatriated back to the South African shareholder free of withholding taxes as Mauritius does not levy tax on dividends, interest or royalties for GBL1 companies.

Mauritius/African Tax Treaty Network – Lower Withholding Tax Rates

South African companies often route investments into other Africa countries via Mauritius since Mauritius has negotiated better benefits in its tax treaties with some African countries than South Africa has. This is especially so with regard to withholding tax rates (on dividends, interest, royalties and management/technical fees) in treaties between Mauritius and other African countries, which are generally lower than the withholding tax rates in tax treaties between South Africa and other African countries. To take advantage of the treaties that Mauritius has signed with some African countries, investors will route their investments in Africa via Mauritius.