Mauritius has introduced the controlled foreign company (CFC) rules for the first time in its income tax legislation. In its final Base Erosion and Profit Shifting (BEPS) Action 3 report, the OECD recommended jurisdictions to implement a CFC rule designed to prevent a parent company from artificially moving its profits abroad to a controlled subsidiary in a country with a more favourable or lower tax rate. The recommendations in the final report on BEPS Action 3 on CFC rules were in the form of six building blocks, covering definition of a CFC; CFC exemptions and threshold requirements; definition of income; computation of income; attribution of income and prevention and elimination of double taxation. These recommendations have been implemented in the Mauritian CFC rules. Further, CFC rules are regarded by the EU as an appropriate anti-abuse measure to tackle tax-planning opportunities in respect of regime such as the Mauritian partial exemption regime. With the introduction of the CFC rules, Mauritius has also addressed the deficiencies identified by the EU Code of Conduct Group with regards to the partial exemption system under the specific criterion of substance. The main characteristics of the CFC rules are set out below.

Application of the CFC rules

Where a Mauritius tax-resident company (?Resident Company?) carries on business through a CFC and the Mauritius Revenue Authority considers that the non-distributed income of the CFC arises from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax benefit, that income will be deemed to form part of the chargeable income of the Resident Company.

An arrangement or a series of such arrangement will be regarded as non-genuine if the CFC would not own the assets or would not have undertaken the risks which generate all, or part of, its income if it were not controlled by a company where the significant people functions, which are relevant to those assets and risks, are carried out and are instrumental in generating the controlled company’s income. Tax benefit means the avoidance or postponement of the liability to pay income tax or the reduction in the amount of the income tax.

Definition of CFC
A CFC is defined as a company which is not resident in Mauritius and in which more than 50 per cent of its total participation rights are held directly or indirectly by the Resident Company or together with its associated enterprises and includes a permanent establishment of the Resident Company.

An associated enterprise is defined as an entity in which the Resident Company holds directly or indirectly a participation in terms of voting rights or capital ownership of 25 per cent or more or is entitled to receive 25 per cent or more of the profits of that entity. It also includes an individual or entity which holds directly or indirectly a participation in terms of voting rights or capital ownership in the Resident Company of 25 per cent or more or is entitled to receive 25 per cent or more of the profits of the Resident Company. Where an individual or entity holds directly or indirectly a participation of 25 per cent or more in the Resident Company and one or more entities, all the entities concerned, including the Resident Company, will also be regarded as associated enterprises.

CFC exemptions and threshold requirements
The CFC rule will not apply to a CFC where in an income year –

I). accounting profits are not more than EUR 750 000, and non-trading income is not more than EUR 75 000;t with effective cybersecurity programmes on licensed fintech service providers, including the need to have dedicated in-house cybersecurity personnel.

II). accounting profits amount to less than 10 per cent of its operating costs for the tax period (the operating costs must not include the cost of goods sold outside the country where the entity is resident for tax purposes and payments to associated enterprises); or

III). tax rate in the country of residence of the CFC is more than 50 per cent of the tax rate in Mauritius.

Definition of Income
The income to be included in the chargeable income of the Resident Company will be limited to amounts generated through assets and risks which are linked to significant people functions carried out by the controlling company.

Computation of Income
The net income of a CFC in respect of its tax year shall be:
I). an amount equal to its taxable income determined in accordance with the Income Tax Act 1995 (the ?ITA?) as if the CFC had been a taxpayer and tax resident for the purposes of the definition of ‘gross income’ under the ITA;

II). determined in the currency used by the CFC for the purpose of its financial reporting.

For the purpose of determining the amount to be included in the income of the Resident Company during any year of assessment, the net income of a CFC in respect of its tax year shall be converted into Mauritius currency by applying the average exchange rate between Mauritius currency and the other currency for that year of assessment.

The undistributed income taxed at the level of Mauritius (through CFC rules) shall be deducted from the chargeable income of the Resident Company when actual distribution is made.

Computation of Income
The attribution of the CFC’s income will be calculated in accordance with the arm’s length principle. The income to be included in the chargeable income of the Resident Company will be calculated in proportion to the Resident Company’s participation in the CFC and the income will be included in the tax return of the Resident Company in respect of the income year in which the tax year of the CFC ends.

Prevention and elimination of double taxation
A credit of the tax paid by the CFC will be allowed against the tax liability of the Resident Company in the same manner as credit is allowed in respect of foreign tax paid.

Whilst the existing general anti-avoidance rules under the ITA covers transactions aimed at avoiding tax that should have been due in Mauritius, the CFC rules would cover schemes involving Mauritius but aimed at eroding other countries’ tax bases. With the introduction of the CFC Rules, Mauritius has implemented the recommendations of the OECD on BEPS Action 3 and has demonstrated its commitment to ensure the tax regime is consistent with EU’s tax good governance standards.