The Republic of Mauritius, Financial Services Center
Roadmap to the future: the Luxembourg/Mauritius DTA
By: Dr Ludovic C. VERBIST

The environment

Mauritius is well known as a high-class tourist destination. In 2002, it has attracted over 720,000 tourists. The other two pillars of the economy are sugar production (around 600,000 tons yearly) and textile exports. Over the past ten years, it has also developed a renowned international financial center.

Mauritius is an island, located in the Indian Ocean, some 1,500 miles off the Eastern coast of Africa. Its population of 1.2 million inhabitants comprises a majority of people of Indian origin, next to descendants of African, Chinese and French immigrants.

It is a country with a mixed jurisdiction, based on English and French laws. Most laws are enacted in English, yet the civil, commercial and civil procedure codes are based upon French law. The Judicial Committee of the Privy Council of the Queen in London is the Court of last resort.

The international Financial Center

Mauritius has evolved into a successful Financial Services Center. The advantages offered by Mauritius, some unique, explain the rapid expansion of the Financial Services Sector. Let us name a few:

Precise and permanent legal, judicial and administrative framework; the rule of law is well-established and respected, in line with Anglo-Saxon tradition

Political stability

Supervision of the Financial Services Sector by the Financial Services Commission (FSC)

Not and never been on the OECD nor GAFI blacklist

Only two hours time difference with mainland Europe (three during the Northern hemisphere's winter)

Fluency in both English and French, either of these being allowed in original documents

Long term commitment and strong governmental support to the offshore sector

Excellent telecommunications

Easy access: daily direct flights from and to major European cities, as well as many countries within the Indian Ocean area

No foreign exchange controls

Large number of Double Taxation Agreements (DTA), both with countries within the Indian Ocean area and with European countries

Growing number of Investment Promotion and Protection Agreements (IPPA) with several countries

Mauritius is part of and a leading member of regional governmental organizations, such as COMESA, SADC and IOR-ARC

Large part of the economy involved with international trade (import and export) and increasingly commercial hub between Asia, Africa and Europe

The Financial Services Sector has always been regulated, formerly by the MOBAA. The new regulatory regime in Mauritius (in place since December 2001) is established along the lines increasingly adopted internationally, where rightly a separation must exist between the promotion services and the regulatory services. This was not the case under the MOBAA, but is now achieved by having both the Financial Services Promotion Agency (FSPA) and the Financial Services Commission (FSC). Although there were some infancy problems at first, especially due to a lack of well-trained people at the regulator's level, this is now gradually being fixed.

Selecting a financial jurisdiction

The choice of a financial offshore center is not only based upon the tax laws. Among the various facts considered are:

the level of service and related costs

local legislation

government's policy towards investors

the number of double taxation agreements (DTA) in force

professionalism and discretion. Bank secrecy and confidentiality are obviously needed. This does not prevent or replace due diligence and to know one's client. But once the initial acceptance procedure has been completed, strict confidentiality must be ensured

competitivity: covering all aspects, including namely legislation, pricing and level of services and adding new products, as international needs arise. So for example investment fund legislation, insurance and reinsurance, maritime registry, private banking and asset management have been introduced and are being refined

taxation: the level of taxation must remain low and attractive, as is the case of Mauritius at present. It must be pointed out that low or zero taxation is no longer a factor retained by the OECD as being proof of harmful tax competition.

Mauritius

Compared to European levels, operating or administration costs and professional fees are modest in Mauritius. It has a good reputation and is well regulated. Mauritius has never been included on any blacklist. In addition, the recent conclusion of DTA with European countries shows its good-standing among these countries. It should also be pointed out that Mauritius has always been a regulated jurisdiction, since its inception, which is by far not the case elsewhere.

Mauritius is growing into one of the most attractive financial centers. Indeed, it offers one of the most attractive environments. Like Luxembourg, Mauritius is the jurisdiction where there is a combination of a company which can use the double taxation agreements (DTA) next to a zero tax company. GBL1 on their own are not attractive enough to develop the sector. In fact, most countries have such a type of company, allowing dividends to flow through, little or not taxed. All so-called tax heavens have the equivalent of GBL2. The combination of the two is rather unique and presents great opportunities in today's world environment.

GBL1 and GBL2

Besides setting up a Trust, companies can be incorporated in Mauritius by non-residents. The activities performed by non-residents are called "global business activities". Some of these activities, as defined by the law, require a category 1 license (GBL1 - banking, investment funds, insurance, ...); for the others, a category 2 license will be issued (GBL2); these companies are not subject to any taxation and are in fact comparable to the "International Business Company" found in other (offshore) jurisdictions.

GBL1 can benefit from DTA and are taxed on their income at the rate of 15%. They can deduct the foreign taxes paid (foreign tax credit), up to the amount of tax due in Mauritius. In the absence of proof, the amount of foreign tax paid is presumed to be 80% of the Mauritius tax (deemed foreign tax credit). The effective amount of taxes paid is therefore between 0% and 3%. There is no capital gains tax, and never any withholding tax on distributed dividends and interest paid to non-residents.

To date, Mauritius has signed and ratified twenty-six DTA. Other DTA have been signed and not yet ratified; some more are under negotiation. Most of these DTA present uniquely attractive features. The one with India is widely known and has been important in the emergence of Mauritius as an Offshore Centre. The agreements with the People's Republic of China (China), Singapore and Indonesia are the best these countries have ever entered into. In addition, China, India and Indonesia, rank amongst the five countries highlighted by the World Bank as those, which will experience high growth rates and economic activities. Mauritius should consequently prove itself as a major investment route into these countries.

The Luxembourg / Mauritius Double Taxation Agreement (DTA)

The taxation rate of the Luxembourg "Société de Participation Financière" (SOPARFI) amounts to 30.38% of its income, including local taxes, although wide exemptions are possible under strict conditions (shareholding held for more than twelve months, at least of 25% of shares, ...). There is a withholding tax of 20% on dividends and 12% on royalties paid by the SOPARFI; capital gains are taxed at 30%. There is no withholding tax on interest payments.

The DTA was ratified on September 12, 1996. Under the DTA, withholding rates on dividends out of Luxembourg are reduced to 10% and to 5% in case of at least 10% ownership of the affiliate. There is no taxation on royalties.

The added advantage of this DTA resides in the fact that dividends received by a Luxembourg SOPARFI from a company resident in another European Union State and mentioned in article 2 of the Directive 90/435/CE of 23 July 1990 are fully exempt from tax, if certain other general conditions are met. Similarly, dividends distributed by a Swiss company to a SOPARFI are exempt under the DTA, if the Luxembourg Company has held at least 25% of the shares for at least two years. A further distribution to the Mauritian holding company would only be subject to a withholding tax of 5% in Luxembourg.

Investment Funds

Mauritius is already established as a platform for offshore funds, with a large number of these funds being listed in Mauritius and/or on major international stock exchanges such as London, Dublin and Bermuda. As of today, there are more than 200 funds with a net asset base of over US$ 5 billion. The bulk of these investments have been directed towards India, China and South Africa. A thorough review of the existing laws is currently being performed. A new Act should be voted by the Parliament before the end of 2003.

Trusts

Next to incorporating companies, trusts can also be set up under the Mauritius law. Besides some known features such as the office of the protector, letters of wishes, no forced heirship rules ..., a very attractive feature is offered. The law provides for a separation of the functions of a managing trustee from a custodian trustee. The former will be responsible for the running of the trust, while the latter will be exclusively responsible for the maintenance of the assets of the trust.

Non-resident Trusts are exempt from any taxation, as are their beneficiaries. Resident Trusts are taxed at the rate of 15% on their chargeable income and they can also benefit from DTA; a withholding tax of 15% is levied on their distributions.

Taxation of Savings Directive

An additional advantage which is being discovered in relation to Mauritius concerns the European Union taxation of savings directive, Mauritius offers attractive solutions. Indeed, thanks to its DTA with Luxembourg, interest payments to a Mauritius GBL1 are not subject to any withholding tax in Luxembourg. This will not be affected by any changes currently brought into the Luxembourg withholding rates on interest payments.

This also increases the attractiveness of Mauritius as an ultimate holding company jurisdiction. Several wealthy families have already established their Mauritius companies or trust as the ultimate entity in their international tax structure.

Integrated Resort Schemes

A recently enacted law provides for the granting of permanent residency status to any foreigner (and his relatives) investing an amount of not less than US$ 500,000 in some Qualifying business activities, namely such as Manufacturing, Operational headquarters of multinational companies, Hotel, tourism and related services, Freeport operations, Financial Services or Information Technology. The permanent residency status can also be obtained through an investment of at least US$ 500,000 in quality housing in Mauritius, developed especially with a view towards wealthy persons living abroad.

Cyber Island

Mauritius aims to become the regional electronic hub for businesses and government entities within already established trading communities such as SADC, COMESA. It is envisaged that the Financial and Freeport sectors will play crucial roles in terms of attracting investment and providing a logistical platform for e-commerce. There is a good telecommunications infrastructure and a significant number of operators in the transport, business and financial services, trade and publishing. The country occupies a key position in the field of logistics and distribution.

The Mauritius government is also planning to implement a "green visa concept", which allows foreign companies looking to set up a venture in Mauritius to bring in as many IT experts as they need without complicated red tape procedures.

The Ebène Cyber City Project is being set up by Business Parks of Mauritius Ltd (BPML). It will be the IT Center of Mauritius, and be operational before end of 2003. The new city will have its own direct international connectivity, and in order to accelerate the development of the Cyber-City, the Government decided in July to install a satellite reception station by November to ensure adequate connectivity. Adequate capacity at now competitive rates is being provided, especially since the recent launch of the SAFE underwater cable.

Conclusion

Mauritius is a credible investment route among international fund managers. With a network of treaties that provides interesting investment routes, Mauritius is bound to see an increase in offshore activities. The government of Mauritius is sparing no effort to see to it that Mauritius keeps enhancing its image as a business center and as a bridge between countries in Africa, Asia and Europe. The treaty network is expected to become even more attractive, with many treaties under negotiation or awaiting signature.

Dr Ludovic C. VERBIST, Ph.D.
A.A.M.I.L. Global Financial Services Ltd
Managing Director
8, Place du Bourg-de-Four
CH 1211 Geneva 3 Switzerland
Tel: +41 (22) 818 6100
Fax: +41 (22) 818 6101
Web: www.aamil.com E-mail: lverbist@aamil.com