The New Double Tax Agreement Between South Africa and Mauritius - Effect on Business
30 May 2013
Posted by: Author: Aneria Bouwer
Author: Aneria Bouwer (Bowman Gilfillan)
news of the revised double tax agreement between South Africa and
Mauritius ("the new DTA”) on Monday, 27 May, rang alarm bells both
for Mauritian companies investing into South Africa as well as for South
African companies expanding offshore via Mauritius.
are these changes and how will they impact on the use of Mauritian companies
for investment by non-residents into South Africa, or for foreign investment by
main changes to the DTA relate to dual residence for persons other than individuals,
withholding taxes (interest, dividends and royalties) and capital gains.
residence for persons other than individuals
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. A South African incorporated company which is
effectively managed in Mauritius, would thus in terms of the current tiebreaker
deemed to be tax resident in Mauritius and not in South Africa. South
Africa would thus lose its "taxing rights” which apparently does not sit well
new dual-residence tiebreaker 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.
is a very unusual tiebreaker and will create substantial uncertainty for
companies faced with the dual-residence conundrum. They would have to
rely on the tax authorities in the two countries to not only reach agreement on
this issue, but to do so in an expeditious manner to avoid leaving the taxpayer
dangling in mid-air. Should the two authorities not be able to reach
agreement, the taxpayer will not be entitled to rely on the DTA.
a result, at least one article on the new DTA warned taxpayers to be "wary of”
Mauritian structures. However, this specific issue only arises in the
context of dual resident taxpayers other than individuals. 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
has thus really changed for most Mauritian incorporated companies – they should
(as is also currently the case) take care to ensure that they will indeed be
effectively managed in Mauritius.
The current DTA provides for the country of residence of the recipient of
interest to have the taxing rights if such recipient is the beneficial owner of
the interest. A Mauritian lender would thus not be subject to the new
South African withholding tax on interest (once it comes into effect) if the
Mauritian lender is the beneficial owner of the interest. However, the new DTA
does not provide for an exemption but instead caps the tax on interest which
may be imposed by the source country, to 10% of the gross amount of the
the above example, South Africa will be entitled to impose a 10% withholding
tax on interest paid to the Mauritian lender. Any loans from a Mauritian
lender would thus need to be reconsidered to determine the impact of the South
African withholding tax on interest.
does not currently impose a withholding tax on interest paid by so-called GBL1
or GBL2 companies. South African lenders to Mauritian borrowers would
thus as a general rule not be negatively affected by the amendment of the
interest article, while Mauritian lenders to South African borrowers would on
the other hand be prejudiced.
The amendment of the article dealing with dividends constitutes one tiny little
silver lining: In terms of the current DTA, the South African withholding tax
on dividends will be reduced to 5% if the beneficial owner is a Mauritian
company which holds at least 10% of the capital of the company paying the
dividends, while in all other instances, the dividends tax may not exceed
15%. The fall-back position has now been amended to reduce the maximum
dividends tax rate to 10%.
The current exemption from royalties withholding tax has been replaced with a
5% maximum rate.
current DTA provides protection against South African capital gains tax ("CGT”)
for a Mauritian company owning shares in a South African company holding
immovable property. However, the capital gains article of the new DTA now
specifically provides that a country may tax gains derived from the alienation
of shares deriving more than 50% of their value directly or indirectly from
immovable property situated in such country.
this the end of the road for Mauritian holding companies?
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.
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.
this mean that foreigners would be better off investing directly into South
Africa? No, not necessarily – the withholding tax rates provided for in the new
DTA are still lower than the normal South African withholding tax rates.
Of course, a headquarter company enjoys exemptions from these withholding
taxes, but a headquarter company cannot be used for investment into South
Africa. Foreign investors would thus still be better off investing into
South Africa via Mauritius, or they could look for another suitable
jurisdiction to act as holding company jurisdiction for investment into Africa,
including South Africa.