Move for Mauritius

In 2007, Appleby opened for business in The Republic of Mauritius – its fifth offshore location, joining Bermuda, the British Virgin Islands, the Cayman Islands and Jersey. The development was designed to better serve institutional clients looking to invest in the emerging economies of Africa and Asia, including India and China.

By Malcolm Moller, managing partner of the Mauritius office, Appleby

The Republic of Mauritius is a parliamentary democracy modelled on the British system. The separation of powers among the three branches of the Government, namely the Legislative, the Executive and the Judiciary, is embedded in the constitution. The President is the Head of State, while the Prime Minister has full executive power and is the head of Government. The National Assembly comprises 70 members, out of which 62 are elected every five years during parliamentary elections. In addition to its free press, Mauritius’s independent judiciary and the firmly established rule of law are the most significant features of its vibrant democracy. Mauritius has a composite legal system consisting of British common law practices and the French Napoleonic Code. During the French period, the island’s legal system was governed by the French Napoleonic Code, which remained in force under British rule. This entailed subsequent amendments in civil and criminal procedural laws, as well as in company law. Although Mauritius has been a Republic since 1992, the country is still a member of the Commonwealth, and the Privy Council in London is the Supreme Court of Appeal.

Double taxation benefits

In recent decades, the global business industry in Mauritius has been quite active, mainly for inbound investment into India, Africa and China. Since the double taxation treaty between Mauritius and India (the Mauritius treaty) is more favourable as compared to other jurisdictions, Mauritius has become ‘number one’ for providing foreign direct investment in India. As a result, many investment and/or hedge funds were incorporated in Mauritius for the purposes of investment in India. For example, the income of a Mauritius fund will be subject to income tax in Mauritius at the rate of 15 per cent. However, the Mauritius fund will be allowed a credit for foreign tax on its income that is not derived from Mauritius against the Mauritius tax computed by reference to that same income.

If no written evidence is presented to the Mauritius Commissioner of Income Tax showing the amount of foreign tax charged, the amount of foreign tax will be conclusively presumed to be equal to 80 per cent of the Mauritius tax chargeable with respect to that income, which would reduce the rate of tax effectively to three per cent. Capital gains derived from the sale of securities held by the Mauritius fund will not be subject to Mauritius tax, and any dividends and proceeds paid by the Mauritius fund to the shareholders will be exempt from Mauritius withholding tax.

The Mauritius fund will register with the Securities Exchange Board of India (SEBI) as a Foreign Institutional Investor-sub-account. Accordingly, it will primarily earn income from:

Dividend income;
Interest income;
Capital gains realised on transfer of investments.

Under the Mauritius treaty, any capital gains that the Mauritius fund realises on transfer of investments in Indian securities would not be liable to tax in India so long as the Mauritius fund does not have a permanent establishment in India – to which its investment holdings may be attributed. Accordingly, based on the Mauritius treaty, the Mauritius fund should be exempt from paying tax in India on capital gains realised on the transfer of investments in Indian securities.

The Mauritius treaty has always been, and continues to be, a subject of controversy. While the Supreme Court of India in Azadi Bachao Andolan & Anr 263 ITR 706 has upheld the use of Mauritius to invest into India, media reports nevertheless bring up news items that suggest further challenges in investing though Mauritius. Mauritius has also tightened its tax residency requirements and formulated strict anti-money laundering laws. In addition, a Memorandum of Understanding (MoU) signed between India and Mauritius provides for effective exchange of information in the detection of fraudulent market practices. Certain procedures have been established for the effective exchange of information, both on request and on a voluntary basis, about suspicious securities dealings between the two countries. It should be noted, however, that the intention behind the MoU is to track down transactions tainted by fraud and financial crime, not to target bona fide legitimate transactions. Until the two nations decide to re-negotiate the Mauritius treaty, Mauritius shall continue to be a recommended and effective jurisdiction for inbound investments into India and shall continue to be the number one jurisdiction in providing Foreign Direct Investment in India.

Collective investment schemes or closed-end funds

Any collective investment scheme or closed-end fund (individually a ‘scheme’, or collectively ‘schemes’) wishing to be approved, registered with, recognised and/or licensed by the Financial Services Commission under the Securities Act 2005 must first apply to the Commission for authorisation as a collective investment scheme or closed-end fund under the Securities Act in the manner set out in the Securities Regulations 2008, and obtain a Category one Global Business Licence (GBL1) under the Financial Services Act 2007 (for global schemes). The business purpose of these schemes is making collective investment of funds in a portfolio of securities, or other financial assets, real property or non-financial assets, whose operation is based on the principle of diversification of risk for the benefit of Global Business Fund members.

The present regulatory framework now allows collective investment schemes and closed-end funds to be constituted, under Mauritius Law, as:

A company limited by shares;
A trust (including unit trusts); or
Any other legal entity prescribed or approved by the Commission and that may operate as a Collective Investment Scheme: a scheme constituted as a company, a trust (including a unit trust), or any other legal entity prescribed or approved by the Commission, whose:

Sole purpose is the collective investment of funds in a portfolio of securities, or other financial assets, real property or non-financial assets as may be approved by the Commission;
Operation is based on the principle of diversification of risk;
That has the obligation, on request of the holder of the securities, to redeem them at their net assets value, less commission or fees; and where the participants do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions in respect of such management.

Collective investment schemes
include closed-end funds whose shares or units are listed on a securities exchange. These are an arrangement or a scheme, other than a collective investment scheme, constituted in such legal form as may be approved by the Commission, and whose object is to invest funds, collected from subscribers during an offering made under the Securities Act, or from sophisticated investors, in a portfolio of securities, or in other financial or non-financial assets, or real property, as may be approved by the Commission.

Closed-end funds usually have a fixed share capital and typically restrict investors’ rights to call for their shares to be redeemed at net asset value by the fund. However, a close-ended fund may also be listed on the Mauritius Stock Exchange, thereby preventing any lock-in by enabling investors to buy and sell shares in the market.

Recognition of foreign schemes

The Commission may, on application, also recognise collective investment schemes established in a foreign country. This recognition may be subject to such conditions that the Commission considers necessary or desirable for the protection of participants in the scheme. It is also possible to constitute an umbrella fund under each of the foregoing structures, allowing investors to switch their investment from one sub-fund to another without redeeming shares or units. Under the current flexible approach, a Mauritius Global Business Fund can also be set up as a sub-fund under a non-Mauritius-based umbrella fund, or as a feeder fund for a non-Mauritius-based master fund.

Ongoing regulation

The Commission requires all schemes to file yearly financial statements and audited annual reports, which must be prepared in accordance with IFRS and audited in accordance with the International Standards on Auditing or any other recognised international accounting standards, as may be approved by the Commission, or as may be issued under the Financial Reporting Act 2004 by an audit firm approved by the Commission. The Commission has issued a Circular Letter-CLOIO205 dated 22 February 2005 advising that a GBLl corporation may, without the prior approval of the Commission, prepare its audited financial statements in accordance with the UK's Generally Accepted Accounting Principles (GAAP), US GAAP, and South African GAAP. In addition to the published reports and reporting requirements, the Commission may request any other information, and has the right to inspect the Global Business Fund’s books and records.

Under the present regulatory framework, the central administration of any Global Business Fund must be situated in Mauritius, and requires that the schemes keep and make available, or carry out, the following in Mauritius:

Have at least two directors, resident in Mauritius, of sufficient caliber to exercise independence of mind and judgment;
Maintain at all times their principal bank account in Mauritius;
Keep and maintain accounting records at a registered office in Mauritius;
Prepare statutory financial statements and/or cause to have such financial statements audited
in Mauritius.

The current regulatory regime also requires that schemes, subject to the prior approval of the Commission, appoint duly licensed CIS Administrators, managers and custodians and auditors.

Investment restrictions and exemptions

The restrictions on investments are as follows:

Purchase a security (other than a government debt security) representing more than five per cent of its net asset value (NAV) after the purchase;
Purchase a security representing more than 10 per cent of a class of securities of that issuer;
Purchase real estate;
Purchase a mortgage;
Purchase a security for the purpose of exercising control or management of the issuer of the security;
Purchase an illiquid asset representing more than 10 per cent of the net assets of the collective investment scheme after the purchase;
Purchase or sell derivatives (except for a specialised CIS);
Purchase or sell a physical commodity, including precious metals (except for a specialised CIS).

Restriction on investment practices are:

To borrow money or provide for the creation of any charge on assets except in the two following situations: the transaction is temporary for the redemption of securities of the CIS and where the borrowings do not exceed five per cent of the NAV after the transaction, or the charge secures a claim for the fees and expenses of the custodian or a sub-custodian;
To subscribe securities offered by a company under formation;
To underwrite or market securities of any other issuer;
To lend money, securities or other assets;
To guarantee securities or obligations of another person;
To purchase or sell securities other than through market facilities where the transaction price is negotiated on an arms-length basis;
To purchase a security from, or sell a security to, the CIS manager or the custodian, or an officer of the CIS manager or the custodian, or an affiliate of a CIS Manager or Custodian unless the purchase from, or sale to, the affiliate is carried out at arm’s length.

Exemptions

The above restrictions on investments and investment practices shall be entirely exempted for the following:

Closed-end funds: a scheme whose object is to invest funds, collected from subscribers
during a public offering under the Securities Act, or from sophisticated investors in a portfolio of securities, or in other financial or non-financial assets;
Professional funds: a scheme offering its shares to either sophisticated investors, or to subscribers through private placements;
Expert funds: a scheme subscribed to by expert investors – that is, either an investor who makes an initial investment, for his own account, of no less than US$ 100,000; or a sophisticated investor.

Part exemption of the above restrictions applies to the specialised fund, a scheme authorised by the
FSC as one that invests in real
estate, derivatives, commodities or any other product authorised by the Commission. Part exemption is dealing in real estate, derivatives and physical commodities (including precious metal), as well as any other product as authorised by the Commission.

Taxation

All schemes are liable to pay Mauritius income tax at 15 per cent, but the successful application of foreign tax credits can effectively reduce the rate to three per cent or nil, in given circumstances. In addition, schemes that are centrally controlled and managed and are tax resident in Mauritius may, upon written approval from the Commissioner of Income Tax, benefit from any one of over 33 double taxation agreements. There is no withholding tax on dividends, capital gains or interest, and no stamp duty leviable. In the appropriate circumstances, a management or advisory company may also be established so as to take advantage of the beneficial tax regime.

Application

All applications for registration must be made through a licensed management company and require
the following:

Constitution (three copies);
Notice of first directors, secretary, management shareholders and location of registered office;
Consent forms of directors, management shareholders and secretary KYC documentation on the directors, management shareholders and promoters;
Other information that is necessary for the establishment of a company;
Letters of reference from banker, lawyer, accountant (letters of reference may be dispensed with if the promoter is itself a fund manager authorised in another jurisdiction. In such cases, the letters of reference may be replaced by proof of authorisation in the other territory, and a copy of the promoter’s latest accounts. Short CVs of the persons involved in key positions in the Mauritian company are needed);
Legal certificate from a local law practitioner;
Name and address of the local representative;
Set of constitutive documents of the scheme (i.e., prospectus signed by two directors, custodian agreements, sub- custodian agreement, investment management agreement, administration agreement, investment advisory agreement, secretarial and registrar agreement, etc.);
Name and particulars of expatriate staff if required;
Brief track record of applicant and detailed business plan.

Typically, the incorporation and registration of a company and application for a GBL1 will take between three and six weeks.

Investment opportunities

The global business industry in Mauritius is quite active, mainly for inbound investment into India,
Africa and China. Mauritius is a member of the World Trade Organisation (WTO), the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC) – and it has the effective commercial and legal infrastructure required to support he development of a global business network.

Although there are often rumblings in the media about the possible challenges of investing in India through Mauritius, the double tax treaty is still effective, and various mutually-beneficial strides towards targeting fraudulent transactions and financial crime have been made, including the effective exchange of information. Mauritius has also tightened its tax residency requirements and formulated strict anti-money laundering laws. Until the two nations decide to re-negotiate the Mauritius treaty, Mauritius will continue to be a recommended and effective jurisdiction for inbound investments into India, and continue to be the jurisdiction of choice for providing foreign direct investment in India. Whether utilising a collective-investment scheme, a closed-end fund or a myriad of other investment vehicles, Mauritius is an offshore jurisdiction offering dynamic opportunities for investment in the African and Asian markets.

Malcolm Moller is managing partner of the Mauritius office of Appleby. He can be contacted at: mmoller@applebyglobal.com