Out-Law News 3 min. read

New South Africa double tax treaty will affect Mauritius holding company structures, said expert


A new double tax treaty between South Africa and Mauritius will allow South Africa to tax some repatriations of profit on investments in South Africa structured through a Mauritian holding company, according to Eloise Walker a tax expert at Pinsent Masons, the law firm behind Out-law.com. 

The old tax treaty provided that interest and royalties were taxable only in the state where the owner resided so South Africa could not impose tax on interest and royalties belonging to Mauritian resident companies or individuals. However, the new treaty will allow South Africa to impose a 10 per cent tax rate on interest arising in South Africa to a resident of Mauritius and a 5 per cent tax rate on royalties.

The new treaty does not change the maximum rate of withholding tax on dividends of 5% for companies holding 10% or more of the dividend paying company’s capital. However, the new treaty reduces the rate of withholding tax for other owners from 15% to 10%.

There will be a new 'tie-breaker' clause in the treaty to deal with the situation where a company or other entity appears to be resident in both states. It provides that the tax authorities in each state will endeavour to settle the question by mutual agreement. The Southern African Treasury states that this test has been proposed to become the accepted test of the Organisation for Economic Cooperation and Development (OECD's) Model treaty under its Base Erosion and Profit Shifting (BEPS) initiative. South Africa and Mauritius have signed a Memorandum of Understanding which sets out the factors that the two states will take into account in deciding the country of residence. These include where board meetings take place but also "where the senior day to day management" of the company is carried on.

The old tax treaty was silent on the treatment of property rich companies. The capital gains provision in the new treaty now specifically provides that a state may tax capital gains derived from the disposal of shares deriving more than 50 per cent of their value directly or indirectly from immovable property situated in that state.

Eloise Walker said "The new capital gains tax article only allows South Africa to tax indirect capital gains – ie capital gains on the sale of the shares in a South African company by a non-resident company - where more than 50% of the South African company's value derives from land in South Africa – which would include mines.  It would be much more controversial if this measure applied to indirect sales of companies holding other South Africa assets such as South African businesses. This is the issue that Vodafone had in its well publicised dispute with the Indian tax authorities."

The old tax treaty contained a 'tax sparing' provision, but this has been removed from the new treaty. Under a tax sparing provision, the foreign investor country allows credit for notional taxes foregone by the investment country because of a tax incentive or holiday in the investment country. However there were concerns that the provision in the old treaty was being used for "double non-taxation".

Mauritian holding companies are commonly used as a structure for foreign companies investing in Africa. Tax campaigners such as Action Aid have criticised the use of holding companies in Mauritius, describing the practice as "tax avoidance" suggesting that it "deprive[s] poor countries of hundreds of millions of dollars in tax".  

Walker said that Mauritius is generally chosen for a holding company location for investment in Africa because it has a wide network of double tax treaties with African countries, adding that "for Mauritius this could be a PR disaster in the making - regardless of exactly what the actual impact of the changes may mean, and even if Mauritius remains favourable as a holding company jurisdiction for African investment, the mere fact that the new treaty allows interest and royalty withholding tax at all is going to hurt its reputation as the "Gateway to Africa"".

According to  South Africa's national treasury department the main reason for the renegotiation of the treaty was "to curb abuse" of the old treaty. The new treaty was signed by the two countries on 17 May 2013 and the South African Parliament ratified it on 14 September 2013, but Mauritius did not notify South Africa of its ratification of the new treaty until 28 May 2015. The new treaty will apply from 1 January 2016.

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