New South Africa Treaty and its Effects on Mauritius Holding Companies

August 13th 2015
Mauritius has long been a favourite destination for both investment into South African as well as for South African investment abroad, but this may be about to change when the new agreement comes into force on 1 January 2016.

Residence
Currently according to the existing agreement with South Africa and Mauritius where a person other than an individual, for example a company, is tax resident in both Mauritius and South Africa, then it will be deemed to be a resident of whichever state in which the effective management is held.  Therefore currently South African companies that are managed in Mauritius are not taxed in South Africa and vice versa.  However, in future this will now be decided ‘by mutual agreement’ between the two states.  This amendment is set to cause great uncertainty for companies where dual-residence is in question although there is a Memorandum of Understanding which sets out the factors to determine in which state they will be taxed.  There are also concerns over the period of time it will take the two states to reach their agreement.
Mauritius incorporated companies which are entirely managed in Mauritius or elsewhere abroad and South African incorporated companies which are not managed in Mauritius will not be affected by the above changes.

Withholding Taxes

Previously the old tax treaty provided for a zero rate on interest and royalties, taxable only in the state of residence.  However, the new treaty provides for a 10% rate on interest and a 5% rate on royalties in the country where these are earned.
Whilst Mauritius companies no longer provide complete protection from South African withholding taxes it should be noted that the above withholding tax rates are still lower than the normal South African tax rates.

Capital Gains

This was not covered in the previous treaty, but this has been amended to state that a contracting state may tax capital gains derived from the disposal of shares deriving more than 50% of their value directly or indirectly from immovable property situated in the contracting state.
If you are unsure how the above changes are going to affect either existing structures or potential structures please feel free to contact us for more information.