The Reality of Mauritian Tax Residency

It’s more about Substance than Sunsets

Ah, Mauritius… tropical beaches, island living, and tax benefits. What’s not to love? Well, not so fast — that third point might need a closer look. Many successful entrepreneurs are drawn to Mauritius because of perceived tax benefits, but it’s not always as simple as most people think.

Imagine board meetings and quarterly suntans combined with tax savings. Sounds tempting, right? But many international business owners stumble when it comes to setting up corporate structures in Mauritius. One reason for this is that many do so with the sole aim of tax benefits, rather than assessing the real business reasons. Saving on tax should only be an added benefit.

If your aim is to move business operations to Mauritius for the sole purpose of tax benefits, then we’d err on the side of caution. With increased focus on lower tax-countries, the principal purpose of the entity and substance requirements are some of the complexities to consider. It’s not always as simple as it’s commonly assumed to be.

What’s required?

The thing is, being incorporated in Mauritius does not automatically make a company a tax resident in Mauritius. It is often not enough to only meet local Mauritian tax legislation, it is also essential to assess the possible impact of international tax legislation where applicable, too. This is critical if you have any foreign influence such as shareholders and/or directors.

In terms of Mauritian law, a company is a tax resident in Mauritius if it is incorporated in Mauritius or, if it has its Central Management and Control (CMC) in Mauritius. If the locally incorporated company has foreign shareholders or directors, it is critical to assess the impact of those foreign jurisdictions’ tax legislation, with specific reference to tax residency. In these cases, it is highly likely that the Place of Effective Management (PoEM) of the local entity would be used to determine the tax residency of the company.

Meet Dave

Consider Dave’s situation. He believed he had properly established his business in Mauritius by meeting all local requirements, including having a local Management Company and attending regular board meetings as instructed. However, Dave was unaware that managing his Mauritius entity from South Africa inadvertently made it a South African tax resident, which exposed him to significant and potentially costly tax risks.

Luckily, Dave found CFO Insight Mauritius just in time. We got Dave primed for PoEM providing him with an understanding of all the necessary requirements and implementing solutions that assured his compliance.

What’s the difference?

CMC and PoEM are central concepts when it comes to determining tax residency. The definitions of both can get quite lengthy and complicated, but in layman’s terms the CMC is basically where your board of directors sits. This would in all likelihood be the place where management and control are exercised, and would therefore be the place of tax residency when only considering CMC.

However, only considering local legislation, especially if your Mauritius entity has foreign influence is not enough.  Place of Effective Management (PoEM) of the entity becomes a critical consideration, and things tend to get a little sticky here. PoEM is a bit more complex than just the location of the board, and takes a broader, more holistic assessment of where “the shots are called.”

Things like the day-to-day management, executive management, and shareholder influence are taken into account when it comes to determining PoEM, amongst other things.  Where are the decisions being made, and by who? Different countries also have different ways of looking at PoEM, which gives way to a range of potential pitfalls.

What’s the problem?

Determining PoEM is a holistic approach to truly identify “who is calling the shots” and from where this is being done. This is certainly much wider than the concept that Board of Directors control and manage a company (CMC). If your local company has decision-makers based abroad and PoEM is relevant, relying solely on the concept of Board control could expose you to significant tax risks. The idyllic image of relaxing on the beach doesn’t quite factor in the tax implications, does it?

The way forward

By being primed for PoEM, you’ll be equipped with a thorough understanding of exactly what is required of you and supplied with the substance necessary to meet those requirements. We’re here to help you along the way by mitigating risks and making sure you are fully informed. If you’d like to learn more about PoEM and how it affects your business, click the link below and we’ll send you more information.

Get Primed for PoEM