In the 2019 budget, the government introduced several measures to enhance the island’s financial sector. For instance, it aims to improve the relevant infrastructure, encourage the use of new technologies and improve the ease of doing business. Subsequently, the Finance Act 2019 has been passed to implement these measures. The latter introduced the Controlled Foreign Company (CFC) Rules. What are these?
What is a CFC?
A Controlled Foreign Company (CFC) is defined as a company which
- Is not a resident in Mauritius,
- Has more than 50% of its participation rights held either directly or indirectly by a resident company or together with its associated enterprises and
- Includes a permanent establishment of the resident company.
An associated enterprise is an individual or entity in which the company directly or indirectly at least 25% of the participation rights/capital ownership or is entitled to receive at least 25% of its profits. It also includes an individual or entity which holds directly or indirectly a participation in terms of voting rights or capital ownership in the Resident Company of 25% or more.
CFC rules, introduced in Mauritius’s income tax legislation, are designed to prevent a parent company from artificially moving its profits abroad to a controlled subsidiary in a country with a more favourable or lower tax rate. These regulations are regarded by the EU as subsidiary in a country with a more favourable or lower tax rate and they address the deficiencies identified by the EU Code of Conduct Group with regards to the partial exemption system under the specific criterion of substance.
Application of CFC Rules
If a Mauritius tax-resident company is conducting business through a CFC and the Mauritius Revenue Authority considers that the latter’s non-distributed income is the result of non-genuine agreement that has been established for the purpose of obtaining a tax benefit, then that income will be deemed as forming part of the chargeable income of the Resident Company.
Arrangements are considered as non-genuine if the CFC would not own the assets or would not have taken the risks which generate part or all of its income if it were not controlled by a company where the significant people functions are instrumental in generating the controlled company’s income.
When will CFC not be applied?
In many cases, companies will be exempt from the CFC rules. This will occur when
- The CFC’s accounting profits do not exceed more than EUR 750 000, and non-trading income is not more than EUR 75 000. Additionally, it should have effective cybersecurity programs on licensed fintech service providers and a dedicated in-house cybersecurity personnel,
- The CFC’s accounting profits amount to less than 10 per cent of its operating costs for the tax period. The operating costs must not include the cost of goods sold outside the country where the entity is resident for tax purposes and payments to associated enterprises, and when
- The tax rate in the country of residence of the CFC is more than 50 per cent of the tax rate in Mauritius.