Partial Exemption in the Mauritian Tax System: A Legal and Practical Guide

Introduction

Mauritius has established itself as a reputable and competitive international financial centre, underpinned by a robust legal and regulatory framework. A cornerstone of its corporate tax regime is the Partial Exemption System, introduced through the Finance Act 2018 and codified in the Income Tax Act 1995. This regime provides for an 80% exemption on specified categories of income, thereby significantly reducing the effective corporate tax rate for qualifying entities. This article provides a comprehensive overview of the legal foundation, eligibility criteria, substance requirements, and practical considerations associated with the partial exemption regime in Mauritius.

Legal Framework

The legislative basis for the partial exemption regime is found in the Income Tax Act 1995, supplemented by the Income Tax (Partial Exemption) Regulations 2018. The regime was introduced in response to international tax reform initiatives, particularly the OECD’s Base Erosion and Profit Shifting (BEPS) project and the EU Code of Conduct Group’s recommendations on harmful tax practices. Its objective is to ensure that Mauritius remains compliant with international standards while maintaining its attractiveness as a jurisdiction for cross-border investment.

The partial exemption applies to specific categories of income, provided certain conditions are met. Some of these qualifying income include, but not limited to the following,:

• Foreign-source dividends provided such dividends are not deductible in the source country.
• Foreign-source interest income.
• Income from the leasing and provision of international fibre capacity.
• Income from reinsurance and reinsurance brokering activities.

Substance Requirements

To benefit from the partial exemption, companies must demonstrate adequate economic substance in Mauritius. The Income Tax Regulations 1996 outline the following minimum requirements:

• The company must maintain a physical presence in Mauritius, such as a dedicated office.
• It must employ a reasonable number of full-time staff commensurate with its level of activity.
• It must incur operating expenditure in Mauritius that is proportionate to its business operations.
• Core income-generating activities (CIGA) must be conducted in Mauritius.

These requirements are designed to ensure that the company’s presence in Mauritius is not merely nominal but reflects genuine economic activity.

Application and Compliance

The partial exemption is not granted automatically. Companies must elect whether they would opt for partial exemption or not. In the eventuality that a company claim partial exemption, they are also required to maintain comprehensive documentation to substantiate compliance with the substance requirements. Furthermore, income benefiting from the partial exemption cannot simultaneously benefit from a foreign tax credit, necessitating careful tax planning and jurisdictional analysis.

Anti-Avoidance and International Compliance

The partial exemption regime is widely used by Global Business Companies (GBCs) to structure cross-border investments, particularly in emerging markets across Africa and Asia. It is especially advantageous for investment holding companies receiving foreign dividends, treasury centres earning foreign interest, and aircraft leasing firms operating internationally. The regime enhances Mauritius’ value proposition as a platform for regional and global investment.

To safeguard the integrity of the regime, Mauritius has implemented several anti-abuse measures. These include the General Anti-Avoidance Rule (GAAR) under Section 90A of the Income Tax Act, transfer pricing regulations applicable to related-party transactions, and a network of exchange of information agreements with over 40 jurisdictions. The partial exemption regime has been reviewed by the OECD Forum on Harmful Tax Practices and the EU Council and has been deemed compliant with international standards, provided that substance requirements are met.

Challenges and Considerations

While the regime offers significant tax advantages, it also imposes operational and compliance burdens. The cost of maintaining substance—such as office rental, staff salaries, and administrative overhead—can be substantial, particularly for smaller entities. Companies must carefully assess whether the tax savings outweigh the associated costs.

Additionally, the Mauritius Revenue Authority (MRA) has intensified its scrutiny of companies claiming the partial exemption. Taxpayers should be prepared for audits and must maintain robust documentation to demonstrate genuine economic activity. As part of a company’s tax computation, Forvis Mazars often suggest clients to opt for a substance requirement review before claiming partial exemption.

Conclusion

The Partial Exemption System in Mauritius represents a strategic tool for tax-efficient structuring of international business operations. However, its benefits are contingent upon strict adherence to substance requirements and regulatory compliance. As global tax standards continue to evolve, companies must remain vigilant and ensure that their use of the regime aligns with both domestic legislation and international expectations. When applied correctly, the partial exemption regime reinforces Mauritius’ position as a credible and compliant international financial centre.