The Partial Exemption Confusion: The Alteo Case and the Meaning of CIGA

In Alteo Energy Ltd and another v Director-General, Mauritius Revenue Authority (Mauritius) (2026, UKPC 27), the board dismissed the appeal by the Mauritius Revenue Authority “MRA” and upheld the position of Alteo in relation to the partial exemption claimed on its interest income for the year of assessment 2019/20.

The judgment provides important clarification on the meaning of “core income generating activities” “CIGA”  under Regulation 23D(2) of the Income Tax Regulations 1996.

In particular, the Privy Council made clear that “core income generating activities” should not be equated with the company's core or principal business activities. A company does not have to be principally engaged in money lending or financing merely because it earns interest income.

The partial exemption regime is governed by section 7 of the Income Tax Act 1995, read together with Item 7 of Sub-Part B of Part II of the Second Schedule.

Item 7 provides for an 80% exemption on qualifying interest income, subject to the conditions relating to the substance of the company's activities prescribed under Regulation 23D (2) of the income tax regulations.

The relevant conditions require a company to:

1. carry out its core income generating activities in Mauritius;
2. employ, directly or indirectly, an adequate number of suitably qualified persons to conduct its core income generating activities; and
3. incur a minimum expenditure proportionate to its level of activities.

Regulation 23D(2)(b) further provides that, for the purpose of Item 7(b), “core income generating activities” includes:

agreeing funding terms, setting the terms and duration of any financing, monitoring and revising any agreements, and managing any risks.

Whilst Regulation 23D(2) contains three substance conditions, the dispute in Alteo centred almost entirely on the first requirement, namely the meaning and scope of CIGA.

Alteo background

Alteo Energy Ltd is a Mauritius-incorporated company forming part of the Alteo Group.

For the relevant year, the company's principal activities were in the energy sector, including the production of electricity from bagasse and coal. Alteo also earned interest income from including interest on a loan to Coal Terminal Management Ltd, on car loan and its treasury account. For the year ended 30 June 2019, the total interest income amounted to approximately Rs 2.15 million. By comparison, the company's total income was approximately Rs 853.95 million, meaning that interest income represented only about 0.25% of its total income. The company's principal source of income was its electricity business, with turnover from the sale of electricity amounting to approximately Rs 817.2 million.Alteo claimed the 80% partial exemption on its interest income.

Key Issue

The principal issue throughout the proceedings was whether the first condition under Regulation 23D(2) required the activities generating the interest income to constitute the taxpayer's principal or core business activities.

The MRA argued that, because Alteo's principal business consisted of generating and selling electricity rather than financing or money lending, the company failed to satisfy the CIGA requirement.

According to the MRA, the activities generating the relevant interest income had to be core business activities of the taxpayer itself.

Alteo disagreed.

Alteo argued that the legislation did not impose a requirement that financing or money lending constitute the company's principal business.

The relevant question was whether the activities generating the interest income were carried out in Mauritius. There was no additional statutory requirement that those activities also constitute the taxpayer's principal business operations.

The central issue therefore became the meaning of the expression:

"core income generating activities"

and, more particularly, the significance of the word:

"core".

Assessment Review Committee decision

The Assessment Review Committee "ARC" adopted a restrictive interpretation of Regulation 23D(2) and upheld the position of the MRA.

The ARC considered that the expression "core income generating activities" necessarily required the activities generating the interest income to form part of the taxpayer's core business operations.

The Committee observed that more than 99% of Alteo's income was generated through its electricity business and that only a small proportion of its income was derived from interest.

The ARC therefore regarded the earning of interest as merely incidental to Alteo's principal commercial activities.

In the ARC's view, financing-related activities such as agreeing funding terms, establishing financing arrangements, monitoring agreements and managing financing risks could not constitute Alteo's CIGA because financing was not part of the company's core business model.

Accordingly, the ARC concluded that Alteo had failed to satisfy the first limb of Regulation 23D(2) and was therefore not entitled to the partial exemption.

Supreme Court Decision

The Supreme Court overturned the ARC's determination and adopted a broader interpretation of the legislation.

The Court emphasised the well-established principle that tax legislation should be interpreted according to the ordinary meaning of the words used by Parliament and that additional requirements should not be implied where none appear in the statutory text.

The Court observed that neither Item 7 nor Regulation 23D(2) expressly requires the activities generating the interest income to form part of the taxpayer's principal business.

Particular significance was placed on the wording of Regulation 23D(2)(b), which provides that CIGA "includes" certain listed activities.

According to the Court, the use of the word "includes" rather than "means" demonstrates that the list is not exhaustive and cannot be treated as limiting the availability of the exemption to financing companies.

The Supreme Court therefore rejected the proposition that Item 7 was intended to apply only to entities principally engaged in financing activities.

The Court concluded that the legislation does not require interest income to arise from a taxpayer's principal business activity and that no such condition could be read into the statutory provisions.

The matter was accordingly remitted for reconsideration on the basis of the Court's interpretation.

Privy Council Decision

The Privy Council ultimately dismissed the MRA's appeal and confirmed that Alteo was entitled to the exemption. However, whilst agreeing with the outcome reached by the Supreme Court, the Board expressly stated that its reasoning differed in several respects.

What does "Income" mean?

The Board first addressed the meaning of the word "income" within the expression "core income generating activities".

The Supreme Court had adopted a broader interpretation which looked generally at the income generated by the company's activities.

The Privy Council disagreed.

According to the Board, the word "income" in Regulation 23D(2) refers to the category of income capable of benefiting from the exemption under the relevant paragraph of the Schedule.

For Item 7, that income is interest income.

The relevant enquiry is therefore not:

"Where does the company generate its total income?"

Rather, the correct question is:

"What activities generate the interest income in respect of which the exemption is being claimed?"

What Does "Core" Mean?

Having clarified the meaning of "income", the Board then turned to the significance of the word "core".

The MRA argued that the word "core" meant that the activities generating the interest income must themselves be core business activities of the taxpayer.

The Board rejected that interpretation.

The Privy Council considered that the MRA's approach impermissibly conflated two different concepts:

the taxpayer's core business activities; and

the taxpayer's core income generating activities relating to the income benefiting from the exemption.

The Board explained that the word "core" qualifies the activities necessary to generate the relevant income. It does not require those activities to be central to the taxpayer's overall business operations.

A company's principal business may be electricity generation, agriculture, manufacturing, trading or another commercial activity. That fact alone does not prevent the company from having CIGA connected with the generation of interest income.

The Board therefore rejected the proposition that only financing companies, money lenders or similar entities could satisfy the CIGA requirement. 

The significance of the word "Includes"

Particular importance was also attached to the wording of Regulation 23D(2)(b).

The regulation provides that CIGA "includes" activities such as:

• agreeing funding terms;
• setting the terms and duration of financing;
• monitoring and revising agreements; and
• managing financing risks.

The Board considered it significant that Parliament chose the word "includes" rather than "means".

The provision therefore identifies examples of activities relevant to the generation of interest income but does not create an exhaustive definition.

Nor does it transform Item 7 into an exemption available exclusively to financing businesses.

The examples illustrate activities capable of constituting CIGA. They do not impose an additional requirement that financing must form part of the taxpayer's principal business.

The importance of the Statutory Exclusions

Another important aspect of the Board's reasoning concerned the specific exclusions contained in Item 7.

The legislation expressly excludes a number of categories of taxpayers from the benefit of the exemption, including banks and various other regulated financial institutions.

The Board considered that these exclusions were significant because they demonstrated that Parliament had carefully identified the categories of taxpayers which were not intended to benefit from the exemption.

If Parliament had intended to restrict the exemption only to financing companies or money lending businesses, it could easily have done so.

The absence of such a restriction reinforced the conclusion that the MRA's interpretation could not be reconciled with the wording of the legislation.

The OECD Substance Requirement

The Board further considered the purpose of Regulation 23D.

The substance requirements were introduced against the backdrop of the OECD's substantial activity requirements and the recommendations emerging from international initiatives addressing harmful tax practices.

Before 2019, Mauritius had a preferential tax regime applicable to Global Business Companies, including the deemed foreign tax credit regime.

In the 2018–2019 Budget, the Government announced the abolition of that regime and the introduction of a new harmonised fiscal regime for domestic and Global Business Companies, together with a specific regime for banks.

The legislation implementing those changes took effect from 1 January 2019.

It was in this new legislative framework that Item 7 and Regulation 23D(2) operated for the purposes of the Alteo case.

The importance of this background is that the partial exemption regime was not framed as a benefit exclusively reserved for traditional financing companies or only for GBCs.

The legislation was framed by reference to the type of income and the substance of the company's activities.

From that perspective, Regulation 23D is concerned with establishing a genuine nexus between the tax benefit claimed and the economic activities carried out in Mauritius.

This explains why the legislation examines:

• where the activities are conducted;
• who conducts those activities; and
• the expenditure incurred in conducting those activities.

The Board observed that the focus is therefore on economic substance rather than the taxpayer's principal line of business.

The Narrower and Broader approaches

The Privy Council acknowledged that there were two possible approaches to identifying Alteo's relevant activities.

The Narrower approach

Under the narrower approach, attention is focused on the activities directly connected with the loans and arrangements which generated the interest income.

These activities could include:

• agreeing loan terms;
• establishing financing arrangements;
• setting durations of financing;
• monitoring agreements; and
• managing associated risks.

If those activities were carried out in Mauritius, the first substance condition would be satisfied.

The Broader approach

The Board also considered a broader approach which focuses on the substance of the company's activities as a whole.

This approach was particularly relevant given that the interest income represented only approximately 0.25% of Alteo's total income and was clearly incidental to its principal electricity-generating operations.

The broader approach therefore considered the overall commercial activities undertaken by the company rather than isolating the lending arrangements from the wider business context.

Which approach did the board prefer?

The Privy Council expressly stated that the broader approach was to be preferred.

The Board considered that this approach better reflected the substance requirements contained within Regulation 23D, particularly the requirements relating to personnel and expenditure.

For a company such as Alteo, where the earning of interest was merely incidental to its main commercial operations, an exclusive focus on employees or expenditure directly attributable to the lending activity would be of limited practical relevance.

The broader approach was therefore more consistent with the substance-based nature of the regime.

Nevertheless, the Board noted that the outcome was identical under either approach.

Application to Alteo

The decisive fact was that all of Alteo's activities were carried out in Mauritius.

Under the narrower approach, the activities directly connected with the lending arrangements were undertaken in Mauritius.

Under the broader approach, Alteo's overall commercial activities were likewise conducted in Mauritius.

The Board further noted that Alteo employed suitably qualified personnel and incurred expenditure proportionate to its activities.

Accordingly, whether analysed narrowly or broadly, Alteo satisfied the substance conditions prescribed by Regulation 23D(2).

The Board therefore dismissed the MRA's appeal and confirmed Alteo's entitlement to the partial exemption.

Conclusion

The Privy Council's decision in Alteo settles an important area of uncertainty concerning the operation of the partial exemption regime and the interpretation of Regulation 23D(2).

The judgment confirms that the CIGA enquiry is directed towards the activities relevant to the generation of the qualifying income rather than the taxpayer's principal business operations. Whilst the word "income" refers to the category of income benefiting from the exemption, namely interest income, the word "core" does not impose an additional requirement that those activities must themselves constitute the taxpayer's core business.

The decision therefore reinforces the fundamental principle that tax legislation must be applied according to the language enacted by Parliament. As the Board's reasoning demonstrates, conditions which Parliament has not chosen to impose cannot be introduced through administrative interpretation.

For taxpayers earning incidental interest income, the judgment provides welcome clarification that entitlement to the partial exemption depends upon compliance with the statutory substance requirements and not upon whether financing constitutes the taxpayer's principal line of business.

For Alteo, that distinction proved decisive. The interest income must be the relevant income for the CIGA analysis but the activities generating that interest do not have to constitute the company's principal or core business.

That distinction is at the heart of the Alteo judgment. That is the enduring significance of the Alteo judgment.

The Privy Council has therefore drawn an important line between the nature of the income, the activities generating that income, and the principal business of the company.

Our conclusions and comments

The judgment does not create an automatic entitlement to the 80% partial exemption for every Mauritian company earning interest income.

What the judgment establishes is that the exemption is not unavailable merely because a company is not principally engaged in financing or money-lending activities. A company may still qualify for the exemption where the interest income falls within Item 7 and the conditions prescribed under Regulation 23D(2) are satisfied.

Accordingly, taxpayers must continue to demonstrate that:

1. the relevant core income generating activities are carried out in Mauritius;
2. an adequate number of suitably qualified persons are employed, directly or indirectly, to conduct those activities; and
3. minimum expenditure proportionate to the level of activities is incurred in Mauritius.

The Alteo judgment therefore reinforces the substance-based nature of the partial exemption regime rather than creating a blanket exemption for all interest income earned by Mauritian companies.

Going forward, it may be desirable for Parliament to consider clarifying and, where appropriate, amending the legislation to provide a more precise definition of "core income generating activities" (CIGA). While the Privy Council has now clarified the distinction between a company's core business activities and its CIGA for the purposes of Item 7, a more explicit statutory definition could further enhance certainty and reduce the scope for future disputes and conflicting interpretations.

Ultimately, the significance of Alteo lies in its confirmation that CIGA should not be equated with a company's principal business activity, and that the focus remains on whether the relevant income-generating activities possess sufficient economic substance in Mauritius. This clarification shall provide valuable guidance to taxpayers, practitioners, and the Mauritius Revenue Authority alike in the application of the partial exemption regime.