The Double Taxation Avoidance Agreement (‘treaty’) signed by Mauritius with the Republic of Congo (‘Congo’) on 20 December 2010 has entered into force on 8 October 2014.
The treaty with Congo provides for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income, and features some interesting aspects.
This article sets out the benefits of using a Mauritius entity for channeling investments into Congo under the treaty and demonstrates the related advantages.
Highlights of the main articles of the tax treaty
Under the Domestic law of Congo, any dividend paid by a resident of Congo is subject to a withholding tax of 20%.
Article 10 of the treaty provides that dividends paid by a company resident in Congo to a Mauritius resident entity may be taxed in Congo at the maximum rate of 5%. However, if the Mauritius resident entity holds at least 25% of the capital of the Congo company, Mauritius has exclusive taxing rights and as such, the dividend will not be subject to any taxation in Congo.
Dividend payment by a company resident in Mauritius is exempt from any tax.
Under Congo domestic laws, interest payment is subject to a 20% withholding tax.
Under Article 11 of the treaty between Mauritius and Congo, interest paid by a resident of Congo to a resident of Mauritius is subject to a maximum tax rate of 5%.
Interest paid by a Mauritius company holding a Category One Global Business Licence (‘GBC1’) does not attract any withholding tax.
A withholding tax of 20% is applicable on royalties paid by a resident of Congo.
A Mauritius company deriving income by way of royalty from Congo shall not be subject to any tax in Congo.
Mauritius sourced royalty paid by a GBC1 does not attract withholding tax.
Capital gains derived by a Mauritian resident company from the disposal of assets (including shares) situated in Congo shall be taxable only in Mauritius except for immovable property and moveable property forming part of a permanent establishment in Congo. Thus, all capital gains earned by a Mauritius resident Company would be tax-exempt as there is no capital gains tax in Mauritius.
Under Article 7 of the tax treaty, should the Congo authorities treat the proceeds of the disposal as business income, the gains will be taxable in Mauritius as long as there is no permanent establishment in Congo. In Mauritius the gains or profits on disposal of securities are exempt from tax.
Generally, the treaty eliminates double tax by allowing a tax resident of Mauritius to apply the Congo income tax paid as a credit against its Mauritius tax. In case of dividends, where the Mauritius company directly or indirectly controls at least 5% of the Congo company paying the dividends, the credit shall, in addition to any Congo WHT on dividends, also take into account the underlying taxes i.e., the tax payable by the Congo company in respect of the profits out of which the dividends are paid.
The treaty also provides a tax sparing clause through which the credit for income tax payable in Mauritius would not only include the actual tax paid in Congo but also the tax spared by in Congo by reason of its law relating to tax reduction, exemption or tax incentives for the promotion of economic development.
Therefore, in practice where the Mauritius company qualifies for underlying tax credit on dividends / tax sparing credit, the Mauritius tax liability on the dividend income will be nil.
Provisions of the Mauritius Income Tax
Under the Income Tax Act 1995, a GBC1 is subject to tax at the rate of 15%. The tax liability can be reduced by claiming the foreign tax credit (withholding tax, underlying tax and tax sparing) under the provisions of the Tax Treaty or under domestic legislation through the Income Tax (Foreign Tax Credit) Regulations. In most cases the domestic law is more favourable to the tax payer. Under the said regulations, the taxpayer credit is the higher of actual tax suffered or a unilateral tax relief of 80% of the Mauritius tax charge, thus resulting in a maximum effective tax rate of 3%.
All parties planning investments in Congo should evaluate the merits of the treaty with Mauritius, which provides for beneficial rates on interest, dividend and royalties. There is also certainty from an exit point of view, as capital gains is taxable only in Mauritius and profit or gains on disposal of securities are exempt from Income Tax- as well as generous provisions given under the Income Tax (Foreign Tax Credit) Regulations.
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Cim Tax Services Ltd
33, Edith Cavell Street
Port Louis, Mauritius