Economic substance

Definition

Economic substance is the requirement for a company established in Mauritius to demonstrate a genuine presence and effective activity in the territory, rather than a mere administrative seat. This notion covers several concrete elements: carrying on the income-generating activities locally, the presence of a sufficient number of qualified staff, a level of expenditure proportionate to the declared activity, and effective management exercised from Mauritius. It is a condition for access to certain favourable tax regimes, in particular for Global Business Company (GBC) structures.

Framework in Mauritius

In Mauritius, the economic substance requirement applies in particular to GBCs, which benefit, subject to compliance with these conditions, from a partial 80% exemption on certain foreign-source income (foreign dividends, interest, profits of foreign permanent establishments, ship or aircraft leasing, among others). Only where the substance conditions are actually met can a reduced effective tax rate, of around 3%, apply to this income; otherwise, the exemption is not available. The competent authority is the Financial Services Commission (FSC), the regulator of non-bank financial services, which oversees GBCs through a management company licensed to administer them.

In practice

In practice, a company must be able to demonstrate that its income-generating activities are genuinely carried on in Mauritius, that it employs qualified staff suited to its object, and that its operating expenditure is proportionate to its level of activity. Particular attention should be paid to the consistency between the declared activity and the means actually deployed locally: a company with no staff or expenditure corresponding to its activity risks having its tax regime called into question. The assessment of substance is made case by case, depending on the sector of activity and the volume of operations concerned. This assessment is an individualised exercise, carried out under the supervision of the licensed management company and, where applicable, of the FSC.

Related terms

Economic substance is inseparable from the Global Business Company (GBC), the regime to which it primarily applies, as well as from the Financial Services Commission (FSC), the competent regulatory authority, and from the management company, the licensed entity in charge of administering the company and supporting compliance with these requirements.

Related terms