Tax Alert: Alteo Energy Ltd v ARC & DG, MRA

Johanne Hague and Medina Torabally of CMS Prism (in association with CMS), appeared for the appellant, Alteo Energy Ltd. 

Summary

In a judgment dated 31 January 2025  1 , the Supreme Court of Mauritius allowed the appeal of Alteo Energy Ltd (“AEL”) against a ruling of the Assessment Review Committee (“ARC”) where the ARC had maintained the Mauritius Revenue Authority’s (“MRA”) position to disallow the 80% exemption claimed by AEL in relation to the interest income it derived on its surplus cash during the relevant tax years 

The MRA’s position (as maintained by the ARC) was that the 80% exemption on interest income provided for pursuant to item 7, sub-part B, part II of the Second Schedule to the Income Tax Act 1995 (“Item 7”) can only be claimed by companies whose core business (or one of their core businesses) consisted of money lending or financing activities. 

AEL, whose main business consisted of producing electricity, contended that it should be eligible to claim the 80% exemption so long as it satisfied the substance conditions prescribed under the law (namely under Regulation 23D(2) of the Income Tax Regulations 1996), regardless of whether deriving interest income formed part of its core activities. 

In allowing its appeal, the Supreme Court found that the ARC’s ruling had strained the language of Regulation 23D(2) so as to introduce a further condition that the interest income must be derived from the core income generating activity (or CIGA) of the company (see below footnote 3) when, in fact, such a condition has not been clearly and expressly provided for in Regulation 23D(2). 

In applying the principles of statutory interpretation in relation to taxing provisions and after considering the context in which Item 7 and Regulation 23D(2) were introduced, the Supreme Court concluded that there is no restriction that the interest income should be derived from “CIGA only or must be necessarily included in the CIGA”. In doing so, it essentially confirms that the so-called “partial exemption” applies on the interest incomes to all resident companies in Mauritius, irrespective of the nature of their business activities, provided the relevant company could also satisfy the prescribed substance conditions in Mauritius.

AEL’s appeal was allowed, with costs, and the case was remitted back to the ARC to apply the provisions of Item 7 and Regulation 23D(2) in line with the judgment. 

The Supreme Court judgment can be aptly described as a “landmark” judgment for many reasons, including because of its broader implications for companies operating with the financial services industry, which were left in a quagmire of uncertainty (and a certain angst) since the introduction of the so-called “partial exemption”. 

The overhaul of the Mauritius tax regime in 2018 and the introduction of the partial exemption regime 

In 2018, Mauritius overhauled its tax regime as part of its commitments to international standard-setting institutions (namely the OECD and the EU) to eliminate provisions in its tax legislation that contained potentially harmful features from a tax perspective. In particular, the OECD and the EU had identified the previous “deemed foreign tax credit” regime as ring-fencing the tax treatment of global business companies (“GBCs”) from purely domestic companies, with the effect that GBCs were subject to an effective rate of taxation capped at 3%, whilst domestic companies were generally subject to tax at the rate of 15% (plus 2% Corporate Social Responsibility).

The Finance (Miscellaneous Provisions) Act 2018 repealed the deemed foreign tax credit provisions (with a grandfathering period in relation to existing structures) from 31 December 2018. Instead, with effect from 1 January 2019, all companies (whether domestic or GBCs) were entitled to claim an exemption of 80% on certain types of income, such as foreign dividends and interest income, provided that the companies satisfied prescribed substance conditions. 

Item 7 provided for an 80% exemption on interest income derived by a company (other than expressly excluded companies), subject to the prescribed substance conditions being satisfied. The substance conditions are set out under Regulation 23D(2) which provide that a company must:

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

Since its introduction, the list of excluded entities under Item 7 extended over time (initially only banks were excluded) and in 2021, the MRA published Statement of Practice SP 22/21 to set out its position in relation to the scope of the partial exemption. 

In particular, it took the bold stance that the exemption under Item 7 could only be claimed by companies which were involved in money lending business (other than specified excluded entities) or otherwise provided debt finance or made debt investments as their core activity (or one of their core activities). 

This position was at odds with that taken by many companies (both domestic and GBCs) which claimed the exemption under Item 7 on the interest income they derived, whether or not deriving interest formed part of their core activities. 

The MRA disagreed with this interpretation and issued assessments accordingly, many of which we understand are currently pending before the ARC. 

The case of Alteo Energy Ltd was the first one to reach the Supreme Court of Mauritius and it goes without saying that its relevance and potential impact is significant. 

The Supreme Court judgment 

By allowing the appeal, the Supreme Court confirmed that the exemption under Item 7 could be claimed by all resident companies, regardless of the nature of their business (subject to substance conditions being satisfied).

Salient features of its reasoning are summarised below:

1.  The Supreme Court emphasised the principles of statutory interpretation in taxation matters, particularly that taxing statutes must be construed strictly and language in tax statutes should not be stretched to bring a particular income into the tax net. If there is ambiguity, it should be resolved in favour of the taxpayer  2 .
2.  The ARC erred by giving an ambiguous and contradictory interpretation of the statute and by reading an additional requirement into Regulation 23D(2)—that interest income must be derived from the company’s CIGA, thereby straining the statutory language and adding a condition which did not exist.
3. In addressing the issue of whether the definition of “core income generating activities” (or CIGA) was exhaustive or illustrative, the Supreme Court found that the use of the word “includes” rather than “means” in the definition of CIGA extended its natural meaning rather than restricting it. As a result, it found that interest income does not need to be derived solely from CIGA 3  in order to qualify for the exemption. 
4. Of note, the Supreme Court examined the legislative history of Item 7 and Regulation 23D(2) and in particular the annex to the Budget Speech of 2018 (announcing the repeal of the deemed foreign tax credit regime and the introduction of the partial exemption regime) revealed the intent for the exemption to apply to all companies (other than expressly excluded ones such as banks). 

Additional commentary 

This judgment is particularly noteworthy for many reasons, including:

• It is the first Supreme Court judgment on the interpretation of the partial exemption regime following the complete overhaul of the Mauritius tax system in 2018 in line with the BEPS Action 5 proposals and its commitment to satisfy OECD’s BEPS minimum standards;
• It brings much needed comfort and certainty to the industry, including the global business sector, on the scope and application of the exemption;
• It reaffirms principles of statutory construction in tax matters, including the principle of strict construction and the circumstances in which legislative history may be resorted to for guidance in interpreting a statute; and,
• It puts into serious question the MRA’s statement on practice SP22/21.

Companies which did not claim the exemption out of an abundance of caution or because they were advised not to, may wish to revisit their position (albeit they would need to balance filing amended returns with the risks involved in resetting the clock on time-barred tax years). 

It is not known, at the time of publication, whether the MRA will apply for leave to appeal to the Judicial Committee of the Privy Council. 

It is also worth highlighting that the judgment only concerned the issue of whether interest income had to be derived as part of a company’s core activity. There are two other substance conditions under Regulation 23D(2), namely conditions relating to employment and expenditure. Whether or not companies seeking to claim the exemption under Item 7 meet these two other conditions is also another hotly debated issue and we hope that the courts will be able to provide more clarity on the application of these conditions in practice, particular insofar as they relate to GBCs.