Tie breaker clause for dual resident companies
A dual resident company is a company that is tax resident in both South Africa and Mauritius. This happens, for example, when a Mauritius incorporated company is effectively managed from South Africa. This company would be Mauritius tax resident because of its incorporation in Mauritius and South African tax resident as its place of effective management is located in South Africa.
In the past, for those taxes covered by the treaty, dual resident companies would be treated as being tax resident solely where the place of effective management was located. However, the new treaty contains a different tie breaker clause. Going forward the competent authorities of the Contracting States will by mutual agreement settle the question and determine the mode of application of the Agreement to such companies. If no agreement is reached the company falls outside the scope of the DTA, except for the provisions of Article 25.
Article 25 contains the exchange of information clause.
The Mauritius Revenue Authorities have confirmed that in such a dispute they would seek to continue to apply a “place of effective management test”. The question remains as to whether SARS would also apply such a test, and if so, on what basis would they interpret this concept.
Taxes covered by the treaty
What is of particular interest is that in the case of South Africa the new DTA applies to the normal tax (which does not include any of the withholding tax (“WHT”) regimes), the secondary tax on companies (which has been abolished), the withholding tax on royalties and the tax on foreign entertainers and sportsmen.
Considering that it is a newly negotiated DTA, surely the new dividend and interest withholding taxes should have been expressly included?
We are now left to rely on interpretation and the General binding ruling (19 February 2013) issued by SARS to try get confirmation that these taxes are in fact covered by the treaty.
The DTA does expressly state that it applies to any identical or substantially similar taxes that are imposed after date of signature of the agreement, in addition to or in place of the existing taxes that the treaty covers. This of course cannot include the dividend withholding tax. The reason is that the dividend withholding tax existed prior to signing of the treaty. It is further questionable whether the interest withholding tax, as a brand new tax, qualifies under this provision.
SARS did recently publish a statement confirming that they will apply South Africa’s DTA network to the dividend and interest withholding tax. SARS also confirmed that they will undertake a process to make it clearer in the DTAs that these taxes are covered. However, given that this is a brand new treaty and these taxes are not expressly covered, the position seems very uncertain.
One aspect of the DTA that may force SARS to apply the DTA to the dividend and interest withholding tax is the non-discrimination clause in the treaty.
The current DTA provides that profits derived from construction, assembly or installation projects lasting more than 9 months will be taxed in the source state. The new DTA is more beneficial as the source state will only be able to tax projects lasting more than 12 months.
The new DTA provides that profits derived from services rendered for more than 6 months in the aggregate in any twelve-month period commencing or ending in a fiscal year will be taxed in the source State.
Taxation of dividends
Under the existing DTA, a dividend paid to the beneficial owner of the dividend, that is a company, that holds at least 10% of the capital of the company distributing the dividend can be taxed at 5% of the gross amount of the dividend. In all other cases, a 15% rate would apply. The new treaty retains the 5% rule but in all other cases the rate is now 10%.
Taxation of interest
Under the current DTA, interest paid out of South Africa to a Mauritius beneficial owner would not be taxable in South Africa. Under the new DTA, the Mauritius beneficial owner of the interest will be subject to tax in South Africa at a rate of up to 10 per cent of the gross amount of the interest.
The treaty also exempts certain interest amounts from tax. This includes interest paid on debt instruments listed on the JSE or the Mauritius Stock Exchange. This is in line with South Africa’s domestic interest WHT law.
Taxation of royalty income
Similar to interest, royalties that were historically not taxable in South Africa will be subject to tax at a rate of 5% on the gross amount.
Taxation of capital gains tax
For capital gains tax purposes, non-residents are only subject to tax in SA in the following instances:
- immovable property situated in the Republic held by that person or any interest or right of whatever nature of that person to or in immovable property situated in the Republic; or
- any asset which is attributable to a permanent establishment of that person in the Republic.
An interest in immovable property includes any equity shares held by a person in a company or ownership or the right to ownership of a person in any other entity or a vested interest of a person in any assets of any trust, if –
(a) 80 per cent or more of the market value of those equity shares, ownership or right to ownership or vested interest, as the case may be, at the time of disposal thereof is attributable directly or indirectly to immovable property held otherwise than as trading stock; and
(b) in the case of a company or other entity, that person (whether alone or together with any connected person in relation to that person), directly or indirectly, holds at least 20 per cent of the equity shares in that company or ownership or right to ownership of that other entity.
This means that foreign investors into South Africa would be subject to South African tax if they were to sell shares in a South African company that is “property rich” per the above test. Many foreign investors making property rich investments into South Africa selected to invest via Mauritius. The reason being that the current double tax agreement between South Africa and Mauritius would restrict South Africa’s right to tax any capital gain on the shares.
Mauritius and South Africa have now concluded a new double tax agreement. The new treaty will give South Africa taxing rights on a share disposal where the underlying company is property rich. However the threshold to determine whether a company is property rich for treaty purposes is even lower than our domestic law test (50% threshold is included, similar to the UK/South Africa double tax agreement).
Share disposals of companies that are not property rich remain taxable only in Mauritius.
Relief from double tax
The new DTA no longer includes a tax sparing clause. Rather the new DTA allows for relief in the form of a foreign tax credit.
Exchange of information
The new DTA has a far more comprehensive exchange of information article giving South Africa far greater powers to gather information from Mauritius. Mauritius would not be permitted to refuse to supply the information simply because the information is held by a bank, other financial institution, nominee, person acting as agent or in a fiduciary capacity.
The new DTA also contains provisions for assistance in the collection of taxes along the lines of the OECD Model Agreement.
Each of the Contracting States is required to notify to the other in writing, through the diplomatic channel, of the completion of the procedures required by its legislation for the entry into force of the new agreement. The agreement will then enter into force on the date of receipt of the later of these notifications.
The provisions of the Agreement shall have effect as follows:
In Mauritius on income for any income year beginning on or after the first day of January next following the date upon which the Agreement enters into force; and
In South Africa:
(i) with regard to taxes withheld at source, in respect of amounts paid or credited on or after the first day of January next following the date upon which the Agreement enters into force; and
(ii) with regard to other taxes, in respect of taxable years beginning on or after the first day of January next following the date upon which the Agreement enters into force.
The existing DTA with Mauritius, signed at Pretoria on 5 July 1996, will be terminated with effect from the date of entry into force of the new DTA Agreement and shall cease to have effect for any period thereafter for which the provisions of the new Agreement apply.
A protocol has also been agreed to the new DTA
The protocol stipulates that if a DTA is subsequently concluded between South Africa and another country and the rates for taxation of dividends in the source State are lower than those specified in this newly negotiated Mauritius/SA DTA, South Africa shall immediately inform the Government of Mauritius in writing through the diplomatic channel and will promptly enter into negotiations with the Government of Mauritius with a view to providing comparable treatment as may be provided for the other country.