The Assessment Review Committee (ARC) recently decided in favour of the Mauritius Revenue Authority (MRA) in the case of Alteo Energy Ltd (Alteo) with respect to a claim of an 80% tax exemption on interest income.

 The facts

Alteo is engaged in the production and sale of electricity. For the year of assessment, 2019/2020, Alteo derived income from the sale of electricity (representing 99.75% of its total income) and interest income (representing 0.25% of its total income).

The interest income was derived from an intercompany loan, staff car loans and on a treasury account. Alteo treated 80% of its interest income as exempt under item 7 of Sub-Part B of Part II of the Second Schedule to the Income Tax Act 1995 (ITA).

The relevant conditions on the exemption laid out in the ITA are prescribed in regulation 23D (2) of the Income Tax Regulations 1996 (ITR):

• Alteo carries out its core income generating activity (CIGA) in Mauritius;
• it employs, directly or indirectly, an adequate number of suitably qualified persons to conduct its CIGA; and
• it incurs a minimum expenditure proportionate to its level of activities.

As regards interest income, CIGA includes agreeing funding terms, setting the terms and duration of any financing, monitoring and revising any agreements and managing any risks relating to the loan agreements pursuant to regulations 23D (2) of the ITR.

The MRA considered that the interest income does not qualify for the partial exemption on the ground that the interest income is incidental to Alteo’s CIGA. It issued a notice of assessment claiming income tax on the full interest income derived by Alteo.

For the MRA, a business that has multiple core activities will be able to claim partial exemption on interest income provided some of its core activities are activities as specified in Regulation 23D (2) of the ITR.

Alteo objected to the assessment and, while the MRA’s Objections, Appeals & Dispute Resolution (OADR) Department agreed that Alteo carries out its CIGA in Mauritius, it maintained the view that the interest exemption could not be applied as the interest was not derived from the core activities of Alteo.

Alteo objected to the determination of the OADR on the grounds that the real test is whether the CIGA of Alteo regarding the interest income, is performed (i) by Alteo and (ii) in Mauritius, and that the law does not require interest income to be derived in the ordinary course of a taxpayer’s business for him to benefit from the partial exemption.

ARC finding

The ARC found that to benefit from the exemption what needs to be considered first and foremost is the substance of the activities of Alteo which must satisfy at least the three conditions laid down in regulation 23D (2) of the ITR. If the interest income is not from the substance of the activities of Alteo, it will not benefit from the exemption. The interest income of Alteo represented only 0.25% of its total income for that year, hence it was not derived from the CIGA of Alteo.

The ARC further admitted that the law does not clearly state that the interest income must be derived from the CIGA of Alteo. But, when one considers that the CIGA must necessarily include activities that are undeniably linked to the production of the interest income, it becomes clear that the legislator has intended for one of the three conditions relating to the substance of the activities of Alteo claiming exemption on interest income, to include activities that relate to the production of interest income. Further, that these activities must necessarily exist in the CIGA of Alteo. These activities are ‘agreeing funding terms, setting the terms and duration of any financing, monitoring and revising any agreements and managing any risks’.

Our comments

While it is not a condition under regulation 23D (2) of the ITR for interest income to be derived from the CIGA of Alteo in order to claim a partial exemption, the ARC is of the view that the activities relating to the production of interest income must be one of the CIGA of Alteo for a claim of partial exemption based on its interpretation of the intention of the legislator.

This interpretation will have a significant impact on the tax liability of companies earning interest income that is incidental to their CIGA. The non-availability of the partial exemption will mean that interest income will be subject to income tax at the rate of 15% (unless where foreign tax credits can be claimed).

Alteo may lodge an appeal against ARC’s decision with the Supreme Court within 21 days of date of the decision, but it is not yet known whether Alteo has lodged an appeal.