A preferred jurisdiction

Author: | Published: 1 Oct 2008
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Over the past decades, the global business industry in Mauritius has been quite active, mainly for inbound investment into India, Africa and China. As the double taxation treaty between Mauritius and India (the Mauritius treaty) is more favourable compared to other jurisdictions, Mauritius has become the preferred jurisdiction for providing foreign direct investment into India. As a result, many investment and/or hedge funds were incorporated in Mauritius for the purpose of investment into India.

For example, the income of a Mauritius fund will be subject to income tax in Mauritius at the rate of 15%. However, the Mauritius fund will be allowed a credit for foreign tax on income not derived from Mauritius against the Mauritius tax, computed by reference to that same income. If no written evidence is presented to the Mauritius Commissioner of Income Tax showing the amount of foreign tax charged, the amount of foreign tax will nevertheless be conclusively presumed to be equal to 80% of the Mauritius tax chargeable with respect to that income, which would reduce the rate of tax effectively to 3%. Capital gains derived from the sale of securities held by the Mauritius fund will not be subject to Mauritius tax and any dividends and proceeds paid by the Mauritius fund to the shareholders will be exempt from Mauritius withholding tax. Typically, such Mauritius funds are registered as sub-accounts of foreign institutional investors (as described below) and directly allowed to invest in Indian public market securities. Foreign investment into India is permitted primarily through two routes: (i) foreign direct investment route (FDI route), pursuant to which offshore persons and entities may invest directly in Indian portfolio companies (listed and unlisted); and (ii) foreign institutional investment route (FII route), pursuant to which foreign institutional investors (FIIs) registered with the Securities and Exchange Board of India (Sebi) may invest directly in Indian securities (primarily listed securities) via the stock exchange. Under the FII route, unlike under the FDI route, FIIs and their sub-accounts can purchase securities directly on listed Indian securities. Accordingly, the FII route is used by investors seeking to invest in listed securities. Until recently, Sebi generally did not permit foreign hedge funds to register as FIIs. As a result, most hedge funds were making their investments in Indian listed companies indirectly by subscribing to offshore derivative instruments (ODIs) issued by registered FIIs or their sub-accounts. In October 2007, Sebi revised its policy in respect of registration criteria for FIIs and sub-accounts, indicating that it is open to foreign hedge funds investing directly in the Indian markets, provided that such hedge funds register as FIIs and/or sub-accounts with Sebi. Furthermore, shortly thereafter, by way of Press Release 286/2007 issued on October 25 2007, Sebi announced new policy measures that materially restrict the ability of foreign investors to make any further investments in India through the route of ODIs and that also require investors to unwind certain of their existing ODI positions within 18 months. Pursuant to this policy change by Sebi, a large number of hedge funds have registered with Sebi as FIIs/sub-accounts.

Under the Mauritius treaty, capital gains (if any) that the Mauritius fund realises on transfer of investments in Indian securities would not be liable to tax in India as long as the Mauritius fund does not have a permanent establishment in India to which its investment holdings may be attributed. Accordingly, based on the Mauritius treaty, the Mauritius fund should be exempt from paying tax in India on capital gains realised on the transfer of investments in Indian securities. The Mauritius treaty has always been and continues to be a subject of controversy. Though the Supreme Court of India, in Azadi Bachao Andolan & Anr (263 ITR 706), has upheld the use of Mauritius to invest into India, media reports raise news items that suggest further challenges for investing through Mauritius. Mauritius has also tightened its tax residency requirements and formulated strict anti-money laundering laws. In addition, a memorandum of understanding (MoU) signed between India and Mauritius provides for effective exchange of information in the detection of fraudulent market practices. Certain procedures have been established for effective exchange of information, both on request and on a voluntary basis, about suspicious securities dealings between the two countries. It should be noted that the intention behind the MoU is to track down transactions tainted by fraud and financial crime, not to target legitimate transactions. Until the two nations decide to renegotiate the Mauritius treaty, Mauritius will continue to be a recommended and effective jurisdiction for inbound investments into India and will continue to be the number one jurisdiction for providing foreign direct investment into India.

Flexible guidelines for funds

The Financial Services Commission (the Commission) has, since its coming into existence in 2001, developed a very flexible set of guidelines for the regulation of collective investment schemes in Mauritius, adopting what it considers industry best practices from various long-established and well-regarded jurisdictions. While this has, over the years, resulted in over 439 investment funds having been incorporated in Mauritius and assets in excess of $43 billion, this trend is set to grow with the recent coming into force of the Securities Act 2005 (Securities Act), the Securities (Licensing) Rules 2007 (Securities Licensing Rules), the Financial Services Act 2007 (FSA 2007) and the Securities (Collective Investment Schemes and Closed-end Funds) Regulations 2008 (Securities Regulations 2008), providing a modern, comprehensive legislative and regulatory framework for the setting up and administration of funds in Mauritius.

Regulation and compliance

Any collective investment scheme or closed-end fund (individually a scheme or collectively schemes) wishing to be approved, registered with, recognised and/or licensed by the Commission under the Securities Act must first apply to the Commission for authorisation as a collective investment scheme or closed-end fund under the Securities Act in the manner set out in the Securities Regulations 2008 and obtain a Category 1 Global Business Licence (GBL1) under the Financial Services Act 2007 (for global schemes). The business purpose of these schemes is making collective investment of funds in a portfolio of securities, or of other financial assets, real property or non-financial assets, whose operation is based on the principle of diversification of risk for the benefit of global business fund members. The present regulatory framework allows collective investment schemes and closed-end funds to be constituted, under Mauritius Law, as:

  • a company limited by shares;
  • a trust (including unit trusts); or
  • any other legal entity prescribed or approved by the Commission.

Collective investment schemes and closed-end funds may operate as the following.

Collective investment schemes

This means a scheme constituted as a company, a trust (including a unit trust) or any other legal entity prescribed or approved by the Commission whose: (i) sole purpose is the collective investment of funds in a portfolio of securities or other financial assets, real property or non-financial assets as may be approved by the Commission; (ii) whose operation is based on the principle of diversification of risk; and (iii) that has the obligation, on request of the holder of the securities, to redeem them at their net asset value, less commission or fees and where the participants do not have day to day control over the management of the property, whether or not they have the right to be consulted or to give directions in respect of such management. Collective investment schemes include closed-end funds whose shares or units are listed on a securities exchange.

Closed-end funds

This means an arrangement or a scheme, other than a collective investment scheme, constituted in such legal form as may be approved by the Commission and whose object is to invest funds, collected from subscribers during an offering made under the Securities Act or from sophisticated investors, in a portfolio of securities or in other financial or non-financial assets or real property, as may be approved by the Commission. Closed-end funds usually have a fixed share capital and typically restrict investors' rights to call for their shares to be redeemed at net asset value by the fund. However, a closed-ended fund may also be listed on the Mauritius Stock Exchange, which prevents any lock-in by enabling investors to buy and sell shares on the market.

Recognition of foreign schemes

The Commission may, on application, also recognise collective investment schemes established in a foreign country. Recognition may be subject to such conditions that the Commission considers necessary or desirable for the protection of participants in the scheme.

It is also possible to constitute an umbrella fund under each of the foregoing structures, allowing investors to switch their investment from one sub-fund to another without redeeming shares or units.

Under the current flexible approach, a Mauritius global business fund can also be set up as a sub-fund under a non-Mauritius-based umbrella fund, or as a feeder fund for a non-Mauritius-based master fund.

Continuing regulation

The Commission requires all schemes to file yearly financial statements and audited annual reports, which must be prepared in accordance with the IFRS and audited in accordance with the International Standards on Auditing or any other recognised international accounting standards, as may be approved by the Commission or as may be issued under the Financial Reporting Act 2004 by an audit firm approved by the Commission. The Commission issued Circular Letter-CLOIO205, dated February 22 2005, advising that a GBC l corporation may, without the prior approval of the Commission, prepare its audited financial statements in accordance with the UK GAAP, US GAAP or South African GAAP. In addition to the published reports and reporting requirements, the Commission may request any other information and has the right to inspect the global business fund's books and records.

Carrying out business in Mauritius

The Financial Services Act 2007 requires that the central administration of any global business fund be situated in Mauritius, and requires that the schemes keep and make available or carry out the following in Mauritius. That is, global funds should:

  • have at least two directors, resident in Mauritius, of sufficient calibre to exercise independence of mind and judgment;
  • maintain at all times its principal bank account in Mauritius;
  • keep and maintain its accounting records at its registered office in Mauritius;
  • prepare its statutory financial statements and/or cause to have such financial statements to be audited in Mauritius; and
  • provide for meetings of directors to include as least two directors from Mauritius.

CIS administrators, custodians, managers and auditors

The current regulatory regime also requires that schemes, subject to the prior approval of the Commission, appoint duly licensed CIS administrators, managers, custodians and auditors.

CIS administrators

Under the present regulatory framework, schemes holding Category 1 Global Business Licences in Mauritius, in accordance with the Securities Act and the FSA 2007, must at all times be administered by a qualified management company, duly regulated and licensed by the Commission and holding a valid management licence (CIS administrator).

CIS administrators, subject to the prior approval of the Commission and to such terms and conditions the Commission may deem appropriate, may be appointed by collective investment schemes or closed-end funds (or CIS managers acting on their behalf) to provide administrative services.

Administration services, under the Securities Act, are restricted to services with respect to the operations and administrative affairs of collective investment schemes or closed-end funds including accounting, valuation or reporting services and/or the provision of the principal office of a collective investment scheme.

When seeking the approval of the Commission, the applicant must provide details specifying the administrative services that the CIS administrator will provide, full details on the CIS administrator, the fees specified in the FSC Rules and any other information required by the Commission.

Custodians

The assets of the collective investment scheme or closed-end fund cannot not be held for safekeeping by a person other than a person approved by the Commission or licensed as a custodian under the Securities Act and who will be independent of the CIS manager. Every collective investment scheme or closed-end fund will appoint and will at all times have a custodian.

The responsibility of the custodian is to take the assets of the scheme into its custody for safekeeping and hold and deal with the assets in accordance with the provisions of the Securities Licensing Rules and the constitutive documents of the scheme. The custodian will not exercise any function or activity in relation to a scheme, other than that for which it has been licensed.

Assets of a collective investment scheme or closed-end fund, other than a global scheme, will be kept in Mauritius except where it is appropriate to keep them outside the country in order to facilitate transactions outside Mauritius. In the event of the above, the custodian must appoint a sub-custodian in accordance with the provisions of the Securities Licensing Rules or any other applicable regulations in force from time to time. However, the delegation of custodial authority to a sub-custodian does not relieve the custodian from any of its obligations to the scheme, the CIS manager or the Commission. Both the custodian and the sub-custodian will act independently of the CIS manager and the scheme.

CIS managers

A collective investment scheme or closed-end fund, apart from a global scheme, will appoint and have, at all times, a CIS manager duly licensed by the Commission and having a place of business in Mauritius. No person will act as the fund manager (CIS manager) for a collective investment scheme or closed-end fund unless that person holds and complies with the conditions of a CIS Manager Licence issued by the Commission. The CIS manager holding a valid CIS Manager Licence will not engage in any activity other than the management of scheme.

The Commission will not grant a CIS Manager Licence to an applicant unless:

  • the applicant is a body corporate;
  • the Commission is satisfied that the applicant will be able, if licensed, to comply with the requirements of the FSC Rules regarding the financial and other resources requirements needed by the CIS manager for the collective investment scheme; and
  • the applicant and each of its officers are fit and proper persons and meet the requirements relating to eligibility, duties and obligations, rules of ethics and other such conditions as may be specified in the FSC Rules.

The Commission may, on application, exceptionally allow a company to be managed by its own board of directors, provided that the board of directors performs the functions of a CIS manager and that such directors are jointly bound and responsible to perform the functions of the CIS manager.

A CIS manager, subject to the Securities Act, the Securities Licensing Rules or any relevant rules, may carry out any of the activities related to the management of a scheme including:

  • all administrative services required by the scheme;
  • provision of registrar and transfer facilities;
  • distribution of the securities of the scheme;
  • maintaining accounting records of the scheme;
  • giving investment advice in relation to the scheme; and
  • managing the portfolio of the scheme.

A collective investment scheme or closed-end fund (or the CIS manager where applicable) will not, without the prior approval of the Commission, replace its CIS administrator, manager or custodian. Written notice of any proposal to replace the CIS administrator, manager or custodian of a collective investment scheme or closed-end fund must be given to the Commission. Such replacement will only be effective if the shareholders of the scheme have approved the change in accordance with the constitutive documents (where applicable) and the Commission has given its approval to the proposed replacement

Auditors

Under the present regulatory framework, schemes, subject to the prior approval of the Commission, are required to appoint auditors in accordance with the law. The Commission will not approve an audit firm unless it is satisfied that the audit firm has adequate experience, expertise and resources to carry out such an audit. The Commission may require that the auditor of a scheme submits such additional information in relation to his audit as the Commission considers necessary.

However, schemes are not prohibited from instructing overseas investment advisers to manage their assets, and may still execute management decisions in relation to investment and disinvestment overseas. Nothing prevents non-Mauritius-based intermediaries from participating as distributors or nominees.

Distribution and marketing

Any collective investment scheme or closed-end fund operating from Mauritius must file a prospectus or a placement memorandum with the Commission, in the form and manner set out in the Securities Regulations 2008, which must, among other things, include all general information concerning the scheme, indicating its principal sphere of activity.

Investment restrictions and exemptions

The restrictions on investments are as follows. The investor may not: (i) purchase a security (other than a government debt security) representing more than 5% of its NAV after the purchase; (ii) purchase a security representing more than 10% of a class of securities of that issuer; (iii) purchase real estate; (iv) purchase a mortgage; (v) purchase a security for the purpose of exercising control or management of the issuer of the security; (vi) purchase an illiquid asset representing more than 10% of the net assets of the collective investment scheme, after the purchase; (vii) purchase or sell derivatives (except for a specialised CIS); or (viii) purchase or sell a physical commodity, including precious metals (except for a specialised CIS).

The investor may not: (i) borrow money or provide for the creation of any charge on its assets except in the two following situations, namely where the transaction is temporary for the redemption of securities of the CIS and where the borrowings does not exceed 5% of the NAV after the transaction, or the charge secures a claim for the fees and expenses of the custodian or a sub-custodian; (ii) subscribe securities offered by a company under formation; (iii) underwrite or market securities of any other issuer; (iv) lend money, securities or other assets; (v) guarantee securities or obligations of another person; (vi) purchase or sell securities other than through market facilities where the transaction price is negotiated on an arm's-length basis; or (vii) purchase a security from or sell a security to the CIS manager or custodian, an officer of the CIS manager or custodian or an affiliate of the CIS manager or custodian unless the purchase from or sale to the affiliate is carried out at arm's-length.

Exemptions

The above restrictions on investments and investment practices will be entirely exempted for the following CIS. Closed-end fund; a scheme whose object is to invest funds, collected from subscribers during a public offering under the Securities Act or from sophisticated investors in a portfolio of securities, or in other financial or non-financial assets, professional funds and a scheme offering its shares to either sophisticated investors or to subscribers through private placements. Expert fund; a scheme subscribed by expert investors, that is, either an investor who makes an initial investment from his own account of no less than $100,000 or a sophisticated investor. Part exemption from the above restrictions applies to the specialised fund, a scheme authorised by the FSC as one that invests in real estate, derivatives, commodities or any other product authorised by the Commission. Part exemption applies for those dealing in real estate, derivatives and physical commodities (including precious metals), as well as any other product authorised by the Commission.

Taxation

All schemes are liable to pay Mauritius income tax at 15%, but the successful application of foreign tax credits can effectively reduce the rate to 3% or nil in given circumstances. In addition, schemes that are centrally controlled and managed and are tax resident in Mauritius may, upon written approval from the Commissioner of Income Tax, benefit from any one of over 33 double taxation agreements.

There is no withholding tax on dividends, capital gains or interest, and no stamp duty leviable.

In the appropriate circumstances, a management or advisory company may also be established so as to take advantage of Mauritius's beneficial tax regime.

Registration procedure

The Commission must approve any scheme before it commences business. In considering an application, the Commission needs to be satisfied as to the following:

  • the track record and credentials of the promoters;
  • the fund structure;
  • the objectives of the fund;
  • the investors and the market targeted;
  • types of investment the scheme will be dealing in;
  • the track record of the investment manager, custodian and administrator; and
  • compliance with regulations in other countries, as appropriate (for example, Sebi's approval if investment is to be made in India).

Once the Commission is satisfied, it will issue an approval in principle so as to enable all of the constitutive documents to be prepared and the global business fund to be incorporated.

Application procedure

All applications for registration must be made through a licensed management company and will require the following documentation:

  • constitution (three copies);
  • notice of first directors, secretary, management, shareholders and location of registered office;
  • consent forms of directors, management, shareholders and secretary;
  • KYC documentation on the directors, management, shareholders and promoters;
  • other information that is necessary for the establishment of a company;
  • letters of reference from banker, lawyer, and accountant (letters of reference may be dispensed with if the promoter is itself a fund manager authorised in another jurisdiction: in such cases, the letters of reference may be replaced by proof of authorisation in the other territory and a copy of the promoter's latest accounts, as well as short CVs for the persons who will have key positions in the Mauritian company);
  • legal certificate from a local law practitioner;
  • name and address of a local representative;
  • set of constitutive documents of the scheme (prospectus signed by two directors, custodian agreements, sub-custodian agreement, investment management agreement, administration agreement, investment advisory agreement and secretarial and registrar agreement, among others);
  • names and particulars of expatriate staff if required; and
  • brief track record of applicant and detailed business plan.
Author biographies

Malcolm Moller

Appleby

Malcolm Moller is the managing partner of the Mauritius office and a member of both the insurance and structured finance teams within the corporate and commercial practice group. Malcolm specialises in advising financial institutions on financial regulation, regulatory capital issues, financial institution M&A and insurance-related transactions, as well as advising on derivatives transactions and securities offerings.

Before joining Appleby in January 2003, Malcolm worked for Hardings Solicitors, Sydney Australia, and Heath International Holdings Insurance Ltd (formerly Winterthur International Insurance Ltd). Malcolm also worked at the London office of Clifford Chance, where he gained significant experience in insurance-related transactions.

Malcolm attended Macquarie University in Sydney, Australia, where he obtained both his Bachelor of Economics degree in 1996 and Bachelor of Law in 1997. Malcolm obtained his Postgraduate Diploma in Legal Practice from the College of Law in Sydney, Australia and was admitted as a Legal Practitioner of the Supreme Court of New South Wales in 1998, Solicitor and Barrister of the High Court of Australia in 1999 and as a Solicitor in England and Wales (not practising in that capacity) in January 2003 and Solicitor and Barrister of the Supreme Court of Bermuda in 2004. Malcolm also obtained a Master of Laws Degree in Corporate and Commercial Law from the University of New South Wales, Sydney Australia, in 2000.

As a regular contributor of Mauritius-related articles, Malcolm's writings have been featured in numerous publications including The Lawyer and International Investment and Investor Services Journal. Malcolm also provides commentary to publications including Legal Business and The Lawyer.