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Mauritius: Budget highlights – promising changes relating to debt funds and the fund industry generally

21 June 2023
– 3 Minute Read
| Tax

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Overview

  • For many years Mauritius has been known as an ideal location for routing equity investments by both domestic and global funds while debt investments by funds have remained underutilised.
  • It is hoped that measures proposed in the Budget speech delivered on Friday 2 June 2023 will make Mauritius a more attractive and competitive jurisdiction for the setting up of debt funds.
  • The changes proposed include amending the Mauritius Securities Act to make it clear that Mauritius funds may invest via loans. This will put Mauritius on par in terms of its financial products offering with other domiciliation jurisdictions where debt as an investment instrument is quite common.
  • Further, the partial exemption granted in respect of interest earned by a collective investment scheme or a closed-end fund established in Mauritius, which is currently at 80%, will be increased to 95%.

The Budget speech delivered on Friday 2 June 2023 signalled some significant measures which will undoubtedly be welcomed by financial institutions and investors alike. In particular, it was announced that the Mauritius Securities Act will be amended to make it clear that Mauritius funds may invest via loans. This will put Mauritius on par in terms of its financial products offering with other domiciliation jurisdictions where debt as an investment instrument is quite common.

Commentators had identified this shortcoming in our product offering some time ago, particularly for a country aspiring to be a financial centre to the African continent at a time where lending interest rates are at an all-time high and there is a dire need for emerging businesses to access cheaper sources of finance.

The status of a ‘debt’ fund, which is understood to be a collective investment vehicle whose principal objective is to invest by way of loans, has been notoriously unclear in Mauritius regulation. The lack of clarity is compounded by the process of setting up such funds which is more protracted than other funds for a number of reasons as outlined below.

The fund manager currently faces the initial hurdle of having to establish, to the satisfaction of the Regulator, that a ‘loan’ can be construed as a transferable ‘security’. This term is defined under the Securities Act in the context of securities offerings. As a result, the fund often needs to restructure its product to meet the definition. The second challenge is to avoid falling within the net of regulated money-lending activities and other activities under the purview of the Central Bank.

It is expected that clarifying the intrinsic nature of a fund as being a ‘debt’ or ‘credit’ fund will help to make Mauritius better known as a centre for debt capital raisings, alongside its established reputation for equity raises mainly due to the absence of a capital gains tax regime. An expected corollary outcome of this development will be that any non-fund special purpose vehicle structured in Mauritius to carry investments by a debt fund, will not have the obligation to apply for a moneylender licence from the Mauritius Financial Services Commission (FSC).

The Budget goes on to announce a significant related development on the tax front as if to further underscore the Government’s wish to give impetus to the market for debt funds.

The partial exemption granted in respect of interest earned by a collective investment scheme or a closed-end fund established in Mauritius, which is currently at 80%, will be increased to 95%. This will result in interest income of a fund being effectively taxed at the rate of 0.75%. Currently, all income of a fund authorised by the FSC may be taxed at an effective rate of 3% under the partial exemption regime, provided that the fund satisfies the conditions relating to the substance of its activities by:

  • carrying out its core income generating activities in Mauritius;
  • employing directly or indirectly an adequate number of suitably qualified persons to conduct its core income generating activities; and
  • incurring a minimum expenditure proportionate to its level of activities.

For many years Mauritius has been known as an ideal location for routing equity investments by both domestic and global funds while debt investments by funds have remained underutilised. It is hoped that the latest measures proposed will make Mauritius a more attractive and competitive jurisdiction for the setting up debt funds. We now await the parliamentary debates on the Finance Bill to be presented in the near future, with a more conclusive view to be communicated upon the passing of the Finance Act.