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Reasons for entrepreneurs to consider setting up an offshore business

Access to opportunities rather than tax efficiency is the guiding principle.

Hundreds of South African businesses have set up offshore companies in Mauritius – among other offshore jurisdictions – in recent years because of the business-friendly environment and availability of professional skills.

In the past, Mauritius, like many other international finance centres, was seen as a soft spot for aggressive tax planning. That is no longer the case, neither in perception nor reality, says Willem Badenhorst, managing director of corporate clients at Maitland.

For one thing, Mauritius has an emphasis on commercial ‘substance’. Additionally, Mauritius was an early adopter of the Common Reporting Standard (CRS) and other anti-tax avoidance measures being introduced globally under the auspices of the Organisation for Economic Cooperation and Development (OECD) and the G20 countries, principally through the Inclusive Framework on Base Erosion and Profit Shifting (Beps).

“The motivation and benefit of using offshore structures is less about tax planning and more about operational efficiency and access to opportunities,” says Badenhorst. “Additionally, companies setting up offshore structures want to limit the jurisdictional risk arising from issues such as corruption, governance, expropriation and nationalisation in emerging and frontier markets.”

There is a worldwide movement to stamp out opportunistic profit-shifting (also known as base erosion) to avoid tax in a particular jurisdiction by recognising profits in a lower (or zero) tax jurisdiction. “It doesn’t make sense to hop to a jurisdiction for a few tax advantages that may evaporate in a few years,” he says. “It may be better to commit to a jurisdiction that might be slightly stricter and more costly, but more commercially reliable in the long term.”

Opportunities abound in Africa

The rest of Africa’s combined growth trajectory surpasses that of South Africa, and with a population of more than 1.2 billion and further demographic tailwinds, is likely to far exceed the developed world for some time, particularly as urbanisation picks up steam.

Africa has large natural resources and a huge potential labour market. The Fourth Industrial Revolution is presenting massive opportunities to increase productivity and diversify economies that are traditionally resources-dominated.

But coming to grips with the local regulatory, tax and compliance environment when doing business in other African countries can be a time-consuming and expensive process, and so discernment needs to be brought to the choice of jurisdiction that one operates from.

Potentially restrictive exchange controls are a key example of the challenges posed to entrepreneurs trading across borders. Says Badenhorst: “It’s not that approval cannot be obtained for legitimate and appropriate transactions, but rather that the relevant frameworks may limit the efficiency in what can often be very time-sensitive transactions – in other words, it creates risks around missing out on opportunity. In addition, it increases the cost of doing cross-border payments, which can become a complicated and time-consuming process rather than a simple electronic transfer.”

Why Mauritius?

Mauritius holds several advantages as a gateway to doing business in Africa:

  • Ease of doing business – The World Bank Doing Business Report 2019 ranks Mauritius first in Africa (it is now ranked among the top 20 economies in the world in this category);
  • Political stability – The Economist Intelligence Unit’s Democracy Index 2018 ranks Mauritius first in Africa;
  • Good governance – Mauritius is first in Africa in the Mo Ibrahim Foundation’s 2018 Ibrahim Index of African Governance;
  • Economic democracy – Mauritius ranks first in Africa in the Heritage Foundation’s Index of Economic Freedom, and first in Africa in the Fraser Institute’s Economic Freedom of the World Index

Added to this, Mauritius is a four-hour flight from Johannesburg, and visas can be obtained on entry. The time zone, two hours ahead of SA, is ideal for local businesses. There are experienced professionals on the island to assist with company set-up, ongoing administration and compliance.

Mauritius recognises that the digital revolution presents an opportunity for Africa to leapfrog the industrial age, and is positioning itself as a fintech hub for the continent. It is linked to the South Africa Far East (Safe) cable network and is introducing regulations for the safe custody of digital assets by investors.

The island has made it attractive for entrepreneurs in the fintech space to set up operations for the exchange of digital assets, and issues ‘sandbox’ licences for entrepreneurs to encourage tech development.

“This will reduce the uncertainty around legal and regulatory recognition, and ultimately be beneficial for international tech companies looking for a robust – yet dynamic – jurisdiction from which to operate,” says Badenhorst.

No harmful tax practices

Mauritius joined the Beps Inclusive Framework, which commits signatories to implementing the minimum standards put forward by the OECD on harmful tax practices, tax treaty abuse, country-by-country reporting, and dispute resolution mechanisms. Mauritius has also signed the OECD’s Multilateral Convention to transpose Beps recommendations into tax treaties worldwide. In August 2017, Mauritius was rewarded with a favourable ‘compliant’ status (the highest status possible) under the enhanced peer review process undertaken by the OECD’s Global Forum.

Innovative corporate structures providing tax holidays

The island allows for tax holidays for global headquarter administration (eight years), global treasury services (five years), and asset and fund managers managing a minimum asset base of $100 million (five-year holiday for employees).

Membership of regional trading blocs

Mauritius is a member of several regional trading blocks, including the Southern African Development Community, the African Union, and the Common Market for Eastern and Southern Africa.

Investor protection

Mauritius offers investment promotion and protection agreements (IPPAs), which are international bilateral agreements between governments to protect and encourage investments. This is one of the most underrated benefits of Mauritius, says Badenhorst.

Setting up offshore and what to expect

The main pitfalls for South African entrepreneurs looking to set up corporate structures in Mauritius are generally well known. They include South Africa’s tax laws regarding controlled foreign companies; the definition of tax residency; exchange controls; and the pitfalls associated with loop structures (also known as ‘round tripping’) where, typically, South Africans directly or indirectly use offshore structures to purchase assets within SA.

The days of operating a ‘post box’ offshore company are gone. Offshore corporate structures must have substance (generally meaning offices and employees), and must comply with the regulatory burden and expenses associated with running such an office.

Entrepreneurs should be aware that global business companies in Mauritius need to be facilitated through a licensed management company that has responsibility for, among other things, anti-money laundering monitoring. These responsibilities are strictly applied and one should anticipate questions and be willing to respond and share any information requested, which is now a norm in the age of tax transparency that CRS has introduced.

While there are similarities in Mauritius legislation to South Africa’s Companies Act and to a lesser degree the Trust Property Control Act, there are also material differences.

Badenhorst says SA entrepreneurs need to recognise that the culture is different, and that foreign rules, customs and approaches apply. “Don’t assume things work according to the same rules and approaches as are common in South Africa – these are not necessarily better or worse, but they are different.”

Entrepreneurs would be wise to seek specialist support from reputable service providers so that the pressure on in-house teams is reduced and the risk of errors and non-compliance are mitigated.

Maitland has a team of 60 people in Mauritius, mostly professionals, offering a full suite of services from fiduciary and corporate services to fund administration (private equity, real estate, and infrastructure investing into Africa).

Brought to you by Maitland.

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I have in recent weeks had 3 interactions with Mauritian government departments via e-mail.

I had all 3 questions answered in less than 15 minutes. One was from the Mauritius Tax Authority.

All straight to the point with all information required answered IN FULL.

Having worked in many African countries I was not even expecting an answer.

These guy’s want to do business and their conduct is comparable to the best in the world.

Well done Mauritius. It’s not just talk.

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