The Credit Method
The Deemed Foreign Tax Credit
Key Factors: The Mauritius GBCI Company
Mauritius has double taxation agreements with Botswana, Lesotho, Madagascar, Mozambique, Namibia, Rwanda, South Africa, Swaziland and Zimbabwe.
The Mauritius GBC 1 company is a tax resident company and has access to the double tax avoidance treaties with the aforementioned treaty countries.
The Mauritius GBC 1 company pays tax at the rate of 15%. However, it also receives a "deemed tax credit" of 80% which can effectively reduce the rate of tax to a maximum of rate of 3%. Under the provision of the Double Taxation treaty between the two countries there is also an option to reduce the rate to 0%, using what is known as "the credit method". Either the "deemed foreign tax credit", or the "credit method" can be applied, but not both.
This essentially credits the amount of tax suffered by the subsidiary. Mauritius allows for underlying tax credit i.e. credit for any taxes suffered after the profits made by the subsidiary (distribution tax, withholding taxes, etc.) The credit amount is however limited to a maximum of 15%, which means the company pays tax at the rate of 0%, should the maximum credit be applied.
In a situation where the tax suffered by the subsidiary amounts to, for example, 11%, applying the credit method will mean that the Mauritian company will be liable to approximately 4%. In such a case the company can opt for the alternative deemed tax credit method, reducing it's liability to the maximum of 3% tax.
It is worthwhile noting that Mauritius has no capital gains tax or any withholding taxes. This creates an interesting scenario for investors whereby no withholding tax equates to a better return of investment and no capital gains tax equates to a far better exit route. Both of these are factors of prime importance to any investor.