- Slides: 7
The Mauritius Route Peter J. Wattel Netherlands Supreme Court
Share issue $ 1 billion South Africa Topholding Direct transfer $ 600 million loan capital contribution South Africa Subholding Mauritius Holding Interest-free loan Mauritius Finance (GBC 2 status ) Dutchco 1 (acquiring) loan Dutchco 2 (acquiring)
Art. 10 a Corporation Tax Act: Interest is not deductible if: • paid to an associated body or person, where • the debt is connected to, inter alia, the acquisition of an interest in an entity which through the acquisition becomes associated, unless the taxpayer proves that either • the associated creditor effectively pays at least 10% on the interest (no credits; no set-off), or • both the acquisition and the debt were predominantly prompted by non-tax reasons. So: the use of a low or non tax jurisdiction is not per se unacceptable
Facts: • South Africa applies foreign exchange restrictions (creating also currency risks); • Mauritius is part of the South African Development Community (SADC); the Netherlands are not; • Share capital acquired from non-SA investors may be transferred directly to group cos outside S-A; • The group was exploring the targets eventually acquired, but was negotiating a South-American takeover at the time of share issue; • The investor prospectus in general terms referred to takeover prospects in the areas eventually carried out instead of the aborted South-American prospect;
More facts: • No equity was withdrawn from the Netherlands part of the Group (no circular cash course); • Dutchcos did not possess the funds required for the takeovers: genuine need for financing; • Mauritius Finance was the group’s finance company, but had no bank account and no employees; it paid no tax; • Group CFO and treasurer were stationed in the Netherlands; • Except the SADC-advantage, the advantages of the Mauritius route would also be available via the Dutch route;
Court of 1 st instance found for the taxpayer: it considered credible that (i) group finance structure was primarily prompted by avoiding South African exchange controls and currency risks, and (ii) share capital was not attracted with a view to the concrete fisve acquisitions carried out by the two Dutchcos The fact that other routes not entailing interest deduction in the Netherlands were available, was considered irrelevant.
Issues: • If a genuine target is acquired from a 3 rd party, and the acquiring group co. does not have the necessary funds - implying a genuine need for financing - is borrowing by definition above suspicion, given the entrepreneurial freedom to choose between equity and loan financing? • Was the equity acquired with a view to the takeovers actually carried out; or may the share issue be viewed as untargeted ‘own resources’? • Was there an artificial detour in the finance routing on Mauritius (difference in tax level between Mauritius Holding and Mauritius Finance; finance company that does not even have a bank account)? • If the tax haven route and the non tax haven route offer the same non-tax advantages, is the choice free?