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The South African Treasury has noted the entry into force of a new double tax agreement with Mauritius, which was published in the Official Gazette on June 17, 2015. The treaty replaces the existing agreement dating back to 1996.
The new treaty reflects changes in the tax policies of the two countries and is in line with international best practices to deal with tax abuse as outlined in the OECD Model Tax Convention. It addresses in particular the treatment of dual residence for persons other than individuals and withholding taxes on interest and royalties.
In cases of corporate dual residence, the tie-breaker clause in the new tax treaty, in Article 4(3), follows the alternative test under paragraph 24.1 of the Commentary to the OECD Model Tax Convention. It provides that the states shall, in any case where a person other than an individual is a resident of both states, endeavor to settle the question by mutual agreement. In order to provide greater certainty to the small number of companies that may be affected by the change, South Africa and Mauritius have signed a memorandum of understanding that sets out the factors that the two competent authorities will take into account in deciding the country of residence.
The old treaty stated that interest and royalties were taxable only in the country of residence. Under the new treaty, interest will be subject to a withholding tax of 10 percent and royalties 5 percent, both at source.
Corporate capital gains are also addressed: any sale of shares deriving more than 50 per cent of their value directly or indirectly from immovable property situated in a contracting state may be subject to capital gains tax in that state.
A tax sparing provision which was included in the old treaty has now been removed. This provided that a foreign company could claim a credit to reflect any tax breaks or holidays to which it would have been entitled if operating domestically. The provision had caused concerns that it allowed for double non-taxation.
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