“If you get up early, work late, and pay your taxes, you will get ahead – when you strike oil.”
In an effort to render the Mauritius tax system better understood by the taxpayer, we endeavour to present select case studies where rulings have been passed, thus providing our interpretation of such sections of the relevant taxation law of the land.
Under section 159 of the Income Tax Act, any person who derives or may derive any income, may apply to the Director General for a ruling as to the application of the Act to that income.
Case Study 20:Capital Allowances and Finance Leases
Facts
A Ltd intends to set up a wholly owned Mauritius subsidiary, B Ltd (the Company), which will be incorporated in Mauritius and hold a GBL Licence. The Company will be the 100% beneficial owner of a US trust which will be engaged in aircraft leasing. Currently a Bermuda company is the beneficiary of the trust. The nature of the trust will be similar to that of a bare trust in that the beneficiary, i.e. B Ltd, will be considered the owner of the aircraft for US tax purposes. The Company will have full control on the aircraft with power to instruct the trustee, and the interests and rights of the trust will be transferred to the Company when it will have been set up.
The US trust will lease an aircraft from a Cayman Island company under a finance lease, and the principal and interest payments will be payable to this latter company. The US trust will lease the aircraft on operating lease to a South African airline company for a period of 10 years. The sole income of the US trust will consist of rental income from the South African airline company. It will not derive any income from Mauritian source.
Points in issue
Confirmation as to whether –
- the US trust will be considered as transparent for Mauritius tax purposes so that the finance leasewill be treated as if entered into between the Cayman Island company and B Ltd, and the operating lease entered into between B Ltd and the South African airline company;
- B Ltd may claim treaty benefits under the Mauritius-South Africa Double Taxation Agreement;
- B Ltd will be entitled to claim capital allowances on the aircraft which would be leased by the trust to the South African airline company as if it had itself purchased the aircraft on finance lease, and the rate of capital allowances will be 100% of cost.
Rulings
(i)&(ii): The US trust will, for all intents and purposes, be considered as a company in accordance with the Income Tax Act, and therefore no issue of transparency for tax purposes arises. B Ltd will be the beneficial owner of the US trust, and therefore will not be concerned with the Mauritius-South Africa Double Taxation Agreement. As such, it will be liable to tax on any distribution it will receive from the trust.
(iii) As B Ltd will not be involved in any leasing activities but will receive distribution income from the US trust, it will not be entitled to any capital allowances.
The lease is a finance agreement in which lessor (owner of the asset) purchases the asset and let the lessee (user of the asset) use the asset for a limited period against periodic payments (lease rentals). The terms and conditions of the lease are written in the lease deed(agreement). Finance or capital lease and operating lease are two types of lease.
Finance Lease is a lease in which the risk and rewards are transferred to the lessee with the transfer of the asset. Assets purchased under finance lease should be recorded in the statement of financial position under non-current assets.
Risk and rewards include maintenance of assets, wear and tear (depreciation should be accounted in accounts), etc.
UnlikeOperating Lease, in which the risks and rewards are not transferred to the lessee with the transfer of the asset. Assets purchased under operating lease should not be recorded under non-current assets, but monthly lease rental shall be accounted as an expense.
Tax benefit
- Finance lease
Depreciation and finance charges (interest paid) are allowable as a deduction to lessee for tax purpose.
Interest paid is allowable only if total lease interest payable for the asset is capitalised under capital allowance.
- Operating lease
Lease rental is allowable as a deduction to lessee for tax purpose.
Capital allowance
Capital allowance is an amount of money spent on business assets that can be subtracted from what a business owes in tax.
Claiming capital allowance means a reduction in tax, something that is nearly always a positive for a business (and individual). Essentially, a percentage of the amount that the company has spent on assets is deducted from the tax rate when taxes are filed.
A reduction in tax amounts can be a plus point for a business, especially one just starting out as it means you retain more cash that can be reinvested to boost company growth.
Capital allowance cannot be claimed on land.
