Gary Gowrea, Regional Director, MEMG International Ltd, shares his insights on the new Special Purpose Fund regime and how it can serve to enhance the competitive edge of the financial services industry in Mauritius. Indeed, he highlights that the SPF can help increase the country’s foreign reserves and stabilise the Mauritian Rupee vis-à-vis other currencies, given that it has all the ingredients in requiring substance and flow of funds within the jurisdiction, and also ensures that funds can be collected from investors in abeyance of getting suitable recommendations from fund managers.

Edited excerpts from an exclusive interview:

 

How do the Special Purpose Fund (Amendment) Rules 2021 enhance the competitiveness of the jurisdiction? In particular, how do these new rules make it less onerous for fund managers to operate an SPF compared to the earlier rules?

As you are aware, although Mauritius can be considered as a young financial centre, its offerings have matured rapidly. In that respect, it was essential that a new product offering which is appealing to fund managers is developed. The Special Purpose Fund (SPF) is essentially a Collective Investment Scheme (CIS), but it is treated as an exempt body for tax purposes. Note however that under the Rules, the offer of the CIS shares must be made solely by private placements to investors having competency, significant experience and knowledge of fund investment. The minimum investment is USD 100,000 per investor and the CIS can only have a maximum of 50 investors. In this respect, the SPF lays open to small and mid-size fund managers a nice offering as with the tax exemption, this will give a higher return which is not eroded by an increasing expense ratio. 

The new Rule is appealing as it is still a tax resident vehicle in Mauritius and thus the SPF can benefit from the fast expanding and beneficial tax treaty network, which provides low or nil withholding tax rates (WHT) as compared to source rates. Again, the benefit of the low WHT is that it enhances returns for investors. Further, in most of the tax treaties that Mauritius has signed, under the capital gains article, the taxing right is given exclusively to the resident state. Thus, in case of exit of investments the gains would be taxed exclusively in Mauritius and there is no capital gains tax. 

A lot of our competitor jurisdictions offer tax exemption, but they do not have the benefit of the tax treaties that Mauritius has in force. This is an important Unique Selling Proposition (USP) that one must look at when structuring.
 
Could you tell us about the context against which these new rules were introduced, and why were they needed?

As you are aware, many investors would invest out of their hard-earned cash saved over the years which had already been subjected to tax. If they are to invest in instruments that are subjected to tax, this potentially leads to double taxation, which seems unfair. Thus, the SPF provides an optimal solution to avoid the unintended consequence of double taxation. Further, as the total expense ratio (TER) is under continuing scrutiny from investors, having the tax exemption as explained above alleviates their concerns and improves returns. 
 
Under the new rules, one can structure a Collective Investment Scheme (CIS) provided it meets certain obligations. Could you take us through these conditions?

As set out in the Financial Services (Special Purpose Fund) Rules 2021, there are certain minimum obligations that the SPF must meet, namely:

1.1 Investors offer its shares, solely by way of private placements, to having competency, significant experience and knowledge of fund investment;
1.2 Have a maximum of 50 investors and a minimum subscription of USD 100,000 per investor;
1.3 At all times be: (i) managed by a CIS manager; and (ii) administered by a CIS administrator 
1.4 Comply with any such other conditions as may be imposed by the FSC.

2. The SPF, the CIS manager  and  the  CIS administrator  shall  carry  out  their  relevant  core  income generating  activities (CIGA) in, or from, Mauritius.  

Could you elaborate upon the substance requirements in particular?

The CIGA would entail employment, directly or indirectly, of an adequate number of suitably qualified persons to conduct such core income generating activities and also incurring a minimum expenditure proportionate to the level of such activities. The Income Tax Act 1995, which the FSA refers to when dealing with CIGA, provides that the collective investment scheme must carry out investments of funds in a portfolio of securities, or other financial assets, real property or other financial assets; diversification of risks and redemption on the request of the holder. You would note that this is basically the definition of a CIS under the Securities Act 2005. Direct employment would mean that the SPF employs its own staff to carry out the managerial and administrative tasks, but indirectly these tasks may be performed by the management companies that usually have a staff complement with extensive experience and qualifications. Note that these activities may also be outsourced to firms that are capable of delivering such service.

In practical terms, how can fund managers looking at structuring for Africa or Asia leverage the new rules to set up an SPF structure?

The SPF gives a broader dimension to investments as one is not limited to securities, but one can also look at real estate. With Africa and Asia hungry for infrastructure projects, one can undertake the pooling of funds in Mauritius and carry out various infrastructure investments. Of course, we will need to have a manager in Mauritius that assists in identifying, evaluating, and recommending viable projects to the board of directors of the SPF. 

One can also add a different dimension to the structuring proposition as one can contemplate using the protected cell legislation which is available in Mauritius which looks at licensing the cell as an SPF – thus protecting other cells from risks of contagion if the assets of a particular cell perform badly. The benefit is that the manager can also be acting for the other cells and thereby deriving economies of scale.

At the launch of the new SPF Rules, the FSC CEO noted that “while the rules governing the SPF have been made flexible, the FSC will still maintain all its rigour when it comes to supervision.” From a broad perspective, how do you see Mauritius balancing the requirements of providing further flexibility and easing access to new markets with the need to maintain rigorous supervision and conform to international standards?

Mauritius has always taken the approach of flexibility, transparency and yet accountability in most of the legislative frameworks that have been enacted, be it the Companies Act, the FSA, and so on. The flexibility that the SPF Rules provide is that the rules can be customised to work hand in hand with the protected cell legislation as explained above. 

The role of a regulator is to maintain rigour within the framework and thereby give the necessary trust and credibility to the jurisdictions so that investors can feel at ease when placing their investment. Thus, the role of the FSC is to ensure that the application of the regulatory framework is done in such a manner so that it is not disruptive to the commercial rationale of the structure but at the same time gives investors the necessary comfort that the ecosystem is conducive.

One of the core ingredients of the SPF is that it must have a manager in Mauritius. What would entice fund managers to set up in Mauritius?

There are a whole host of reasons why a fund manager should select Mauritius as the domicile for their future funds. Firstly, as announced in the Finance Act 2021, the Income Tax Act has been amended to allow one employee of the fund manager to be exempted from income tax for a period of 10 years from the day it is licensed provided the assets under management are no less than USD 50 million. Further, as he is relocating to Mauritius, he will be eligible for an Occupational Permit (OP) valid for 10 years which may be converted to a Permanent Residence Permit subject to fulfilling certain conditions under the laws of Mauritius. The partner of the fund manager will also be eligible for an OP and three dependents can get Residence Permits. In addition, the expatriate staff can also acquire property in a PDS scheme or a flat in a complex which is ground plus two. Note that returning residents having spent more than 5 years abroad can also benefit from the diaspora scheme which gives them exemption from income tax for 10 years.  

Finally, could you tell us how these rules have led to an increased uptake of SPF vehicles, based on your observation of the market since the FSC issued the Financial Services (Special Purpose Fund) Rules 2021, effective as from 06 March 2021? If it is too soon to comment on evidenced uptake, what are the market expectations around adoption of SPF structures following these new and improved rules?

Since the issuance of the SPF Rules came at the time of the COVID-19 pandemic, a lot of the professionals within the financial services sector have not been able to travel for marketing trips with the borders being closed. Yes, one can engage with online marketing, but it does not give the same flavour as face-to-face marketing which Mauritius professionals have been very successful at doing. Having said so, while there have been quite a few enquiries, it is hard to comment in the absence of official figures from FSC. 

If structured properly the SPF can become one of the success factors for the financial services industry and it has all the ingredients in requiring substance, flow of funds within the jurisdiction and with funds collected from investors in abeyance of getting suitable recommendations from fund managers, that can help the country’s foreign reserves and stabilise the rupee vis-à-vis other currencies. 

Finally, under the OECD/G20 initiative on Base Erosion and Profit Shifting, on the setting up of the two pillars, it is worth noting that regulated financial services and pension funds have been excluded from Pillar II, which deals with minimum taxation. This augurs well for the jurisdiction as it will avoid tax leakages in the hands of investors, be it institutional, pension funds, or others. Thus, the SPF is an attractive proposition for fund managers to consider Mauritius.