The Mauritius Route Peter J. Wattel Netherlands Supreme Court

South Africa Topholding South Africa Subholding Mauritius Holding Dutchco 1 (acquiring) Mauritius Finance (GBC 2 status ) Dutchco 2 (acquiring) Direct transfer $ 600 million Share issue $ 1 billion loan capital contribution Interest-free loan

Art. 10a 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More facts: No equity was withdrawn from the Netherlands part of the Group (no circular cash course); Dutchcos did not possess the funds required for the takeovers: genuine need for financing;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 1st 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 3rd 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?