Application of deemed interest income & non-deductibility of passage benefits on an accrual basis: The Supreme Court upholds the ARC’s decision

Application of deemed interest income & non-deductibility of passage benefits on an accrual basis: The Supreme Court upholds the ARC’s decision

While businesses would argue that interest-free loans may be justified in certain cases (e.g., providing an #interest-free loan to a subsidiary because the latter is heavily indebted), the counter argument has typically remained that loans should not be interest-free as all transactions must be carried out at arm’s length.

In the recent judgment of Innodis Ltd v The Director General, The Mauritius Revenue Authority (Customs Department) [2023 SCJ 73], the Supreme Court of Mauritius upheld the decision of the #Assessment Review Committee (“ARC”) that deemed interest income should be applied on the interest-free loans granted by Innodis Ltd, to its wholly owned subsidiaries. The Supreme Court found that these interest-free loans were not part of an arm’s length transaction.

The main principles set out by the Supreme Court in relation to the application of the deemed interest income are as follows:

-???????Section 75 of the #Income Tax Act 1995 (“ITA”) which incorporates the arm’s length principle requires that parties (in both international and domestic transactions) act in an independent manner and with self-interest to attain the most beneficial deal: a deal which “closely matches a fair market value”.

-???????The ‘real purport or the commercial motivation’ for the granting of interest-free loans is irrelevant for the purpose of section 75 of the ITA.

-???????There is an obligation for parties to transact at arm’s length irrespective of the?“economical or otherwise good reason behind the business transaction undertaken.”

-???????The MRA was entitled to bring a claim under section 75 of the ITA even if the claim could have been considered under section 90 of the ITA. Section 90 of the ITA relates to transactions designed to avoid liability to income tax.

Furthermore, the Supreme Court in its judgment also considered the deductibility of overseas passage allowances which were due to employees under their contract of #employment. These allowances had been earmarked but were not actually paid to the employees. The Supreme Court reached the same conclusion as the ARC and held that the passage allowances in question were not deductible for tax purposes until they are actually disbursed.?

In light of the judgment, it has become clear that the #mra and the courts have taken the position that interest-free loans are not justified. Loan arrangements between related parties must imperatively be made at arm’s length, failing which, the parties run the risk of being assessed by the MRA.

About the Author

? Yashna Munbauhal is an associate in the Corporate & Commercial team at BLC Robert & Associates. She advises on domestic and cross-border corporate and commercial transactions, including, mergers and acquisitions, and corporate restructuring. She also handles a wide range of tax matters which cover both international and domestic tax issues.