Mauritius ruling creates flutter in fund industry

The Mauritian Revenue Authority (MRA) has recently held that distributions of carried interest by a Mauritius-based investment fund to its Mauritius-based investment manager would be subject to tax as ordinary income, arising from the rendering of management and advisory services by the investment manager. The MRA clarified that such earnings would not be considered tax exempt.

The case involved a unified structure in which a Mauritius-based fund subscribes to the units of an Indian trust. The investment manager provides investment advisory services to the fund for which it receives fixed advisory or management fees. The investment manager is also entitled to receive a variable element (carried interest) along with the investors in accordance with the distribution waterfall, which sets out how the proceeds from the sale of investments should be allocated between the investors and the investment manager.

The fund has issued only two classes of shares: “preference shares” for investors committing to the fund, and “management shares” for the management of the fund. The management shares that were issued to the fund’s Mauritius-based investment manager were disentitled from receiving dividends.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.