The Privy Council rules in favour of Alteo Energy Ltd
On 30 June 2026, the Privy Council (PC) delivered a landmark judgment in favour of Alteo Energy Ltd (“Alteo” or the “Company”) and confirmed that the Company was entitled to claim 80% exemption on interest income during the year ended 30 June 2019 [2026] UKPC 27].
The main business activity of Alteo is the production and sale of electricity. During the year ended 30 June 2019, it derived income from the sale of electricity as well as interest income out of excess cash deposited with a sister company.
Alteo claimed 80% exemption on interest income in accordance with item 7 of Sub-Part B of Part II of the Second Schedule to the Income Tax Act (ITA). This provision allows companies, other than certain excluded companies such as banks, to be partially exempt from income tax on interest derived. The exemption is conditional on the company satisfying the following three prescribed “substance” conditions as laid down in Regulation 23D(2) of the Income Tax Regulations 1996 (ITR):
- The company should carry out its core income generating activities (CIGA) in Mauritius;
- The company should employ directly or indirectly an adequate number of suitably qualified persons to conduct its CIGA; and
- The company should incur a minimum expenditure proportionate to its activities.
The ITR states that “core income generating activities” include activities such as agreeing funding terms, setting financing terms and duration, monitoring and revising agreements, and managing risks.
According to the MRA,
“income” meant the relevant interest income and “core” required the interest-generating activities to be the core business activities of the company;
The substance condition was not met because interest income represents about 0.25% of the total income of the Company and its lending activities were incidental to its main electricity business.
The Company’s claim for 80% exemption was denied by the MRA and an assessment raised accordingly.
According to Alteo,
Even if “income” meant interest income, the test did not require the interest-generating activities to be core business activities of the company;
The substance condition was satisfied because all its activities were carried out in Mauritius.
The Assessment Review Committee (ARC) ruled in favour of the MRA and took the view that to benefit from the exemption, what needs to be considered first is the substance of the activities of Alteo. As such, Alteo had to satisfy all three conditions laid down in Regulation 23D of the ITR. In this case, the ARC determined that since the interest income only represented 0.25% of the total income for the year, it cannot be said that the interest income was derived from the CIGA of the Company.
The Supreme Court held that:
- Based on item 7, any company (other than excluded financial institutions) may claim the exemption and there is no restriction such as the nature of business activities;
- The only requirement to be met in order to claim partial exemption is that the company satisfies the conditions relating to the substance of its activities as prescribed;
- The term ‘includes’ cannot have an exhaustive and restrictive meaning. It has been used in the present context so as to encompass both its ordinary and natural meaning as well as the enlarged statutory meaning to therefore include also companies making funding agreements, monitoring and managing risks etc.;
- The intention of the legislator is to avoid all doubts that the partial exemption applies to companies (other than excluded financial Institutions) making funding agreements monitoring and managing risks etc., whether local or GBL companies, provided the three conditions are duly complied with; and
- CIGA should be given its natural meaning, i.e., any business activities which generate the main income of the company as well as the extended statutory meaning given to CIGA for the purposes of item 7 to claim the partial exemption.
The Privy Council held that:
- In the present context, “income” meant income of the type capable of benefiting from the relevant exemption; for item 7, that meant interest income.
- The word “core” qualifies the relevant “income generating activities”, not the company’s overall business. The condition therefore asks whether the core activities required to generate the relevant income were carried out in Mauritius, not whether money-lending was central to Alteo’s business;
- The list of activities in regulation 23D(2)(b), such as agreeing funding terms and managing risks could not displace the plain meaning of the first condition, and the regulation imposed no restriction on the nature of the company’s business.
The PC considered the Mauritius legislation against the background of the OECD’s work on harmful tax practices and BEPS Action 5 which focuses on ensuring a link between preferential tax benefits and the substantial activities required to generate the income benefiting from the regime. The PC noted that the relevant activities could be viewed narrowly as the loan-making activities that directly produced the interest or more broadly as the company’s overall operations from which the incidental interest income arose. The choice did not affect the outcome because all Alteo’s activities were carried out in Mauritius. The PC preferred the broader approach for a company like Alteo where interest income was merely incidental to its main business because it better reflected the substance-based purpose of the rules.
Our views:
The Privy Council dismissed the MRA’s appeal although for reasons different from those given by the Supreme Court. The judgment confirms that substance condition for the interest exemption focuses on where the relevant income-generating substance is located not on whether the relevant income stream forms part of the taxpayer’s core commercial business.
The PC judgment is hailed for setting a legal precedent on the issue of whether a domestic company with incidental income is eligible to claim partial exemption. It confirms that the exemption cannot be denied merely because lending is not the company’s principal business activity.
The PC’s judgement provides welcome clarity and is likely to have implications beyond the parties to the litigation. Taxpayers should consider whether the decision affects their current tax position, historical filings, internal processes or gives rise to opportunities such as refund claims. As the implications will depend on the specific facts of each case, a careful assessment is advisable. We would be pleased to assist taxpayers in evaluating the impact of the judgement and identifying any appropriate actions in light of this important development.
For more information please contact:
Yamini Rangasamy
Associate Director - Tax
yamini.rangasamy@pwc.com
Mobile: +230 5472 7339 | Office: +230 404 5469
Akshay Gowrisunkur
Associate Director - Tax
akshay.gowrisunkur@pwc.com
Mobile: +230 5256 4977 | Office: +230 404 5022
