The judgment in Alteo Energy Ltd and another v Director-General, Mauritius Revenue Authority [2026] UKPC 27 provides important clarity on the meaning of ‘core income generating activities’ for purposes of the substance-based exemptions that apply across multiple categories of income.

In this case, the Judicial Committee of the Privy Council dismissed the Mauritius Revenue Authority’s (MRA) appeal and confirmed that a Mauritius-resident operating company receiving incidental interest income is entitled to the 80% partial exemption under item 7 of Sub-part B of Part II of the Second Schedule to the Income Tax Act 1995 (ITA). This is provided that it carries out the core activities generating that income in Mauritius with adequate substance.

Background

As part of Mauritius’s response to OECD BEPS Action 5 concerns regarding harmful tax practices, the global business company preferential tax regime was replaced by a substance-based partial exemption framework with effect from 1 January 2019.

Under item 7 of Sub-part B of Part II of the Second Schedule to the ITA, 80% of interest income derived by a qualifying company is exempt from income tax, subject to the company satisfying substance conditions prescribed in regulation 23D(2) of the Income Tax Regulations 1996.

These conditions require the company to: (i) carry out its ‘core income generating activities’ in Mauritius; (ii) employ an adequate number of suitably qualified persons to conduct those activities; and (iii) incur minimum expenditure proportionate to its level of activities. The same formula is used across multiple exemption items in the Second Schedule (including ship/ aircraft leasing and reinsurance income), with only the list of activities varying.

The facts

Alteo Energy Ltd (Alteo) is incorporated and domiciled in Mauritius and principally engaged in electricity production, with sales to the Central Electricity Board accounting for 95.7% of its total income in the 2019/20 tax year. Alteo also received interest on certain loans it had made, representing approximately 0.25% of its total income – an amount incidental to its main business.

The MRA denied the 80% partial exemption on this interest income on the basis that Alteo’s core business activities were electricity production rather than money-lending. The Assessment Review Committee upheld the MRA’s position. The Supreme Court of Mauritius allowed Alteo’s appeal, though on reasoning subsequently found to be incorrect by the Privy Council.

The issue before the Privy Council

The central question was whether Alteo satisfied the first substance condition in regulation 23D(2)(a)-that it ‘carries out its core income generating activities in Mauritius’.

Two sub-issues arose:

• does ‘income’ refer to all of the company’s income or only the specific category of income eligible for the exemption (ie interest)?; and
• does ‘core’ require the income-generating activities to be the company’s core business, or merely that the essential activities generating that specific income are conducted in Mauritius?

The decision

The Board (Lord Leggatt delivering the judgment) dismissed the MRA’s appeal, holding as follows:

On ‘income’: The Supreme Court was wrong to interpret ‘income’ as referring to all of the company’s income. It means only income of the type capable of benefiting from the specific exemption (here, interest income). This follows from the function of regulation 23D(2) as a gateway to the item 7 exemption, reflects the OECD substantial activity requirement’s purpose of linking specific exempted income to the core activities producing it, and is confirmed by the use of the same formula across multiple exemption items with only the illustrative activities varying.

On ‘core’: The word ‘core’ qualifies ‘income generating activities’. It requires that the essential activities generating the relevant income are carried out in Mauritius. It does not impose a requirement that the income-generating activity be the company’s principal or central business. The regulation does not restrict the nature of the company’s business; it merely requires that wherever the relevant income-generating activities are performed, they be located in Mauritius.

Application: Since all of Alteo’s activities were carried out in Mauritius with adequate qualified staff and proportionate expenditure, the substance conditions were satisfied. The Board preferred a broader view of Alteo’s operations (focusing on the substance of the company’s activities as a whole) particularly given that the interest was an incidental by-product of its main electricity business.

Key takeaways

This Privy Council ruling is of direct relevance to global business companies and other Mauritius-resident entities relying on the substance-based partial exemptions in Part II of the Second Schedule to the ITA. The decision clarifies that:

• The substance test is assessed by reference to the specific category of income for which the exemption is claimed, not the company’s total income.
• A company need not have the relevant income-generating activity as its core business to qualify. Incidental income (such as interest on loans made by an operating company) can benefit from the partial exemption provided the activities generating it are genuinely carried out in Mauritius with adequate substance.
• The MRA cannot deny the partial exemption merely because the income-generating activity is not the company’s principal business line.
• The same reasoning applies to the other exemption items using the identical ‘core income generating activities’ formula (eg ship/ aircraft leasing under item 42 and reinsurance income under item 46).

This decision provides helpful comfort to Mauritius-resident companies, including operating companies outside the traditional ‘global business’ sector, that receive incidental interest or other item-specific exempt income alongside a different principal business, provided genuine substance in Mauritius is maintained.

Written by Javed Niamut, Partner, Bowmans