The Mauritius Revenue Authority takes bold policy decision to treat compensation under Compromise Agreements as exempt income
In a bold move, the Mauritius Revenue Authority has decided on the 20 December 2024 to treat compensation received under a compromise agreement pursuant to Section 16 of the Workers Rights Act as “exempt up to a maximum of Rs 3 million”.
Appleby recently acted for a company in a redundancy matter, under Section 72 of the Workers’ Rights Act, whereby after several rounds of negotiations a compromise agreement was signed pursuant to Section 16 of the Workers’ Rights Act 2019.
Section 16 provides:
16. Compromise agreement
(1) Notwithstanding any provision to the contrary in the Code Civil Mauricien and any other enactment, where a worker and an employer 26 agree to resolve a dispute concerning the amount of compensation or other related payments, by whatever name called, paid following a termination of employment, or the amount of remuneration payable in a case of non-payment or short payment of remuneration, the worker and the employer shall enter into a compromise agreement.
(2) A compromise agreement shall not be valid where – (a) the compromise agreement was not vetted by an independent adviser; (aa) the worker has not, prior to entering into the compromise agreement, received advice from a relevant independent adviser regarding the terms of the agreement and the effect of that agreement on his claim; or (b) the independent adviser was a party to the matter for the employer.
(3) Where an employer fails to comply with a compromise agreement, any payment due to the worker under the agreement may be claimed in Court.
(3A) Subject to subsection (2), where a compromise agreement concerning termination of employment is made between a worker and an employer under subsection (1), the employer may deduct the contributions payable to the Portable Retirement Gratuity Fund from the amount payable under the compromise agreement.
(4) In this subsection (1) – “relevant independent adviser” means – (a) a qualified law practitioner; (b) an officer or a member of a registered trade union; (c) an officer of the Ministry.
The issue that arose was whether the amount paid to the employees as “compensation” under Section 16 of the Workers’ Rights Act 2019 was exempt from tax.
Following an exchange between an employee of the company and the Mauritius Revenue Authority (MRA), the MRA informed the employee that the compensation payable would be “exempt up to a maximum of Rs 3 million…employees who reckon less than 12 months of service will not be eligible for the exemption”.
In an interesting exchange with the MRA, it came to light that the MRA treated the compensation as a “severance allowance” payment. The attention of the MRA was drawn to the wording used by the legislator in Section 16 of the Workers’ Rights Act 2019 which uses the term “compensation” as opposed to “severance allowance” or “severance payment”.
Following the exchange, the MRA took to time to consider and on the 20 December 2024, the MRA informed me as follows:
- The MRA has taken a policy decision to treat the compensation as being exempt; and
- The Income Tax Act will be amended accordingly to cater for compromise agreement.
This is a welcomed stand by the MRA inasmuch as it has been a debate for some time, whether when there is a loss of office/redundancy, the compensation paid under a compromise agreement to the employee is and/or ought to be considered as an exempt amount (for up to a maximum of Rs 3 million).
The decision also seems to take into account any potential hardship that may arise (in certain circumstances) with the loss of a job.
Disclaimer:
This is a note on a specific case and ought not to be treated as legal advice. For legal advice on tax or employment matters, you may contact Appleby.
