Taxation of trusts and foundations in Mauritius

November 2021  |  SPECIAL REPORT: CORPORATE TAX

Financier Worldwide Magazine

November 2021 Issue

The financial services sector represents a key component of the Mauritian economy. It comprises major local and international players in banking, insurance, capital markets, fund administration and law. It offers a wide range of products and services to local and international customers and investors. In this article, we look at two specific structures, namely trusts and foundations, in Mauritius.

Trusts

Trusts in Mauritius are legal arrangements governed by the Trusts Act, 2001 and they do not have legal personality. A trust can only be created by an instrument in writing which should state its object, subject, intention, and duties and powers of the trustees. A trust is an arrangement for the holding and administration of property under which property or legal rights are vested by the owner of the property, also known as the settlor, in a person or persons, namely the trustees.

The latter then hold the property for or on behalf of the beneficiaries of the trust. It is essential that the transfer is gratuitous, otherwise the transaction takes on the characteristics of some other legal entity. A trust may therefore be defined as an equitable obligation which binds the trustees to hold and deal with the trust assets for the benefit of the beneficiaries in accordance with the terms of the trust.

The flexibility and protection afforded by trust arrangements are such that they have become an important part of wealth management. Trusts are becoming increasingly sought after structures for preserving family assets for succeeding generations, keeping them significantly free from probate requirements, succession laws, expropriation and foreign exchange controls.

A corporate structure allows its shareholders to have business conducted, to own assets and to limit liability. The ability to manage assets through a combination of trusts and companies is proving increasingly valuable and the legislation in force in Mauritius provides an effective framework for conducting international fiduciary activities and providing services in that respect. Both residents or non-residents of Mauritius can set up trusts in Mauritius, and there is no requirement to register trusts, thereby maintaining confidentiality.

Foundations

A foundation is a legal entity with hybrid features of a company and a trust. It is regulated by the Foundations Act 2012 and is similar to a company which, as a legal entity, can enter contracts on its own behalf, hold bank accounts and can be used for a wide range of investment activities. The foundation has no shareholders; instead, the council of members is the board that manages the foundation. The foundation is homogenous to a trust in that it offers excellent asset protection, as legal ownership of assets is passed on to the foundation and can be used for efficient estate planning.

A foundation is a legal entity formed by registering a document called a foundation charter or declaration of establishment. The foundation is established when a founder registers the particulars of the foundation charter or the declaration of establishment or the memorandum of establishment at the public registry. Unlike a trust, there is no immediate requirement to transfer the assets to the foundation for it to be valid.

Foundations have a distinct legal personality which can sue or be sued, enter into contracts and agreements with companies or persons, open bank accounts and conduct commercial activities. The assets owned by a foundation are independent from the founder. Once they are transferred to the foundation, these assets no longer belong to the founder, but to the foundation only. This means that the endowment cannot be seized, or be subject to any claims or legal actions against the founder or the beneficiaries. The foundation council members report to the foundation. The foundation is managed by a board or council made up of one or more persons; corporate bodies are permitted. A foundation may be revocable and irrevocable.

Tax implications

Trusts and foundations are taxed as if they were companies by legal fiction, which is not the case in other jurisdictions. They are subject to tax on chargeable income at the rate of 15 percent. However, prior to 1 July 2021, a trust in which: (i) the settlor is a non-resident or holds a ‘global business licence’ under the 2007 Financial Services Act (FSA); (ii) all the beneficiaries appointed under the trust are, throughout an income year, non-residents or holds a global business licence under the FSA; and (iii) is a purpose trust under the Trusts Act and whose purpose is carried out outside of Mauritius, could file a declaration of non-residence with the Mauritius Revenue Authority (MRA) within three months after the expiry of the income year and therefore be exempt from income tax in respect of that year.

In the same vein, prior to 1 July 2021, a foundation of which: (i) the founder is a non-resident or holds a global business licence under the FSA; and (ii) all the beneficiaries appointed under the terms of a charter or a will are throughout an income year, non-resident or hold a global business licence under the FSA, could submit a declaration of non-residency for any income year with the MRA within three months from the expiry of the income year and hence be exempt from income tax in respect of that year.

With a view to mitigate the risk of Mauritius being listed on the OECD’s grey or blacklist for harmful tax matters, the Finance Act 2021 brought numerous changes in the Mauritius Income Tax Act 1995 (ITA) in respect of trusts and foundations. The declaration of non-residence has been repealed and will no longer be available, but trusts and foundations which existed prior to 30 June 2021 will still benefit from a declaration of non-residence up to 30 June 2024,meaning assessment year 2024-25 (the grandfathering period).

During the grandfathering period, a trust or foundation cannot benefit from the exemption in respect of new assets or activities such as intellectual property assets acquired and income from specific assets or projects which commenced after 30 June 2021.

Following amendments under the Finance Act 2021, trusts and foundations will no longer be able to file a declaration of non-residence, but they will be considered non-resident if they are centrally managed and controlled outside Mauritius, as set out under Section 73A of the ITA.

Central management and control are not defined in the ITA, but the MRA has set out the criteria to determine central management and control for both trusts and foundations, which are as follows.

For trusts, the trust must be administered in Mauritius, with most of the trustees resident in Mauritius. The settlor of the trust must be resident in Mauritius at the time the instrument creating the trust was executed or at such time as the settlor adds new property to the trust. Most of the beneficiaries or the class of beneficiaries appointed under the terms of the trust must be resident in Mauritius.

For foundations, the founder must be resident in Mauritius and most of the beneficiaries appointed under the terms of a charter must be resident in Mauritius.

All the determinants of central management and control for trusts and foundations must be fulfilled for them to be resident. The residency of trusts and foundations is laid out under Section 73(b) and (da) of the ITA: a resident trust means a trust administered in Mauritius and where most of the trustees are resident in Mauritius, as well as where the settlor of the trust was resident in Mauritius at the time the instrument creating the trust was executed. Similarly, a resident foundation means a foundation which is registered in Mauritius or has its central management and control in Mauritius.

Once a trust or foundation has met the criteria of residency, it will be subject to tax on its worldwide income at the rate of 15 percent. Moreover, it may claim 80 percent partial exemption on certain categories of income, such as foreign dividend income and interest income, provided it satisfies the conditions set out in the ITA relating to substance requirements. As there is no capital gains tax in Mauritius, the capital gains derived by a trust or foundation will not be subject to tax. On the contrary, a foundation or trust whose exclusive purpose is to conduct charitable activities will be exempt from tax in Mauritius.

The distribution made by a trust or foundation to the beneficiaries are termed dividends. Dividends are not subject to withholding tax in Mauritius. Dividends in the hands of resident individual beneficiaries will be exempt up to MUR3m, and the excess will be liable to solidarity tax at the rate of 25 percent but limited to 10 percent of leviable income. Non-resident beneficiaries will be subject to tax, if any, in their country of residence.

Non-resident trusts and foundations are liable to income tax at the rate of 15 percent in Mauritius only on income sourced from Mauritius.

In summary, resident trusts and foundations are subject to tax on their worldwide income, whereas non-resident trusts and foundations are liable only on income sourced from Mauritius. To determine the residency of a trust or foundation, one needs to examine the test of central management and control. The determinants of central management and control are to ensure substance in the post base erosion and profit shifting (BEPS) era. Distributions made by a trust or foundation are termed dividends and there is no withholding tax on dividend distribution in Mauritius.

 

Roomesh Ramchurn is a partner at Mazars. He can be contacted on +230 208 4444 or by email: roomesh.ramchurn@mazars.mu.

© Financier Worldwide

BY

Roomesh Ramchurn

Mazars

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