With pressure mounting from the Organisation for Economic Corporation and Development (“OECD”) and 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 taxation of trust and foundation with the abolishment of the non-residence declaration.
Governed under the Trusts Act 2001, a trust is a three-party fiduciary relationship in which the first party, the trustor or settlor, transfers (“settles”) a property upon the second party (the trustee) for the benefit of the third party, the beneficiary. Flexible as it is, a trust is the preferred vehicle for preserving family assets succeeding generations significantly free from probate requirements, succession laws, ex-propriation and foreign exchange controls.
Contrastingly, a Foundation is broadly defined as a legal entity with hybrid features of a company and a trust. The foundation has distinct legal personality. The assets owned by the foundation are independent from the founder. This means that the endowment cannot be seized, or subject to any claims or legal actions on the founder, or the beneficiaries.
Tax implications
A tax rate of 15% is applicable for Trusts and Foundations. However, before 1 July 2021 if a trust or foundation 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 if they meet the below criteria.
For a Trust
- The settlor is a non-resident or holds a Global Business Licence;
- All the beneficiaries are non-residents; and
- It is purpose trust under the Trusts Act and whose purpose is carried out outside of Mauritius.
For a Foundation:
- The founder is a non-resident or holds a Global Business Licence and;
- All the beneficiaries are non-resident or hold a global business licence under the FSA,
Following amendments under the Finance Act 2021, the declaration of non-residence has been repealed and will no longer be available. Subsequently, the Mauritius Revenue Authority issued a statement of practice to shed lights on the matter especially regarding determining the tax residency. Trusts and foundations which existed prior to 30 June 2021 will still benefit from a declaration of non-residence up to 30 June 2024. 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.
However, with the repealing of the non-residence declaration, Section 73A of the Income Tax Act 1995 should be considered and consequently, trust and foundations will be considered non-resident if they are centrally managed and controlled outside Mauritius.
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 trustee’s 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.
- Majority of 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
- Majority of beneficiaries appointed under the terms of a charter must be resident in Mauritius.
Satisfying these criteria, the worldwide income of a trust or foundation will be subject to tax at 15% and they will also be eligible for the 80% partial exemption tax regime. On the contrary, a Foundation or Trust whose exclusive purpose is to conduct charitable activities will be exempt from tax in Mauritius.
To the extent of non-resident trust and foundation are concerned, they will be liable to income tax at the rate of 15% in Mauritius only on the income source from Mauritius.
Contributed by –
Bhavish Auckloo
Tax Consultant at Mazars Mauritius
*The views expressed are personal.
