With investors and high net worth individuals’ (HNWIs) concern for proper estate planning which is also tax-efficient, a Trust holding structure is a vehicle that is commonly adopted as it offers the flexibility of holding worldwide investments for beneficiaries whilst limiting the constraints or risks associated with legal ownership.
At a time when countries are struggling in the midst of a global pandemic and the consequent economic recession, succession planning and ensuring a safe transition of their assets to the future generation have come to the fore in the minds of investors and HNWIs.
During these unprecedented times, succession planning is no longer a ‘nice-to-have’ but a ‘must-have’, and a Trust can serve as the vehicle for securing investments and safeguarding assets for family members.
What is a Trust?
A Trust is a fiduciary relationship in which one party, known as a trustor, settlor or donor, gives to another party, the trustee, the title to certain property or assets. The assets are held by the trustee for the benefit of one or more beneficiaries which can include the settlor.
Why set up a Trust?
The prime motivation for setting up a Trust remains asset protection. Other reasons include confidentiality as records are not available for public inspection. Likewise, tax planning remains a key aspect of Trusts as does estate planning. Continuity of ownership is also secured through a holding by a Trust.
Overall, investors may benefit from the following advantages when they choose to form a Trust:
- Tax Planning – A properly established Trust may produce substantial savings in income tax, capital gains tax and inheritance tax/estate duty;
- Avoiding Probate – In common law jurisdictions, the need to obtain a grant of representation (probate or letters of administration) before a deceased’s estate can be wound up and distributed may cause delay, expense, unwanted publicity and upheaval. A well-structured Trust may help to avoid such situations;
- Avoiding Forced Heirship – Many jurisdictions have incorporated ‘forced heirship’ provisions into their succession laws, which restrict an individual’s freedom to choose how their property is divided upon their death and confer an automatic entitlement on certain individuals to a portion of the deceased’s estate. These individuals are known as ‘protected heirs’ and typically include the surviving spouse, children and / or other relations of the deceased. Such ‘forced heirship’ is a particular feature of civil law jurisdictions, as well as in countries of Islamic tradition. A Trust can be used to overcome forced heirship claims mostly in respect of international assets i.e. those not located in the countries of domicile of the settlor and/ or beneficiaries;
- Estate Planning – Many settlors prefer to make complex arrangements for the distribution of their assets. They may wish to provide a source of income for a spouse or make provision for the education of children. A Trust is a very convenient and flexible method of making such arrangements;
- Protection against creditors – A discretionary family Trust offers the advantage of asset protection. For example, in the unfortunate event that the businesses of the settlor go bankrupt, the assets of the beneficiaries under the Trust are protected. The creditors cannot make any claim against the assets of the Trust as the legal ownership of the Trust assets rests with the trustees, not with the settlor.
Apart from the commonly cited reasons such as Mauritius being a safe and secure jurisdiction with a conducive and politically stable environment for doing business, as well as a convenient time zone (GMT+4) for providing service to Asian, European and American clients, the specific reasons for opening a Trust in Mauritius would be as follows:
- Based on Common Law – The Trust Act 2001 of Mauritius follows closely on the heels of the UK and other Commonwealth countries legislation. The highest court of appeal of Mauritius is the Privy Council in the UK;
- No forced heirship rules – Against the description of a forced heirship situation provided in the above section, Mauritius happens to be a favourable jurisdiction for investors as it avoids imposing restrictions on individuals’ freedom to choose how their property is divided upon their death and allows investors to choose their successors;
- Efficient tax jurisdiction – A Trust with a foreign settlor and beneficiaries may opt not to pay tax in Mauritius;
- Confidentiality – There is no requirement in Mauritius for the Trust documentation to be available for public inspection, thereby maintaining confidentiality.
Taxation of Trusts in Mauritius
As mentioned above, Mauritius serves as an efficient tax jurisdiction such that a Trust with a foreign settlor and beneficiaries may opt not to pay tax in Mauritius. Other particulars governing the tax treatment of Trusts in Mauritius are as follows:
- Declaration: A Trust is not taxable in Mauritius provided that a Declaration of non-Residence confirming that the settlor/beneficiaries are non-resident in Mauritius is filed per the Income Tax Act. In such a case, no annual tax return is required to be filed in Mauritius.
- Incidence of tax: A Trust which does not qualify to be non-resident is taxable on its chargeable income at a rate of 15% per annum.
- Treaty benefits: A tax resident Trust can benefit from the Mauritius tax treaty network.
- Tax exemptions: Distributions made by a Trust (resident or non-resident) are exempt from tax in Mauritius.
Why Mauritius represents a robust Trust jurisdiction for South African investors
South African investors are increasingly demonstrating their willingness to turn to Offshore Trusts set up in Mauritius to hold and safeguard their international assets. Indeed, the last decade has witnessed a large number of Trusts being migrated from other traditional financial centres to Mauritius as well as new ones being set up, as confidence in the jurisdiction continues to gather momentum.
Among others, the key reasons behind this surge in demand for Mauritian Trusts include the high comfort level with the jurisdiction thanks to the robustness of the Mauritius financial centre; the geographical proximity – especially for South African-based principals; and the range of skills available at competitive costs in the country.
Another common use of Mauritian Trusts is to hold trading structures. Consider a businessman who wishes to trade the products he currently sells in his country of origin to a wider Sub-Saharan African market comprising promising economies. Given the constraints of exchange control, availability of finance and incidence of taxation in his country of origin, he decides to evaluate options for domiciling such a pan-African trading entity.
One viable option is to settle a Trust in Mauritius which will hold shares in an underlying Global Business Licence (GBL) company in Mauritius. The businessman and his family members can be beneficiaries of the Trust and the GBL company will undertake the international trading activities. The following would be the main aspects governing such structuring with all the attendant benefits:
- Conducive capital requirements: Not only can such a structure be set up with only minimum capital requirements to be fulfilled but it can also be managed in such a way that finance for working capital is loaned out by the businessman to the Trust with interest at the relevant LIBOR rate with a
- Streamlined governance and efficient operations: The GBL would function under the aegis of an independent board – which can include the settlor/businessman as well – to make decisions on behalf of the company, with the operations conducted independently in Mauritius. All the documentation for the trading activities will also be done out of Mauritius.
- Reasonable incidence of tax1: The GBL company shall be subject to an effective tax rate of 3% in Mauritius. The dividends declared by the GBL company shall also not be liable to be taxed in Mauritius and shall be distributed to the Trust. The Trust can then consider distributing the assets accumulated in the Trust in the form of capital and/or income distribution.
The way forward: In Mauritius We Trust
Apart from the historical popularity of the jurisdiction as an investment location, the recent changes made in the work and residence permits regime to attract investors to Mauritius are also expected to yield benefits in terms of propelling the jurisdiction to become a ‘top of mind’ preferred financial centre for structuring holding vehicles, including Trusts.
It is clear then that a reputable market player such as Rogers Capital, with a well-entrenched Corporate and Fiduciary Services arm, would serve as an important stakeholder in the process. At Rogers Capital, we understand that with the accumulation of wealth invariably comes the need to shelter assets, and Rogers Capital allows you to do this through different offshore Trusts. Indeed, a dedicated team of professionals including experts from various backgrounds – Trust & Estate practitioners, administrators, accountants, tax experts, and lawyers – is assigned to each of our clients in order to ensure a timely turnaround.
Ultimately, together with the plethora of benefits offered by the jurisdiction itself, Rogers Capital’s vast experience goes a long way in ensuring that investors are ably assisted in their Trusts’ structuring requirements.
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1Please note that the tax comments are based on our knowledge, understanding and interpretation of the laws and practices relevant to the facts and information available at that time. We do not provide any guarantee or indemnity that any interpretation will ultimately be sustained in the event of a challenge by the relevant taxation authorities. The laws, practices and interpretations, on which the tax deliverable is based, may change over time. Such changes may affect the tax opinion provided, the tax treatment adopted, the outcome of the situations and transactions analysed. Therefore, you are cautioned to keep abreast of such changes and should consult us or your legal and tax adviser, as appropriate, if time has passed or circumstances have changed. This document has been last updated in October 2020.
2However, if the dividends are vested in the South African beneficiaries’ hands in the same year of assessment as the income is received by or accrued to the Trust, then they shall be charged at an effective rate of 20%.