An employee share incentive scheme is a plan that enables employees to acquire and hold shares in their employing company. They are generally implemented by employer companies in order to incentivise and retain employees (participants) and for such participants to receive indirect benefits from the appreciation in the growth of such company. A satisfied and incentivised workforce is more productive than an unsatisfied or non-incentivised workforce. Therefore whilst such schemes are beneficial to the employee, they indirectly benefit the employer company. Employees with a vested interest in the success and performance of a company are more motivated to work as their investment is based upon the performance of the company. SIP's can also potentially be lead to tax benefits for the employer company and the employee.
2. Legal Structure of an SIP
An SIP is typically established in tax-neutral jurisdiction, structured generally as a trust and where there would be easy access to appropriate levels of administrative expertise. This type of arm's length, outsourced arrangement is also often seen as more reassuring for staff.
A trust is a legal arrangement which involves a person (the "settlor") transferring legal title to assets to another person or body (the "trustees") to hold for the benefit of one or more persons (the "beneficiaries"), or for a purpose or purposes. The essence of a trust is that the legal ownership of assets is vested in the trustee, who shall have in relation to the trust property, all the powers of a beneficial owner. However, a trustee would have to exercise his powers only in the interests of the beneficiaries or for the purpose for which the trust is established and in accordance with the terms of the trust. Additionally, in the exercise of his functions, the trustee is subject to fiduciary duties and other duties imposed by law. Additionally, in order to control the exercise of powers by a trustee, it is very common for a protector (or a council of protectors) to be appointed.
3. Features of a Mauritius Trust
The law relating to trusts in Mauritius is the Trusts Act 2001. It provides a modern and flexible framework for trusts and caters for a wide range of trusts including Protective and Discretionary trusts; Maintenance and Accumulation trusts; Charitable trusts; Purpose trusts; Commercial trusts and Trading trusts.
An SIP would be specifically structured as a Non-Charitable Purpose Trust. Typically, the Mauritius trust will buys shares of the company using company's fund or borrowed money. The trust then grants options to purchase the company's shares to the employees. The options vest over a number of years and are exercisable at a predetermined price. Once the employees acquire the shares, they are not allowed to resell them for a certain number of years.
The following traits and characteristics of the trust have led to it being a favoured vehicle for the establishment of an SIP:
- Ease of set up – No registration, incorporation or licence generally required. The trust is set up by a written deed accompanied by a transfer of funds (the first settlement). The legal requirement is to have one qualified trustee, an enforcer and a successor to the enforcer.
- Flexible – The trust deed is at its inception a basic agreement for trustees to use funds for a defined purpose. Subject to some restrictions of the law of trusts, the deed can be drafted giving wide discretions or, restrictively dictate the use of those powers. It can be modified to accommodate structures varying in complexity and incorporating different mechanisms for accountability, checks and balance, administration, advice and reporting. More than any other vehicle, a trust allows customization to achieve particular needs of clients. Typically, such trusts house a secretariat for the day-to-day administration matters, conduct of meetings etc. An enforcer is required by law to ensure that the trustees properly carry out their duties.
- Exclusions – While companies legislation imposes strict fiduciary duties on directors to the company they serve, the duties of trustees may be more easily modified or disapplied in a carefully drafted trust deed to fit the purpose for which the trust is established. In a Purpose Trust for example, it is customary to disapply the duty to appreciate the trust fund or the duty to invest. On the other hand, it is as easy to subject trustees to more onerous or specific duties.
- Maintenance – A trust does not have any statutory filing requirements to any governmental authority. The trust deed may, at the option of the settlors, contain provisions for accounts to be prepared and disclosed. The trust deed is free to specify the form and frequency of such reporting. Importantly, a trust would not be considered a subsidiary of the persons establishing the trust and the need to file consolidated accounts would not arise.
- Regulation and oversight – Despite being flexible, a trust is more prudentially regulated than a company. The fact that the qualified trustee is a management company regulated by the Financial Services Commission gives comfort to contributors to the trust fund that it is overseen by a regulated professional and an assurance that recourses exist should the qualified trustee or any other trustee default.
In addition to offering a modern and forward looking legal framework for the establishment and management of trusts, Mauritius also has a number of attractions which make it an ideal jurisdiction for establishing a SIP. The jurisdiction combines the advantages of an international financial centre with no CGT, no withholding taxes, low tax-base, confidentiality and free repatriation of profits and capital among others together with the ability for treaty based tax planning through its network of Double Taxation Avoidance Treaties. It is also an International Financial Centre of substance, well regulated and supportive of all international initiatives (OECD/FAFT/G20), never black (or grey) listed. Mauritius is a also a worldwide reference for political stability in this side of the world with a presidential democracy modeled on the British parliamentary system with the highest court of appeal being the Privy Council of the United Kingdom. Last but not least, Mauritius has developed a fine brand of professional workforce rivaling in competence with European and Western jurisdiction whilst keeping costs at a very competitive level.
Originally published by Journal on International Taxation, October 2013.
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