Enabling high-net-worth clients to retain control of their assets while keeping maintenance costs to a minimum, Client Directors, Jimmy How Saw Keng and Kenny Curpen explore how the Mauritius Foundation presents a suitable alternative to Trusts and Private Trust Companies.
When the Mauritius Foundation Act was introduced in 2012, it was meant to broaden the range of products and services offered by Mauritius' private wealth sector. More specifically, the legislation was a welcome addition to the Mauritius Trust Act that was promoted a decade earlier, in 2001. However, partly because of its late introduction, the Mauritius Foundation is not widely utilised, especially in Africa and Asia where its inherent characteristics have the potential to respond more adequately to the specific needs and aspirations of a wealthy market segment.
Unlike in common law jurisdictions, clients in civil code countries are generally more comfortable with the concept of Foundations than that of a Trust, the main reason being that a Foundation is a separate legal entity. The latter is in fact, by virtue of its characteristics, a hybrid between a Trust and a Company. Nonetheless, there is a perception that the Foundation concept has not been well marketed or indeed taken off, due to our industry's historical emphasis on the Mauritius-India double taxation treaty and our current focus of using Mauritius as a platform for African inbound and outbound investments.
Trusts: a tough sell for wealthy clients in civil code jurisdictions
In many Asian and African cultures, the head of a wealthy family prefers to retain significant or full control of how the family estate assets are managed. At times, the head will reject the idea of establishing a Trust on the basis that the Trustee will retain full control once the Trust assets have been transferred. The family head can often be wary that Trust assets may fall into the wrong hands or that the Trustee may lack the required competence.
Despite the fact that jurisdictions such as Cayman Islands and Jersey have enacted 'reserved powers' legislation allowing the settlor some degree of control over the trust assets, such 'reserved powers' may work against the settlor if the tax authorities in the settlor's home jurisdiction challenge the trust as a sham in tax avoidance schemes.
In Mauritius, the Trust Act 2001 does not provide for any 'reserved powers'. Therefore, the Trust concept is a tough sell for wealthy clients in civil code jurisdictions. Even in certain common law jurisdictions in Africa and Asia, High-Net-Worth Individuals (HNWIs) are wary of the absence of the 'reserved powers' in the Mauritius Trust Act 2001.
Another vehicle, namely the Private Trust Company (PTC), was put in place to provide a solution to make up for the lack of the 'reserved powers' legislation. Indeed, the PTC concept gives more comfort to the settlor as he/she can appoint his/her close aides and family members as directors of the PTC to act as corporate trustee, thereby retaining full control over the trust assets.
An alternative to Private Trust Companies
In Mauritius, a PTC can only be established as a Global Business Licence (GBL) Company or as an Authorised Company (AC). Both the GBL Company and the AC are regulated by the Mauritius Financial Services Commission (FSC). Following the adoption of the OECD Base Erosion Profit Shifting (BEPS) guidelines, the headline tax of a GBL Company is 15%. The latter also needs to demonstrate substance such as minimum annual expenditure and employment in addition to other requirements such as a local audit, which can increase the annual maintenance cost and regulatory compliance.
On the other hand, although an AC is not considered tax resident in Mauritius, it has to elect its tax residency with respect to its Place of Effective Management (POEM). This POEM is usually in the settlor's home and high-tax jurisdiction, which defeats the purpose of setting up an AC. An AC also has to file an annual tax return with the Mauritius Revenue Authority.
In part two, we will examine the overarching benefits of establishing a Mauritius Foundation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.