The Mauritius Finance Act 2021, which was gazetted on 5 August to implement measures announced in the 2021 Budget Speech, has introduced a significant change to Mauritian trusts in respect of residency. This will apply to all trusts settled after 30 June 2021.
Previously, where the settlor and none of the beneficiaries were ordinarily resident in Mauritius during a tax year, a Mauritian trust was permitted to file a 'Declaration of Non-Residence' to the Mauritius Revenue Authority (MRA). This meant that all earnings of the trust were tax exempt in Mauritius, and it would not be required to file a tax return.
The Finance Act 2021 has changed this position. Non-resident trusts are no longer able to file a 'Declaration of Non-Residence' and benefit from a tax exemption. They will instead be subject to income tax of 15%, but with partial exemption on applicable income as follows:
- Dividends received in Mauritius from a local Domestic Company or Global Business Corporation are tax exempt.
- There is no Capital Gains Tax in Mauritius, such that any income received into a trust from the sale of an investment (securities, bonds, property or similar) will not be subject to tax in Mauritius.
- Interest received by an entity in Mauritius is subject to an 80% partial exemption, such that any interest received by a trust will be subject to maximum tax rate of 3%.
- Foreign dividends (including dividends received from an Authorised Company) received by an entity in Mauritius are subject to an 80% partial exemption, such that any foreign dividend received
- by a trust will be subject to maximum tax rate of 3%. In practice, however, Mauritius allows for a deduction of foreign income tax and withholding tax in respect of dividends received from foreign companies, so the tax in Mauritius is often 0%.
A trust whose exclusive purpose or object is of a charitable nature will be exempt from tax in Mauritius.
A grandfathering provision has been provided. Non-resident trusts set up before 30 June 2021 will be grandfathered under the old regime up to year of assessment 2024/2025, meaning they can still file a 'Declaration of Non-Residence' and obtain the associated tax and filing exemption. This will end for trusts having an income year starting on or after 31 December 2024.
During the grandfathering period, a grandfathered trust is not able to benefit from the exemption in respect of new assets or activities, such as intellectual property assets acquired and income from specific assets or projects started after 30 June 2021.
The MRA recently published Practice Note SP24/21 in response to industry requests for clarification around the removal of the 'Declaration of Non-Residence'. This Practice Note confirms the position that trusts will be treated as companies for tax purposes and that therefore the above exemptions and partial exempts will apply.
It also goes further. Section 6.2 sets out what the MRA considers constitutes 'Central Management and Control' in respect of a trust. This states that a trust will have its 'Central Management and Control' in Mauritius when:
- The trust is administered in Mauritius and a majority of the trustees are resident in Mauritius;
- The settlor of the trust was 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; and
- A majority of the beneficiaries of the trust of the class of beneficiaries appointed under the terms of the trust are resident in Mauritius."
The Practice Note indicates that a trust will only have its 'Central Management and Control' and therefore be subject to tax in Mauritius if all three requirements are met – so it is unlikely that any trust settled by non-Mauritians will be subject to tax in Mauritius. Clarity has been requested around the Practice Note because it may actually lead to fewer trusts being taxable than previously. The MRA's response will be confirmed in due course.
Whether this change is applicable or not, trusts will all now have to file tax returns. This has led to concerns that trusts will now become 'exposed' to foreign revenue authorities where the beneficiaries are tax resident in the tax authority's jurisdiction.
Such concerns are unfounded. The creation of a trust involves the passing of ownership of assets from the settlor to the trustee. Some countries charge a donations tax or similar at the point that ownership is passed, but then lose all taxing rights in respect of the assets unless:
- The trust was set up incorrectly and cannot be considered valid.
- The trust assets are located in that specific jurisdiction (this applies only to assets located in that jurisdiction).
- The trust makes a distribution but to a resident of that jurisdiction, in which case the value of the distribution may be taxable in the hands of the person receiving it.
Considering all the above, it is apparent that the tax obligations of many Mauritian trusts will remain unchanged.
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.