MAURITIUS: TAX RESIDENCE AND THE IMPACT OF THE MAURITIUS REVENUE AUTHORITY STATEMENT OF PRACTICE ON TRUSTS AND FOUNDATIONS
The Mauritius Revenue Authority (MRA) issued a statement of practice (SOP) on 24 August 2021 to clarify the tax residency of trusts and foundations. This follows the abolition of the declaration of non-residence option for trusts and foundations through the Finance (Miscellaneous Provisions) Act 2021 (FA 2021).
The repealed declaration of non-residence option
Prior to the enactment of the FA 2021, qualifying trusts and foundations were entitled to declare non-residency with the MRA on a yearly basis by making a declaration of non-residency within three months of the end of each income year.
Such trusts and foundations were exempt from income tax in respect of that income year. The conditions that had to be satisfied to be qualified as non-resident include:
With the changes made to the Income Tax Act 1995 (ITA) through the FA 2021, the declaration of non-residency for trusts and foundations has been abolished.
However, a grandfathering period up to the year of assessment 2024/2025 has been granted to trusts and foundations established prior to 30 June 2021. During the grandfathering period, grandfathered trusts and foundations will not benefit from tax exemptions 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.
Trusts and foundations that are tax resident in Mauritius are liable to pay income tax on their worldwide income. Section 73 of the ITA sets out the definition of tax residency.
A resident trust is defined as a trust:
- which is administered in Mauritius and a majority of its trustees are residents in Mauritius; or
- whose settlor was resident in Mauritius at the time the instrument creating the trust was executed.
A resident foundation is a foundation which is registered in Mauritius or has its central management and control (CMC) in Mauritius.
Section 73A of the ITA further provides that, notwithstanding section 73, a company incorporated in Mauritius will be treated as non-resident if its CMC is outside Mauritius.
The term ‘company’ in the ITA is defined as including a trust and a foundation.
Accordingly, having the CMC in Mauritius is key in the determination of tax residency of trusts and foundations. If the CMC of a trust or foundation is outside Mauritius, the trust or foundation will be considered as non-resident even if the trust or foundation satisfies the conditions set out under section 73 of the ITA.
Until the publication of the SOP, there were no definitions of CMC with respect to trusts and foundations. It was generally understood that the CMC of a trust and a foundation was taken to be where the highest level of decision making took place. The place where such body met in taking final decisions relating to the trust and foundation was considered as being the place of the CMC of the trust or foundation.
The MRA has deemed it appropriate to define what would constitute the CMC for a trust and foundation through the SOP.
A trust would have its CMC in Mauritius if:
- the trust is administered in Mauritius and the majority of the trustees are residents in Mauritius;
- the settlor 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
- the majority of the beneficiaries or the class of beneficiaries appointed under the terms of the trust are resident in Mauritius.
A foundation would have its CMC in Mauritius if:
- the founder is resident in Mauritius; and
- the majority of the beneficiaries appointed under the terms of a charter or will, are resident in Mauritius.
Demystifying the new CMC requirements
The SOP has stretched the conditions to be satisfied by trusts and foundations to be considered as tax resident in Mauritius by adding the requirement to have a majority of Mauritian resident beneficiaries (and for foundations, Mauritian resident founders) to be considered as having their CMCs in Mauritius.
This is a surprising move by the MRA in that the management and decision-making powers of a trust are generally vested in the trustees and, in respect of a foundation, in its council of members.
The beneficiaries in each case only hold a beneficial interest on the trust/foundation property.
As a consequence of the definition of CMC in the SOP, meeting the criteria for tax residency for trusts and foundations has become more onerous and trusts and foundations that do not meet any one of the criteria would de facto be considered as non-resident.
Impact of the SOP on existing trusts and foundations
Existing trusts, which were qualified to declare non-residency under the repealed declaration of non-residence option (by having non-resident settlors and throughout an income year, non-resident beneficiaries) will have their CMCs outside Mauritius, thus will continue to be considered as non-resident.
Accordingly, such trusts will continue to be exempt from income tax on their foreign source income and will be subject to income tax only on income from Mauritian sources.
In effect, such qualifying trusts will be better off, in that their non-residency is outright and they will no longer be required to make a non-residency declaration within the required timeline for each income year, to be exempt from income tax on their foreign sourced income.
Similarly, foundations that were qualified to declare non-residency under the repealed declaration of non-residence option (by having non-resident founders and throughout an income year, non-resident beneficiaries), will have their CMCs outside Mauritius, thus will continue to be considered as non-resident and exempt from income tax on their foreign sourced income.
Taxation of trusts and foundations
Tax resident trusts and foundations are subject to income tax at the rate of 15%, although they would be entitled to claim credits for foreign taxes suffered up to the maximum Mauritian tax liability.
Further, the SOP has clarified that trusts and foundations are entitled to benefit from the partial exemption regime to the extent they satisfy the prescribed substance requirements, wherein the first 80% of certain specified income (such as interest and foreign dividends), are exempt from income tax, and the remaining 20% of such income is taxed at the rate of 15%, making the effective tax rate 3%.
Non-resident trusts and foundations that will only derive foreign sourced income will not be subject to income tax in Mauritius. However, such trusts and foundations will be required to file a nil income tax return confirming that they do not have any Mauritius sourced income.
The Mauritian trust and foundation maintain their attractiveness to investors and high net worth individuals as a vehicle for investment and estate planning.