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Safeguarding your wealth
By Natalie Shama, Specialist Tax Consultant at Eversheds Sutherland, South Africa and Renand Pretorius, Partner at Eversheds Sutherland, Mauritius
Trusts have historically been, and continue to be, a particularly popular asset protection mechanism for South Africans. In recent years, we have seen significant reform of the South African taxation regime applicable to the utilization of local and offshore trust structures. Although many of the noteworthy tax benefits, particularly in the realm of estate planning, have largely been minimized as a result of this legislative reform, trusts – and in particular international trusts – still present a host of benefits and opportunities to South African taxpayers looking to protect their assets and optimize their tax exposure.
Whilst there are several prevalent jurisdictions where South Africans typically choose to incorporate their offshore trust structures, Mauritius remains a preferred cross-border investment hub in the African region, positioning itself as a favorable jurisdiction for facilitating foreign direct investment. Mauritian fiduciary service providers also appear to be offering substantially more affordable services compared to other jurisdictions, thus presenting itself as a cost-effective region through which to invest.
In recent years Mauritius has undertaken reform to strengthen its position as a beneficial jurisdiction internationally. The country received some bad press following the release of the Finance Bill 2021, which was subsequently quelled by the Statement of Practice (“SoP”) released in August 2021. Mauritius made headlines for the right reasons at the end of October 2021, when it was officially announced that the Financial Action task Force (“FATF”) has removed Mauritius from the Grey List, following the significant progress it made in addressing the strategic AML/CFT deficiencies.
As a prudent exercise necessary for any tax beneficial jurisdiction, Mauritius has also been aligning itself with the Organization for Economic Co-operation and Development’s (“OECD”) recommendations on Base Erosion and Profit Shifting and reviewing its legal frameworks. The recent amendment to the Mauritian Income Tax Act relating to trusts comes off the back of this revision.
Taxation of Mauritian trusts:
Prior to the tax law amendments, Mauritian trusts were entitled to file a declaration of non-residence to the Mauritius Revenue Authority (“MRA”) to be exempted from income tax. One such scenario where a Mauritian trust could claim the exemption was where both the settlors and the beneficiaries of the trust were non-resident in Mauritius throughout the income year. In such circumstances, a trust which is not resident in Mauritius would only be liable to pay taxes on its Mauritian-sourced income.
Under the amended taxation regime, Mauritian trusts established after 30 June 2021 will no longer have the opportunity to file a declaration of non-residence, and a grandfathering provision will apply to existing trusts up to the year of assessment 2024/2025.
In determining the residency of a Mauritian trust, the MRA will now assess where the trust has its central management and control (“CMC”). Where the Mauritian trust has its CMC outside Mauritius, it is treated as a non-resident for Mauritian tax purposes.
The amended legislation specifically provides for circumstances where, under Mauritian domestic tax laws, the Mauritian trust would have its CMC in Mauritius, making it a Mauritian resident trust subject to tax. As set out in the SoP, this would be the case where:
- the trust is administered in Mauritius and the majority of the trustees are resident in Mauritius;
- the settlor of the trust was resident in Mauritius at the time the trust instrument was created or at the time new property is added to the trust; and
- a majority of the beneficiaries are resident in Mauritius.
As emphasized above, all three of these requirements must be met in order for the Mauritian trust to have its CMC in Mauritius, and thus be a tax resident under Mauritian laws.
Therefore, in circumstances where a SA resident settlor seeks to incorporate a Mauritian trust, which is effectively managed in Mauritius, for the benefit of non-Mauritius beneficiaries, the Mauritian trust should qualify as a non-resident under Mauritian tax laws. The non-resident trust would therefore only be liable to pay income tax on its Mauritian-sourced income.
South African tax considerations:
One of the critical elements of an offshore trust structure, from a South African (“SA”) tax perspective, is the place of effective management (“PoEM”) of that trust. South Africa charges tax on a residency basis, and for a juristic person such as a trust, it would qualify as a SA tax resident where it has its PoEM in South Africa.
The application of the domestic tax laws in Mauritius, indicating that a non-resident trust has its CMC outside of Mauritius, should not in itself impact the test from a SA tax perspective on the PoEM of the Mauritian trust, which applies a different set of principles.
Whilst the effective management of an offshore trust should always be considered based on its own facts and circumstances, it is pertinent to ensure that the SA settlor does not control the actions and affairs of the offshore trust to the exclusion of the offshore trustees. The offshore trustees must be able to evidence that management and control of the trust occurs in Mauritius.
Navigating the minefield of SA tax laws relating to trusts, including the attribution rules, taxation of trust distributions and transfer pricing provisions, to name just a few, can be overwhelming. However, taking advice both at the outset and throughout the life of the offshore trust structure can aid in simplifying the application of a complex set of rules, and preventing unforeseen tax consequences. This will enable the SA investor to genuinely benefit from the advantages sought from using an offshore trust while being safeguarded against any inadvertent misrepresentations or underpayments of tax to the authorities.
SA investors should also be mindful of the reliance on their SA tax compliance status for foreign investments of over R1million to be authorized for exchange control purposes. Fortunately, once an offshore investment structure is appropriately established and funded, foreign investments emanating from that offshore trust would not require further exchange control authorization. This eases the ability to make additional foreign investments over time as the offshore trust accrues wealth.
Whilst any changes to international structures come with some growing pains and at times, some compromises, the benefits of using a Mauritian trust are by no means eradicated. To the contrary, moves to align Mauritian laws with OECD best practices will bode well for the longevity of Mauritius and its foreign trust settlors for many years to come.
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