Uses Of A Mauritius Offshore Trust

Much water has flown beneath the bridge since the mediaeval days of knights going off to the Crusades and leaving their lands to someone to hold it to the use of themselves and their family. What started up effectively as a device to circumvent feudal rigidities has turned out to be a most useful tool for practitioners. Indeed, with its inherent flexibility and the ability to separate legal and equitable ownership, trusts can be used to achieve any lawful end. This article considers a few of the potential uses of Mauritius offshore trusts, which are governed by the Offshore Trusts Act 1992 (the "Act").

Traditionally, trusts have been used by individuals to preserve the family wealth and ensure that it is distributed in accordance with their wishes. With a Mauritius trust, the settlor can arrange to receive income of the trust during his lifetime and he can determine who, in what proportion and for what purpose shall receive the trust fund at his death. The settlor can provide that the funds will not be distributed to his children until they reach a certain age or that the funds will be used only to provide for their education. In order to protect the prodigal child, the settlor may take advantage of section 51 of the Act which specifically allows the terms of a trust to make the interest of a beneficiary subject to restrictions on alienation or liable to be reduced or terminated in certain events such as the bankruptcy of the beneficiary. The settlor may also preserve the family jewels or matrimonial home so that they can be enjoyed by successive generations by providing restrictions on their sale for the duration of the trust which is, however, subject to a maximum of 100 years from the date of the creation of the trust. Similarly, a settlor who is afraid that his business will become fragmented after his death may transfer the business to a trust during his lifetime. Again minimal disruptions to the family business will occur upon the death of the settlor who has transferred his assets to a trust during his lifetime as they will no longer form part of his patrimony and therefore not be subject to the public grant of probate.

The settlor may decide to set up a discretionary trust whereby the trustee is given the discretion to decide whether to distribute capital and/or income of the trust to such beneficiaries and in such proportion as the trustee deems fit. Such flexibility is very useful especially in case the trustee must react to circumstances which were not or could not have been envisaged at the time of the creation of the trust such as a change in taxation or law. The trustee may further be given the power to add and remove beneficiaries. For example, a beneficiary may request to be removed from the class of beneficiaries because of tax liability. The settlor may give to the trustees a letter of his wishes which he hopes will guide the trustee when exercising its discretion. However, the trustee is not accountable in any way for failing to have regard to that letter. A more effective control would be the appointment of a protector with the power to appoint and remove the trustee. The protector may also be given other powers such as a veto power on appointment or removal of beneficiaries. However, care must be taken not to give too much powers to the protector as the trustee may well be left with no discretion at all!

Not all countries allows a person to dispose of his property as he wishes. Some countries determine how a person’s estate is to be distributed upon his death. For example, in some civil law countries a person is only allowed to freely dispose a quarter of his assets while in certain islamic countries he can only free dispose of a third. By transferring his assets to a Mauritius offshore trust, that person can effectively avoid the forced heirship rules and determine freely how to dispose of all of his assets. Indeed, section 11 of the Act provides that neither the trust nor the transfer of property to a trust shall be invalidated by any foreign rule of forced heirship. However, for the scheme to be successful the settlor should ensure that the trust assets are no situated in the country having forced heirship rules.

Unlike English law where the general rule is that it is not possible to have a non charitable purpose trust (except in limited circumstances), an offshore trust can be established in Mauritius as a purpose trust to carry out certain commercial and non commercial transactions. The purpose trusts may be enforced by the settlor or his personal representative or by any person appointed for that purpose. The potential uses of purpose trusts are endless.

A Mauritius offshore purpose trust can be used in off balance sheet transactions where for example, the client cannot or does not want to incur additional debt. Typically a the purpose trust is set up for the purpose of holding the shares in a special purpose company ("SPV"). As the shares are held by the trust they are off the balance sheet of the settlor. The SPV borrows money from corporate lenders and uses it to acquire receivables or assets. The receivables or assets generate cash flows to the SPV that uses them to repay the interest and principal of the loan as the case may be. Any excess after the loan has been serviced flows to the settlor. The scheme protects the lenders since the receivables and assets remain the property of the SPV until the loan is repaid. There is also an added protection to the lenders in that the SPV will be bankruptcy remote. Indeed, since the trust will have no other activity than to hold the shares of the SPV, there is little risk of the trust becoming bankrupt. Moreover, the trustee will ensure that the SPV is not being used for other unrelated financing. More importantly, the Lenders will not have to bear the risk of the settlor becoming bankrupt since even if the settlor does become bankrupt its creditor will not be get the receivables or assets. This structure has been successfully utilised in securitisation transactions and project finance transactions.

A Mauritius purpose trust is useful where there is a single debtor but a large number of creditors such as in the case of a syndicated loan or bond issue. Where the same security is given to many creditors ranking pari passu, the administration and realisation of that security is more effectively done if it is held by a Mauritius purpose trust acting for all creditors. Similarly, the debtor needs only to pay the aggregate principal amount and interest due to a trustee who is then responsible to distribute it among the creditor. In the case of bankruptcy of the debtor or restructuring of its debts, again it is easier for the debtor to deal with one trustee than with a number of creditors. Of course, care should be taken in drafting the trust deed to ensure that the interest of the creditors is adequately protected. Another advantage of using a purpose trust in such a situation is that a creditor can be substituted without affecting its ranking. Indeed, vis a vis the debtor, it is still the trust which is the holder of the security and therefore there is no need to undergo all the formalities and notification which are otherwise applicable in the case of a change in ownership of a security interest. This is particularly important as it enables the creditors to sell their bond or participation in the syndicated loan.

It is in the interest of any company that its employees are motivated and productive. One way to motivate employees is to set up employees’ trusts for their benefits. Employees’ trusts can be divided into two groups: pension fund trusts and stock option trusts. In the case of a pension fund trusts, the employer and the employees contribute to the pension fund which is held on trust for their benefit. The trust fund is invested in fixed deposits or other low risk investments and the income is used to provide employees with either a lump sum on retirement or death and/or a monthly income after retirement. One drawback with employees pension fund is that although in theory it is supposed to belong to the employees and thus is separate from the funds of the company, in a number of reported cases, employers, such Robert Maxwell, have somehow used the trust fund for other purposes. The second type of employees’ trust, stock option trusts, became very popular with the internet boom. The idea is to motivate employees and more importantly to make them stay with the company by giving them options to buy shares in the company. Typically, the Mauritius trust 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 pre-determined price. Once the employees acquire the shares, they are not allowed to resell them for a certain number of years. The stock option trusts are very popular with start up internet companies whose employees expect to make a fortune when the shares become listed on a recognised stock exchange.

One of the main reasons for using a Mauritius offshore trust is for tax purposes. A Mauritius trust may either be a resident trust or a non-resident trust for taxation purposes. Both types of trusts have their advantages.

A Mauritius offshore trust which elects to be treated as non-resident for income tax purposes pays no income tax on income derived outside Mauritius. However, non-resident trusts do not benefit from Mauritius’ network of double taxation agreements ("DTA"). A non-resident trust is appropriate where the income of the trust is to be accumulated as for example in the case of family trusts. It is also the preferred vehicle in structured finance transactions where the trust will typically be a special purpose trust set up to hold shares in an SPV.

A resident trust is taxable on its chargeable income at the rate of 15% per annum. However, the offshore trust is allowed a credit for foreign tax on the its income which is not derived from Mauritius which is presumed to be equal to 90 per cent of the Mauritius tax chargeable with respect to that income. The effective rate of income tax is, therefore, 1.5%. Now the chargeable income which is subject to tax is defined as the difference between: (a) the net income derived by the trust; and (b) the aggregate amount distributed to the beneficiaries under the terms of the trust deed. Since non resident beneficiaries of an offshore trust are exempt from income tax on the income derived from the trust, the Mauritius resident trust can effectively pay no income tax by distributing all its income to its non resident beneficiaries. This is a considerable advantage over offshore companies, which in any event has to be at least 1.5% income tax irrespective of the amount of dividend distributed to non resident shareholders.

The main advantage of a resident trust is that it has access to the DTA. There was an issue at some point as to whether a trust can actually benefit from a DTA. Indeed, a DTA only applies to persons who are residents of one or both of the contracting states but "trust" is not specifically included in the definition of "person" in OECD Model Tax Convention on Income and Capital. However, a number of DTA to which Mauritius is a party now specifically include "trust" in the definition of "person" eligible to benefit from the DTA. In any event, the preferred view among practitioners is that although a trust is not expressly referred to in the definition, it, nevertheless, falls under the category of "body of persons" which is included in the definition of "person". Therefore, a Mauritius resident trust can enjoy the benefit of the DTA.

There are a number of ways in which a trust can benefit from the DTA. The extent of the benefit will, however, depend on the taxation regime of the countries involved and in particular any anti tax avoidance provisions that they may have. Moreover, care must be taken to ensure that the trust is effectively being managed in Mauritius.

Most of the benefits that an offshore company can obtain from the DTA can also be obtained by a Mauritius offshore trust. For example, the business profit of a trading trust will only be taxable in Mauritius according to Article 7 of the DTA unless the profit is attributed to a permanent establishment of the trust in the other contracting country. A Mauritius trust can be used to hold shares in a company of the other contracting country and benefit from the preferential rate of taxation on any dividend distributions pursuant to Article 10 of the DTA. Similarly, a settlor may assign to a Mauritius trusts all his rights to receive royalties and save withholding taxes on royalties pursuant to Article 13 of the DTA. Moreover, since royalty paid by a Mauritius trust to a non resident is exempt from income tax in Mauritius, there is further tax planning opportunities. A Mauritius offshore trust used in a back-to-back loan structure can also result in substantial tax savings on interest payment by virtue of Article 11 of the DTA. Such a structure is particularly popular with Singapore borrowers. Indeed, under the DTA between Mauritius and Singapore only Mauritius can tax the interest received by a Mauritius lender thereby eliminating substantial withholding tax on interest payment otherwise applicable in Singapore. A Mauritius offshore trust is often used to save capital gains tax that are payable on the sale of shares of companies of the other contracting state because according to Article 13 of the DTA, only Mauritius can tax such capital gains. Since Mauritius has no capital gains tax on disposal of shares (other than shares of a company holding immovable property in Mauritius), using a Mauritius offshore trust leads to savings substantial on capital gains tax. Indeed, funds can be structured as Mauritius trusts to benefit from all these DTA.

Mauritius trusts with their flexibility and relatively little formalism cannot be ignored by any practitioner when advising clients on wealth preservation and commercial structures. In many ways, a Mauritius trust may be a more suitable vehicle than a company. Trusts by their very nature are more secretive than companies. Indeed, the trustees are prohibited from disclosing the name of the settlor or the beneficiaries and there is no requirement that the trust deed to be filed with any authority. Subject to the terms of the trust, beneficiaries may be easily added or removed without the formality involved in case of a change of shareholder and without any restriction which is usually applicable on transfer of shares of private companies. There may also be particular tax advantages in using a trust instead of a company. Indeed, a number of Mauritius trusts have been used to save capital gains tax in England using the DTA between Mauritius and UK. In fact, the potential use of a Mauritius offshore trust is finite as anyone’s imagination.