Is it a bird? Is it a plane? Is it a trust? Is it a company? In this week’s newsletter, we unpack foundations, what they are, how they work, and when they make sense.

A foundation is a specific entity type that has some of the characteristics of a trust and some of a company, it functions very similarly to that of a trust but is administered like a company.  Foundations exist as legal entities under various countries’ regimes, where a foundation is regarded as having a separate legal personality and thus can enter into contracts, hold assets, and have a bank account. In most countries where foundations exist, they are generally used to carry out charitable objectives and so are pretty vanilla from a structuring perspective. However Mauritian foundations can be used for commercial or wealth/asset protection purposes and have some very interesting applications.

Mauritian foundations are governed by the Mauritius Foundations Act 2012.  This provides that a foundation has no shareholders and is thus not owned by anyone, but is administered or managed by a foundation council for the benefit of nominated beneficiaries.  The council’s role is to administer the assets and activities of the foundation in accordance with the Charter under which the foundation is established and for the ultimate good of the beneficiaries.  So far, so trust-like, with the Council similar to trustees and the Charter similar to a letter of wishes and of course beneficiaries being beneficiaries.

However a foundation is a legal entity in its own right (once it has its certificate of registration in its pocket) and cannot be regarded as a transparent or look-through entity and it can thus hold assets directly and can stand on its own as a legal personage, despite having no shareholders or members.

So why and when should we use a Mauritian foundation? 

One of the advantages of using a foundation (similar to that of trusts) is that the foundation is set up completely separate from that of the founder who has created it and is also separate from the beneficiaries.  This means that (in some countries anyway) that the foundation is seen as the owner of foundation property and the founder who has put the property into the foundation will not include the property in his or her estate.

In addition, the concept of trusts is not particularly familiar or recognised in some countries (especially those civil law countries). Where this is the case, those who wish to use a legal entity for their activities may use a foundation instead. Some countries even regard a distribution from a foundation as an exempt dividend, while not treating the foundation as a controlled foreign company, which can be pretty nice!

So now that we’ve learnt the foundation of foundations, what needs to be in place and how is a foundation even taxed in Mauritius? 

As mentioned above, every foundation must have a council which shall include at least one member ordinarily resident in Mauritius and either a Management Company or other person resident in Mauritius must be appointed as a secretary.

Mauritius income tax law differs between resident foundations and non-resident foundations. A tax resident foundation is taxable on its chargeable income at the rate of 15% per annum subject to any exemptions or foreign tax credits which could apply. As there is no capital gains tax in Mauritius, the capital gains derived by a foundation will not be subject to tax.

A foundation that has its central management and control outside of Mauritius will be regarded as non-resident for tax purposes. A foundation will be regarded as having its central management and control outside of Mauritius if the founder is non-resident of Mauritius and the majority of the beneficiaries are non-resident in Mauritius. The foundation being considered non-resident for tax purposes is rather an important piece of the puzzle as it ensures that such non-resident trust is only subject to tax on Mauritian source income. Mauritian dividend receipts, however, will be completely exempt from tax. Any distributions made by a foundation to beneficiaries will not be subject to any withholding taxes in Mauritius.

So there you have it, the Mauritian foundation is a strange chimera with some interesting optionality straddling as it does the line between trust and company.  If this could be of interest to you, please contact us.

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How you structure your business is a critical question as you expand globally.  The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.

Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.

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