Where common law meets civil law

  • Author : Shammeem Abdoolakhan
  • Date : December 2012
ABOUT THE AUTHOR: Shammeem Abdoolakhan TEP is Senior Manager in Corporate Services at Cim Global business

There has been an increase in the popularity and use of the foundation in recent years by both international clients and private-wealth managers. However, there are a number of different schools of thought on the appeal and effectiveness of the foundation as an alternative to the trust. Some argument has been put forward that it is more complementary to the trust than an alternative. The newly enacted Foundations Act 2012 in Mauritius came into force in July 2012. This new piece of legislation sets out the legal framework for registration of foundations in Mauritius, adding to the existing suite of legislations, including the Trust Act 2001.

It is a widely held view that international clients, especially those from civil-law jurisdictions, may find it easier to understand the concept of the foundation than the trust. But there is more than one side to the story and it is important that we understand the trust versus the foundation debate. From the outset, the following differences can be noted.

Firstly, the foundation is an independent legal person with legal capacity to sue and be sued in its own name, whereas the trust is not. The foundation will usually have the rights, powers and privileges and may hold assets in its own name. Broadly speaking, a foundation is a self-owning legal entity, separate from its founder, officers and beneficiaries (if any), with a foundation council that is responsible for its administration. In contrast, the trust does not have separate legal personality, does not beneficially own assets and cannot be made personally liable for trust debts.

Secondly, as per provisions of the Mauritius Foundations Act 2012, a foundation has to be registered by lodging an application to the Registrar of Foundations, accompanied, inter alia, by a declaration from a legal practitioner confirming that the application complies with all the relevant requirements of the Act. On the other hand, the Trust Act 2001 does not provide for a trust to be registered in Mauritius. Although the Registration Duty Act provides for deeds to be registered with the Registrar General, it is almost unanimously agreed on by trust practitioners in Mauritius that this is not required, as the trust deed or settlement, as executed by the trustee and settlor, is a validly constituted document.

Although international clients, mostly those from civil-law jurisdictions, may find it easier to understand the foundation concept, they may have more difficulty coming to terms with the concept of split ownership of assets, which is fundamental to the trust to avoid a sham argument. The idea of ‘gifting’ assets to the trustees (who are often unknown to the client and based in foreign trust jurisdiction) can put clients ill at ease with the structure. Similarly, clients originating from common-law jurisdictions may also find difficulty in relinquishing control to an orphan vehicle that resembles a corporation.

Last but not least, the perpetuity period of both structures must also be taken into account. Under the Trust Act 2001, discretionary trusts are subject to a life span of 99 years as a perpetuity period. This is, however, not applicable for purpose trusts, following amendment of the Trust Act in 2011. On the other hand, the foundation can usually last for an indefinite period of time. A foundation is normally argued to be used mostly as a holding structure and generally cannot engage directly in commercial operations, whereas trusts may be used for trading and commercial purposes.

One important feature that makes both structures appealing to international clients is the confidentiality aspect. Section 33 of the Trust Act 2001 clearly defines under which circumstances and to whom information relating to the trust affairs may be disclosed. Similarly, s46 of the Foundation Act 2012 preserves confidentiality in respect of information relating to the foundation.

Finally, in terms of tax treatment in Mauritius, there are certain provisions that put both structures on a par in terms of their attractiveness. Mauritius runs a uniform income tax rate and as such a foundation is liable to income tax on its chargeable income at a rate of 15 per cent. However, similar to the trust, a foundation may hold a Category 1 Global Business Licence and be therefore subject to an effective income tax rate of 3 per cent.

So who do we believe to be the champion: foundations or trusts? In reality there is not a great deal to differentiate a trust from a foundation. They are both versatile structures with potential uses, such as accumulation and preservation of wealth, succession planning, asset protection, tax planning, off-balance sheet transaction and asset financing. Admittedly, they do not share the same history, and the law of foundations (certainly in common- law jurisdictions) is generally less developed than trust law, but this is not seen as a drawback by tax planners and wealth managers.


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