Why a structure?
The Need for a Proper Structure: One of the most frequent questions surrounding property investments in Mauritius is which legal structure to use when purchasing property. Before diving into the specifics, let's understand why having a proper structure matters:
- Tax in SA
While it is possible to buy property in your personal name, doing so may have adverse tax consequences for South African residents. Rental income from such property would be considered part of your worldwide income, and the asset itself would be included in your estate. The Double Taxation Avoidance Treaty between Mauritius and South Africa may offer some relief, but speaking to a specialist is highly advisable.
- French/Civil Law
Additionally, Mauritius' complex inheritance system, influenced by its colonial history as both a French and English colony, operates under the Napoleonic Code. This system dictates how assets are inherited, often disregarding the terms of a will.
The influence of French civil law on buying and selling property in Mauritius is significant. The Code Civil Mauricien (CCM), which is inspired by the French Code Napoléon, governs property law on the island. Here are some key points regarding its influence:
- Property Rights: The CCM outlines the rights of individuals regarding property ownership, inheritance, and transfer.
- Contract Law: Contracts for the sale of property are based on principles derived from the French civil law system, ensuring clarity and legal certainty in transactions.
- Matrimonial Regimes: These can affect property ownership and transactions, depending on whether the property was acquired before or during marriage.
- Successions: The CCM provides clear rules on inheritance, which can influence the buying and selling of property, especially in estate planning.
- Consumer Protection: While the Consumer Protection Act and The Hire Purchase and Credit Sale Act protect consumers, the CCM remains the main source of substantive civil and commercial contracts.
The hybrid legal system of Mauritius, which combines elements of both French civil law and British common law, creates a unique environment for property transactions. It’s important for buyers and sellers to understand how these laws apply to their specific situation, and it’s advisable to seek legal counsel to navigate the complexities of the legal system in Mauritius. This ensures that all aspects of the transaction are handled correctly and in compliance with local laws.
To best navigate these rules a legal structure like a trust can be used.
- Asset protection
A properly structured investment trust may also offer some asset protection as the trustees assume legal ownership of the asset.
- Legacy Planning
Building offshore wealth is exciting but comes with the downside of a more complex estate. An offshore trust managed by professional trustees simplifies the process considerably. There is no need for an offshore will and your legacy planning can be tailored by giving guidance to the trustees in the non-binding letter of wishes.
Trust vs Company?
A Mauritian trust comprises four key role players:
● Settlor: The individual who establishes the trust and supplies the funds/assets.
● Trustee: At least one qualified trustee must be appointed.
● Beneficiaries: Typically, beneficiaries include the settlor and their family.
● Protector: Nominated by the settlor, the protector has the authority to appoint or remove trustees.
Utilising a trust to hold your assets circumvents the inheritance issue, as the trustee manages the asset in the best interest of the beneficiaries. Beyond this, a trust can also serve as a holding entity for other assets, such as private or public shares and various investment portfolios. This makes it a potent tool for wealth and estate planning, and particularly advantageous for South African investors.
Local companies can be incorporated and owned by a foreigner or a legal structure like a trust. The company is limited by shares and are fairly competitively priced.
So should you use a trust, a trust and a company, or just a company to structure your property investment? Here's a breakdown:
● Trust for Personal Use: If your intention is to purchase one or possibly two properties primarily for personal use and occasional rental, a trust often makes the most sense. A company in this scenario would simply add an unnecessary layer of costs.
● Trust and Company for Rental Portfolio: However, if your goal is to build a rental portfolio in Mauritius, a combination of a trust owning a company, which in turn owns the properties, usually proves most advantageous. This setup allows you to deduct operational costs like management fees and maintenance from rental income, thereby reducing your taxable income. The company is taxed at a rate of 15%, but the company benefits from additional deductions.
Many high-net-worth South Africans have existing company structures in South Africa and may wish to use them for offshore property purchases. This approach is not only inadvisable but also exceedingly challenging. Transferring funds out of a South African company requires approval from the South African Reserve Bank (SARB), a process known as a Foreign Direct Investment (FDI), infamous for its complexity and time-consuming nature. Even if you succeed in purchasing Mauritian property through your South African company, your wealth growth remains tied to South Africa, defeating some of the purpose of offshore diversification.
