The Hidden Headaches of IRS and RES Schemes

 The Grown Child Headache

The owner of a unit in either an IRS or RES scheme that is purchased at a price of USD500 000 or more has the rights to residence in Mauritius for as long as he owns the unit.

His immediate family (wife and children) also have the right to live in Mauritius until they reach the age of 18 or are permanently enrolled as students in Mauritius.

Trusts and Companies that hold a unit as above, may confer these rights to an individual (and immediate family as above).

This creates a problem for many buyers who have grown-up children they wish to relocate to Mauritius with them.

One solution is to start a company with the grown child as investor or employee. But this had better be a real company with real income or the rights may be taken away as soon as the financials move from the Mauritius Revenue Authority to the Board of Investment who control these Occupation permits.

The company has to be a GBL1 company (effectively taxed at 3% or 15% depending on its operations) or a local company (taxed at 15%) and the income of the child will be taxed at 15% unless it is dividend income.

Capital Gains Tax Headache:

The Mauritius Revenue Authority (MRA) has been known to attempt to tax profits arising from the sale of units held by companies or trusts despite the absence of capital gains tax in Mauritius. The MRA attempts to class the companies or trusts that sell the one unit they hold as ‘trading in property’ companies, and believe that the profits are therefore business profits.

Deemed Income Headache:

The second tax headache is can occur when a company or trust confers the right of residency to someone, and that person lives in the house without paying rent.

The MRA contend that the company should pay tax on the notional income that it should have received. Or alternatively, that the individual should increase his income by the notional rental amount and then pay tax on this income.

The efficient solution to the above is that the person living in the house for free pays for the maintenance of the unit and various other expenses. If this payment is made from savings reserves, the resident won’t be taxed, and the company will only pay tax on the amount that exceeds the costs of the property.

 Inheritance Headache:

Inheritance is governed by the Code Civil – a derivative of the French Code Napoleon. Any person who holds property in Mauritius will be subject to forced heirship. Without getting technical, the effect is that the spouse gets half, and then half of whatever is left to the children. If the property is ultimately held by a trust, this is avoided, as the property does not become part of the deceased estate. There are possibly other ways to resolve this problem, and a Notary is the best person to assist in this area.

High Cost Headache:

It is a well known fact that the price of IRS and RES properties carry a premium. They are often sold at four times the cost of construction. In the case of IRS properties this is hard to avoid, for the buyer of the unit also has to pay for the development of the estate, including roads, gardens, security, electricity, water and sewerage. The maintenance costs are also high for the same reasons, but also because the property developer has the legal exclusive right to sell these services to the owners and make a profit from this.

Rental Headache:

IRS and RES unit owners are forced to rent their units through the property development company. While this has benefits as they are responsible for maintenance and can control access and payment, as well as contribute to marketing. Unfortunately, this does make some owners feel that they are not really owners, but rather tenants on their own property. Rental returns can be disappointing.

Here is an extract from the relevant legislation:

23. Rental of residential property
No owner of a residential property under IRS or RES shall offer the property for letting otherwise than through –

(a)  the IRS Company or RES Company; or

(b) a provider of property management services, designated by the IRS Company
or RES Company, as the case may be.

One estate (Villas Val Riche) has devised a plan where the owners eventually take over the rights to the development company’s income, and have a say within the company from the start. Others will surely pick up on this innovative solution.

Joint Ownership Headache:

Often two individuals wish to pool their funds to purchase a unit. If the unit is worth $500 000 only one of these buyers can be the appointed resident – regardless of who the beneficiaries of the trust are, or the directors or shareholders of the property owning company.

Two brothers each contributing $500 000 to purchase a single unit worth $1 000 000 do not both get residency. If they had purchased separate units worth $500 000 then each would be entitled to residence. I believe that if the case is strong enough, special representation to the BOI for both to get residence may be considered. But this would be an exception.

Misunderstanding the Point of this Post Headache:

Please take these comments as a guide to avoiding pitfalls usually not included in the sales pitch. If you know what to expect, you can plan accordingly. This is not an initiative to destroy IRS and RES schemes. I personally believe these schemes are good for both Mauritius and its new residents.

About these ads

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s