A Quarterly Newsletter from the UAE and Oman member firms of the PKF International Ltd.

VOL 13, Issue 3 July 2011

Offshore Update

Foundations – The New “Trust” worthy vehicle?

Foundations have been a popular investment vehicle in countries governed by civil law, where the western trust concept is still an unexplored or unfamiliar option. However, if one observes the larger global wealth management picture, several common law jurisdictions have now accommodated ‘foundations’ laws into their own legislations, to attract new money from the neo rich in the emerging BRIC economies.

Globally, foundations are used for a variety of purposes. In the context of managing one’s wealth, the objective of a foundation is similar to a trust, i.e., protecting the family fortune from the tax man or similar prying sources. The manner in which a foundation is established and run, however, is quite in contrast to that of a trust.

Unlike a common law trust, a foundation is a legal entity more similar to a company. Foundations are formed by a founder who provides the initial assets (endowment) of the foundation. This underlines another area where foundations differ from trusts in that the assets are held for the purposes set out in the foundation’s constitution and are administered according to contractual rather than fiduciary principles. While a trust’s assets are held by a trustee, a foundation has a council which acts more like a company board and which is responsible for fulfilling the purpose(s) of the foundation. Beneficiaries have contractual rights to enforce the operation of the foundation in accordance with the foundation charter, rather than having a proprietary right in its assets.

Foundations have been in existence in Europe since the early 20th Century and notable jurisdictions with foundation laws include Liechtenstein, Netherlands, Austria, and Sweden. These are also popular in Asia and Latin America, particularly in Panama, and principal aspects of some of these countries’ foundation laws are briefly outlined below:

Austria
The private foundation is known as the Privatstiftung. Under Austrian law, a grantor must endow the Privatstiftung with assets of at least EUR 70,000 in cash or kind. If capital is raised as a contribution in kind, an audit is required. However, In Austria private foundations which meet certain criteria currently benefit from fiscal advantages like exemption from gift & inheritance tax laws in certain circumstances, corporate tax breaks on dividend income, withholding tax credits and the option to take advantage of tax treaties.

Liechtenstein
No public registration is necessary, except that a copy of the Foundation Deed is lodged with the authorities. The founder’s rights are transferable, and these normally include the right to terminate the Foundation or amend the bye laws. Commercial activities are not permitted except in so far as they are in pursuit of the Foundation’s non-commercial goals. It is normally administered by a body similar to a board of trustees. In the recently revamped foundation laws, the legislators have modernized the existing legislation to bring Liechtenstein foundations into line with international practice. As a result of the reforms, the protection of the foundation assets is subject to new rules, as are the supervision of foundations and their governance. The non-transferability of the founders’ rights as a further new key feature entails greater legal certainty and clarity.

Panama
The Private Foundation Law 1995 governs private foundations in Panama. The founder establishes the foundation by depositing a notarised private foundation charter at the Public Registry; or the Charter can be executed before the Notary Public. The Charter must specify the names of the Foundation Council, who administer the foundation on behalf of the beneficiaries, the property of the Foundation, its domicile, the name of its Panamanian agent and other details; but the names of beneficiaries and principles of operation can be contained in separate Regulations which do not need to be filed. The minimum capital requirement is USD10,000. No accounts are necessary and an audit is not required. As with all Panamanian entities, tax is only levied on income generated within Panama. Foundations are subject to the same capital taxes and annual registration as are Corporations. Panamanian law specifically excludes the operation of foreign ‘forced heirship’ rules or judgements against foundation assets. Panama itself has abandoned these typical civil law provisions in its own legislation.

Common Law Foundations
Foundation laws are no longer seen just in civil law countries, and a number of common law jurisdictions have developed, or are in the process of developing, their own equivalents. Notable examples include Bahamas, Jersey and Guernsey.

The Future
While it is still very early days in the life of foundation laws in common law jurisdictions, doubts have been cast over whether these structures will actually take off as a concept. In the Bahamas, where foundation legislation has been in place for about seven years, interest in these structures appears lukewarm at best.

Jersey’s experience, however, indicates that there may be a brighter future for the common law foundation. By September last year, more than 50 foundations had been formed in Jersey, at a rate of about five per month. It is difficult to gauge whether these numbers can be viewed as success, as the concept is still new, and relatively unusual. The fact that there has not been significant interest in the migration of foundations to Jersey from more traditional jurisdictions such as Panama and Liechtenstein would suggest the market for common law foundations is perhaps not as vast as previously envisaged, although one could conclude that more needs to be done to promote these structures.

Other factors include the nature of the legislation itself in common law jurisdictions, and this is something that Guernsey is paying particular interest to as it seeks to draft a workable and attractive foundations law. Guernsey is also considering a number of other major policy considerations, such as the extent of the foundation council’s fiduciary duties, when and in what form the endowment should take place, and the reservation of powers.

Time will tell, however, if investors really do want to try something different, or if they will prefer to stick to the tried and trusted trust route.

(This article is contributed by Mr. Chaitanya Kirtikar, Manager, Offshore & Free Zone Services.)