Foundations for the last century have been used by many UHNW individuals across the globe for much the same reason as settlors of trusts; privacy, asset protection, freedom of distribution, smooth succession and tax avoidance.
Although they serve much the same purpose, they are very different in history and nature.
Private foundations developed from entities set up by residents in continental Europe in the middle ages to fund religious houses.
In 1926, Liechtenstein broadened the appeal of foundations when it enactedthe Personen-und Gesellschaftrecht (Persons and Companies Act, hereafter referred to as the PGR) and made the foundation suitable for use as a vehicle to manage family assets.
Liechtenstein remained unique in establishing private foundations until Panama introduced the Foundation Law No.25 of 1995. Since that date foundation legislation that provides for the establishment of private asset- holding foundations has been enacted by the other jurisdictions, including Aruba, Anguilla, Antigua, Bahamas, Cyprus, Guernsey, Isle of Man, Jersey, Malta, Netherlands Antilles, Nevis, St Kitts, Seychelles and Vanuatu.
Joshua came to see me last week, he was looking to set up a structure for his wealth and was looking into trusts, when his friend Michael told him not to bother with trusts, but to set up a foundation, since they were ‘outside the scope of CRS’.
NO, they are not!
Fiduciary businesses which administer foundations must report to the home country of the founder in the same way as they would if they were administering a trust. The only difference will be the way in which the Governments treat this information once in their possession.
I explained to Joshua that Governments want to tax their residents on the assets they hold offshore and in particular if they are held in a trust or foundation.
However, whereas a trust is an obligation, and is only created if the three certainties are present; certainty of objects, certainty of subject, and certainty of intention, a foundation is a legal entity. Trusts are most likely to be attacked if there is no certainty of intention, under the sham doctrine. The evidence Governments will be looking for is whether the settlor passed total control to the trustees or was power reserved either to the settlor or a third party such as a Protector
Foundations, do not need certainties to exist, they are formed, like a company. Forms are filled in, the foundation is endowed and registered, and hey presto, it exists. The intention of the founder is irrelevant!
The bad news is that not only can it be formed like a company it can also be taxed as if it were a company under CFC rules.
CFC (Controlled Foreign Company) rules enable a Government to tax the founder on income arising to the foundation as if it were income of the founder, if he retains control for himself. Therefore, if Joshua were to set up a Foundation and reserve rights to himself, then he will be obliged to report the income arising to his foundation on his tax return in his home country as if it were his own income, and if he does not do so, he will be treated as evading (not avoiding) tax.
Joshua asked whether there was any way he could continue to exercise control of the assets in the foundation without infringing the CFC rules.
The problem here is that there is little case law as to what would or would not be considered ‘control’. Does it extend to having a seat on the Council, does it apply if control is exercised through a Guardian or Protector – it is simply not known – but the problem with not being known is that it leaves it open for hungry Governments to claim that any form of control exercisable by the founder triggers the CFC rules which would make Joshua liable to tax on all the income as it arises.
Joshua looked crestfallen. I told him not to worry. Like all clouds there are silver lining and we were able to put to him a tried and tested solution, which suited him perfectly and he liked very much.
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