My client, Mo came to England fifteen years ago, from the Middle East. He built a successful food importing business from his home country for which he wanted protection from opportunistic creditors and greedy aunts and uncles.
He was advised to set up a trust and holding company in Guernsey to own his operating company and in due course his trustees formed other companies to hold his surplus cash and other complementary operating companies. It is super successful but has also become unwieldy.
Mo came to see me, he wanted to streamline his operation but was also concerned about the substance requirements legislation to be introduced in Guernsey in 2019. Was there anything he could or should do now?
Substance requirements in Guernsey, like most other offshore jurisdictions, have arisen out of research carried out by the OECD in 2015 into profit shifting by companies such as Google, Apple and Microsoft; Base Erosion and Profit Shifting (BEPS). These multinational companies position their IP in a low tax jurisdiction such as Ireland (headline tax rate 12.5% - the number one BEPS hub in the world) to which operations in high tax jurisdictions, such as the US, pay royalties. The royalties reduce the profits in the high tax jurisdiction and increase the profits in the low tax jurisdiction mitigating the overall tax payable.
Clearly, Mo did not set up his trust and holding structure in Guernsey to create a tax deduction in a high tax jurisdiction, he set it up for other reasons. At first blush, his structure is outside the mischief of this legislation.
However, the legislation extends to investment holding companies and so although his operating companies maybe outside the mischief of the law, his investment holding companies could be caught by this legislation.
Mo is lucky, the trust company which administers his trust has anticipated the way the global tax authorities are moving and has created opportunities for him and his advisers to do business in Guernsey, with meeting rooms and working hubs.
However, I told Mo, it is not just a matter of spending more time and doing more work in Guernsey, his structure and the wording of his trusts should also be amended to reflect substance in Guernsey.
The structure he set up fifteen years ago provides for professional trustees to act as both administrators and decision makers, with powers reserved to a Protector to remove the trustees as circumstances require. In addition, he has a detailed Family Constitution which has evolved out of a simple letter of wishes, as his children grew into adults, but is not binding.
His structure is typical of trusts/companies set up fifteen years ago, but times have changed. We now have greater transparency and the automatic exchange of information. His structure is in need of ‘modernisation’.
First, he should de-couple the decision making from the trust administration by setting up a special purpose trustee (SPT), but not a private trustee company. This SPT needs to have incorporated within it, good governance provisions and to make his family constitution binding.
His family and its advisers then need to be appointed as the executive board. This will take the decisions as trustee and as shareholder of the operating companies in Guernsey. Of course, Mo wants his SPT to continue to use the services of his trustees, because they are good, under contract with his SPT.
Second, his Protector needs to remove the non-interference clauses. Once an SPT is appointed as trustee, his professional trustees will no longer have a fiduciary duty which de-risks their business, so these clauses can and should be removed and instead place a positive obligation on his SPT to interfere with the active and passive companies, which is in line with the trustee’s primary duty to act as a ‘prudent man of business’ in making decisions.
To assist Mo GFOS has put together a team of investment performance analysts to carry out independent asset audits on both his active operating and passive investment holding companies. The team produce for the executive board of Mo’s SPT reports on the Return on Investment (ROI) of each company which include whether the fees charged by the managers justify the return and risk taken. With these reports, the executive board will be well equipped to decide how best to consolidate his structure and get a much-improved overall ROI.
I pointed out to Mo, that the costs of operating this structure in Guernsey would be more expensive and would involve more time, but the investment performance recommendations by our team of investment performance analysts would more than compensate for any additional cost. Mo was thrilled.
‘I have always wanted protection of my trust assets, but not at the expense of control. I now have both, and can stop worrying, knowing that I have got the right people doing what I want them to do’
If you would like to find out more, please contact Caroline on firstname.lastname@example.org, or phone on 020 3740 7422.
You can also buy Caroline’s books, ‘When you are Super Rich who can you Trust?’ and ‘how to win business from Private Clients’ direct from www.garnhamfos.com or from Amazon.