How To Transfer Property To A Tax Free Offshore Company

 

A question I’m commonly asked is can I transfer ownership of my home or investment property/s to my tax free Offshore Company?

 

It can be done legally but you need to assume the worst case scenario (ie that that the local revenue/insolvency authorities or a litigation lawyer will investigate and possibly try and overturn the sale) and plan accordingly.

 

The key is commercial reality. The sale must be – and appear to be – “above board”.

 

Tips:

 

1. The inquisitor might ask Where did the buyer come from? How did you meet the buyer? So the smart thing to do would be to list the property for sale with an agent that has international reach (ie one which regularly attracts non local real estate investors) and have the Offshore Company Director make a bid for it after a few others have made an offer.

 

2. The sale will need to be seen to be at fair market value (you can’t just sell the house to your Tax Haven  Company for one Dollar/Euro!). And the contract of sale will need to be seen to be on normal/reasonable commercial terms.

 

3. You will not want to be seen to be doing or managing anything for the IBC. Hence the communications will need to be seen to be coming from the nil tax Offshore Company Director

 

4. Check local tax laws first. Often when a piece of real estate is sold the seller has to pay capital gains tax (“CGT”)

 

5. Check local investment laws next. There may be prohibitions or restrictions on the ability of non-local persons or companies to buy local real estate.

 

6. If you intend to keep living in the property don’t pay rent to the nil tax Offshore Company direct; have a property manager appointed to collect the rent and manage the residential tenancy.

 

Local laws can have an impact. Hence you should seek local legal and tax advice before committing to embark on such a program.

 

 

What is a Controlled Foreign Corporation Law?

 

A Controlled Foreign Corporation (or CFC) Law is one which purports to tax onshore income or capital gains made by Companies incorporated Offshore but which are controlled from onshore.

 

 

Essentially how a CFC law works is if an individual owns or has the capacity to own the overriding majority of shares in an Offshore Company (the percentage of which varies from country to country) then that person is required to declare in his local tax return profits made by the Offshore Company.

 

 

How CFC laws came about was around 30 years ago the big western countries began to realise that certain of their citizens were using nil tax Offshore companies to avoid having to pay tax at home on their non local sourced (ie Offshore) income. In particular the CFC laws target the use of Nominee Shareholders and Directors. If you live in a country which has CFC laws (regardless of whether you are the director/shareholder of the Company or not) if you have the capacity to own and control the company by reference to shareholdings then you would be required to declare and pay tax at home on your Offshore Company’s earnings.

 

 

There are several ways to potentially get around CFC laws. Historically clients would commonly deploy an Offshore (Discretionary) Trust to own the shares of the Offshore Company. However with more and more “Onshore” tax systems claiming tax from any Trust with an onshore resident beneficiary discerning clients these days choose to establish Private Foundations (in particular Seychelles Foundations) as the ultimate holding entity as such entities should not be caught by CFC laws or by CFT (Controlled Foreign Trust) Laws. For more detail click on these links:

 

http://offshoreincorporate.com/private-interest-foundations/

 

http://offshoreincorporate.com/seychelles-foundations/

 

http://offshoreincorporate.com/seychelles-foundations-fact-sheet/

 

Local laws can have an impact hence you should seek local legal and tax advice before committing to set up such a structure.

 

 

WHAT IS A CHARITABLE PURPOSE FOUNDATION?

Any discussion about Charitable Purpose Foundations must necessarily begin with an examination of What is a Purpose Foundation?

 

A Purpose Foundation (like its forerunner the Purpose Trust) is one set up, not to benefit specific natural persons or corporate entities, but rather to raise funds for and/or to carry out some form of specific (usually Philanthropic or Charitable) Purpose.

 

Historically any Purpose Trust or Foundation which is set up to achieve a Purpose other than a Charitable Purpose has been held by the Common Law Courts to be unenforceable.

 

However of late some jurisdictions have passed laws specifically allowing for the establishment of a Foundation which is established to carry on a specific Purpose, Charitable or otherwise.

 

An example of a non-charitable purpose Foundation would include one which is established to maintain the Founder’s collection of antique automobiles, or perhaps one for the purpose of constructing a home for the maintenance and care of his/her cats and dogs and all their offspring.

 

In the Common Law world a Trust must have beneficiaries whose identity can be established with certainty. If the identity or method of determination of the ultimate beneficiaries of a trust is so vague that neither the trustee nor a court could readily determine whether any given individual at any time was or was not a beneficiary, the trust would be unenforceable under common law and therefore, invalid, unless, of course, its purpose was charitable.

 

Historically, a charitable trust, although it may have no named beneficiaries, could be enforced by the local attorney general. In the foregoing examples, however, certainly neither the antique automobiles nor the cats and dogs could sue the trustee to enforce the trust, and none of them is capable of having a personal representative.

 

Interestingly one jurisdiction (ie Seychelles) has specifically catered in its Foundations Law for any attempt by a foreign court to declare a (non-Charitable) Purpose Foundation invalid by including a provision in its law which says that “Notwithstanding a provision of a written law or of a written law of any other country, a Foundation, other than a Foundation with beneficiaries being beneficiaries in terms of section 59, shall be a Foundation established to carry on a specific Purpose”.

 

That being said if your heart is set on establishing a Purpose Foundation and your aim is to fly under the radar or to claim tax deductibility for any “donations” made to the Foundation the wiser choice would be to establish your Foundation as a Charitable Purpose Foundation. Certainly such a Foundation would be far more likely to survive a legal a challenge such as those which have historically struck down Non-Charitable Purpose Trusts in the Common Law Courts.

 

In a Charitable Purpose Foundation the objects of the Foundation must be set out in the Charter (that is the document which is publicly filed giving birth to the Foundation). Here is an example of such objects:

 

 

(a)               To provide assistance and relief for children in ill-health;

 

(b)               To raise funds for, and to financially assist, children in ill-health;

 

(c)                To promote the health and wellbeing of children, including promotion of the provision of proper health care and treatment for children;

 

(d)               To make distributions to non-U.S. entities and institutions that are organized and operated exclusively for charitable purposes and which further the purposes referred to in sub-paragraphs (a) to (c) above.

 

The law of your home state can impact on your reporting requirements. Hence it would be wise to seek local legal and tax advice before committing to establish a Purpose Foundation.