I’m often asked What is the difference between a Tax Free Offshore Foundation and a Tax Free Offshore Trust?
Bottom line is if your reason for wanting to set up an Offshore Trust is to try and avoid tax at home on the earnings of the Trust (or to build a bullet proof fence around any assets to be held by the Trust) you might want to consider setting up a Foundation instead. The disadvantage of a Trust is it’s caught by local Controlled Foreign Trust laws. Put simply if you have the means to remote control an Offshore Trust or are a presently entitled beneficiary of an Offshore Trust chances are you would be required to declare locally and pay tax on the Trust’s earnings or at least your share thereof.
A Private Offshore Foundation is very similar to an Offshore Trust in that it’s set up by a Founder (like a Settlor in the case of an Offshore Trust) and managed day to day by a Councillor (like a Trustee in the case of an Offshore Trust) who manages the Offshore Foundation’s property for the benefit of the beneficiaries of the Offshore Foundation.
Moreover a nil tax Offshore Foundation may get you around the tax issues as it’s a separate legal entity in its own right (ie an Offshore Foundation actually owns – both legally and beneficially – any assets held by the Foundation – unlike an Offshore Trust where the Trustee holds property for someone else ie the beneficiaries) and by law the beneficiaries are not entitled to the income or capital of the Foundation until the Foundation Council actually resolves to pay a distribution to the Foundation Beneficiaries. What this means is potentially you can defer paying tax at home on income of investments held by the tax free Offshore Foundation enabling you to reinvest 100% of that income not just the after tax component.
This can enable you to access the power of compounding on those investment earnings meaning your net worth will grow MUCH faster than what it would were you to pay tax each year on your investment income.
Local laws can have an impact hence you should seek local legal/tax advice before committing to set up a nil tax Offshore Foundation or nil tax Offshore Trust.