Monthly Archives: July 2015

What is a Discretionary Foundation?

If you are looking for maximum Privacy Offshore you should seriously consider including a Discretionary Foundation as part of your International Corporate Structure.

A Discretionary Foundation (like a Discretionary Trust) is a Private Interest Foundation (“PIF”) wherein the Foundation Council has a broad discretion including in terms of:
(a) who to install as beneficiaries and when; and
(b) when distributions are paid, to whom and how much.

In the case of a Discretionary Foundation the beneficiaries do not have a fixed entitlement or interest in the Foundation funds/assets. The Council has the discretion to determine which of the beneficiaries are to receive the capital and income of the Foundation and how much each beneficiary is to receive. The Foundation does not have a complete discretion however. The Council must act in accordance with the Letter of Wishes provided by the Founder at the outset (which commonly provides for the Founder and his/her family to be added as beneficiaries at a later time) and can only distribute to beneficiaries within a nominated class as set out in the terms of the Foundation’s Regulations.

Beneficiaries 

Persons who are to receive a benefit from a PIF are called Beneficiaries. You as the Founder may be a beneficiary though not the sole beneficiary. (Unless you’re setting up a Purpose Foundation) there must be at least one beneficiary nominated from the outset.

There are essentially two ways that you can approach the issue of who to name as Beneficiaries (and when). The first (more traditional) method is to clearly describe to your Foundation Registration Agent (or the Professional person who is setting up the Foundation for you) the names of the persons (which may include you and eg your partner/children) that are to ultimately benefit from the PIF. Some people feel more comfortable if they can see, from the outset, their names appearing as beneficiaries.

Note: in this instance you will need to list the parties which are to be the beneficiaries of the foundation either by name or reference to another party (i.e. the children of XYZ).

You can also provide for your foundation to benefit any future unborn children. If so, in your formation instructions, you would need to clearly specify the full names of the parents or prospective parents (e.g. “the children of my son in the event that he has any children”). You can also give details if you wish to add any age requirements or other conditions for benefits to be distributed.

Discretionary or Potential Beneficiaries

The second, more creative approach is to set up a Discretionary Foundation and to maximize the “Discretionary” nature of the structure to avoid any person’s names appearing anywhere eg in the Regulations or Order form.

One of the key features of Discretionary Foundations is that the Council/lor retains the power to add or substitute further beneficiaries after the PIF has been formed. What you can do in this instance is nominate (in the section of the Order Form asking for details as to beneficiaries) an internationally recognized charity such as Oxfam or Unicef or The Red Cross etc to be the primary beneficiary from the outset.

If you are setting up a Seychelles Foundation this may not really be necessary however as under the Seychelles law there is no deemed entitlement for beneficiaries. Hence if you name yourself/your spouse/family members as beneficiaries it should not give rise to tax consequences onshore (ie unless or until the Foundation actually pays or resolves to pay you/the beneficiaries a Distribution).

Switching Beneficiaries

If your wish is for the Foundation Council/lor to add or substitute beneficiaries at a later time all that needs to be done is to tell your Foundation Registration Agent (or the Professional person who is setting up the Foundation for you) the names of those persons and when, (after formation of the PIF) you would like to see those persons added as primary beneficiaries. By taking this approach if the Foundation’s Corporate document were accidentally found by persons acting on behalf of your creditors (or the Revenue Authorities) they should still be unable to establish whether you (or your partner or family members) are beneficiaries of the PIF.

As with any such structure local laws can have an impact. Hence you should seek local legal, tax and financial advice before committing to establish an entity or structure such as that described above.

When setting up an Offshore Company if privacy is a priority for you (and/or if you want to minimise the chances of having to endure a tax audit) then the ideal is to incorporate your tax free Offshore Company in a country which does not have a TIEA (ie Tax Information Exchange Agreement) with your country of tax residence. (See below which explains what a TIEA is).

But what do you do if, after offshore incorporation, your home country signs a TIEA with the country where your nil tax Offshore Company is incorporated???

For the discerning Offshore Company Owner a key question to ask (as part of the process of choosing an Offshore Company Jurisdiction) is “does this jurisdiction allow its companies to migrate/redomicile???”

The good news is many if not most tax havens allow you to redomicile an IBC to or away from the jurisdiction.

The migration/redomiciliation process is fairly straight forward:

First up the IBC/Offshore Company’s board of directors passes a resolution authorising the change of domicile from country A to country B.

Once that’s done a number of corporate/legal documents need to get drawn up including a board resolution and Articles of Continuation (ie a one page document signed by the Board formally authorising a change of home jurisdiction).

Certain documents then must be delivered to the Company’s new  Offshore Manager/Registered Agent to formalize the process of redomiciling the  company from one jurisdiction to another include the following:

1. Signed board resolution authorizing the change of domicile
2. Articles of Continuation

3.           Original notarized set of documents from previous jurisdiction, containing:

a)            Copy of the Certificate of Incorporation

b)            Copy of the Memorandum & Articles of Association

c)            Copy or original certificate of good standing

Depending on how cooperative the Company’s Registered Agent (Offshore Manager) is the process can take anywhere from a week to 3 weeks. Cost can be anywhere from $500 to $1,500 depending on how old the Company is, what the jurisdiction is and the outgoing Registered Agent’s requirements.

What is a Tax Information Exchange Agreement?

A Tax Information Exchange Agreement (TIEA) provides for the exchange of information on request relating to a specific criminal or civil tax investigation.

Let’s assume that you set up a Tax Free Offshore Company in a country which has a TIEA with your home/taxing country.

How it works in practice is, if your home state becomes suspicious of your connection to or involvement with an Offshore Company (ie if they think an Offshore Company is being used by you to avoid domestic tax obligations), the Tax Authorities of your home country can request of the Tax Haven country Government, as of right, (ie if there is a TIEA entered into between the 2 countries) that they give up the name and address of the “underlying beneficial owner” of the company in question.

Although the information isn’t publicly filed this information must/will be kept by the Tax Free Offshore Company’s local Registered Agent who is obliged by law (as a condition of its International Corporate Service Provider’s License) to hand over this information upon request by/to the local Financial Services Authority (who then pass ownership details to the Tax Haven’s Attorney General’s Office who then pass it down the line to the requesting country).

I am often asked how does one move money to an Offshore Company?

In a 14 + year career specializing in International Corporate Structuring I have seen this done in a number of different ways:

1. You could set up a dual structure (eg a Tax Free Offshore Company the shares of which are held by an Offshore Private Foundation) and have the Foundation set up as a Charitable Foundation. Once the Foundation is registered you could then make regular donations to the Foundation (which would then transfer that money to the Tax Haven Company eg as share capital).

2. You could set up 2 International Business Companies Offshore (ie “IBCs”) ie an Investment Company and a Trading Company. The first IBC you would enter into a speculative (eg high risk/potentially high return) general (long term) investment with. This IBC would then invest money with your trading IBC. The investment with the first IBC could be structured in such a way as to ensure that you won’t be paid a return on that investment for quite a while eg it could be a capital focussed investment. Meanwhile if anyone asks where the money went and why you’ve received nothing back you could truthfully say I’m not yet entitled to a return. Moreover no one can see where the money went to once it landed offshore and no one (eg as can happen in an insolvency claim) should be able to claw back the money from the 2^nd IBC.

3. You could convert your local money into bitcoins then transfer ownership of the bitcoins to your Offshore Tax Free Company (“IBC”). The IBC could then convert the bitcoins into hard currency which the IBC would then use to invest in whatever. The transfer of your local money into bitcoins would be beyond the view of local courts/authorities.

4. You could engage a lawyer to Due Diligence on the Offshore Company you intend to send money to. Whilst the Lawyer’s making inquiries to confirm that the company exists and has been properly incorporated etc, (as you might do prior to a real estate purchase) you could park the money you intend to invest in the IBC in the Lawyer’s Trust/Client/Escrow Account. Once the Lawyer has completed his/her inquiries you would instruct the Lawyer to send the funds from his/her Trust/Client/Escrow account to the Offshore Company’s Bank Account

5. You could “Gift” the money to a family member (or close friend) overseas and then have that family member transfer the money to your Offshore Company

6. If you are holding funds in your own name you could set up a personal account Offshore {eg in/at a Bank located in a country that (a) does not have a Tax Information Exchange Agreement with your home country and (b) which has not agreed to be part of the OECD Bank Account Information Sharing Treaty Network} and then transfer the money from your Onshore bank account to your Offshore Bank Account. Same could be done in the case of funds being held in a Company account onshore (ie you set up an Offshore Privacy Haven Account in the name of your local Company and have funds transferred from the Company’s Onshore account to your Company’s Offshore account. If you open the account in the right place onshore predators will really struggle to find out where the money went once it landed offshore.

Local laws can have an impact. Hence it would be wise to seek local tax/legal/financial advice before committing to embark on such an endeavour.