We are often asked “What is the difference between a Trust and a Private Foundation?”
Trusts and Foundations are very similar ie they are both, in effect, 3 headed creatures.
A Trust is set up by a person called a Settlor, is managed day to day by a person called a Trustee and typically has beneficiaries ie persons who are designed to benefit financially from the set-up of the Trust. (For more details on what a Trust is click on this Link: https://offshoreincorporate.com/offshore-trusts/ )
A Foundation is set up by a person called a Founder, is managed day to day by a person called a Councillor and (like a Trust) typically has beneficiaries ie persons who are designed to benefit financially from the set-up of the Foundation. (For more details on what a Foundation is click on this Link: https://offshoreincorporate.com/private-interest-foundations/ )
In short you can achieve the same result with a Foundation as with a Trust but have more control (and you can get potentially get around CFC rules, see below).
Foundations are a creature of (European) Common Law.
Under Common Law a Foundation is presumed at law to be both the legal owner AND the beneficial owner of any asset it holds.
One jurisdiction ie Seychelles has taken this a step further and enshrined this aspect of Common Law into statute ie in section 71 of the Seychelles Foundations Act, (see Links to the Act below) it specially provides that the legal AND beneficial owner of any asset held by a Seychelles Foundation is the Foundation itself. Moreover, the beneficiaries of a Seychelles Foundation are not entitled receive any income or capital from the Foundation and have no legal or beneficial interest in Foundation assets until such time as the asset is actually transferred by/from the Foundation to the Beneficiary {See section 71 (c)}.
Given the explicit wording of these provisions it’s hard to see how one’s local revenue authority could argue differently. As such you could be a beneficiary of a Seychelles Foundation and potentially not have to report income/pay tax on any profits made by the Foundation (or any Company it owns) unless or until such time as the Foundation actually resolves to pay you a Distribution (or until such time as you receive income – eg Consulting fees/salary – from any Company owned by the Foundation).
In the case of a Trust all actions must take place under the hand of the Trustee. If not, the Trust could be rendered/declared void for being impotent at law (also known as a Sham Trust). If a Trust is declared a sham all income and reporting/tax payable obligations revert back to the Settlor of the Trust.
In the case of a Foundation, day to day control lies in the hands of the Foundation Council/Councillor; Unlike a Trust, the Councillor’s powers can be reserved to the Founder of the Foundation and (eg where a “Nominee” Founder is deployed) then assigned confidentially to any third party (eg you) without effecting the legal integrity of the Foundation!
Again, unlike a Trust, a Foundation is a separate legal entity and is typically used as a vehicle by which to potentially avoid the application of CFC (Controlled Foreign Corporation) rules. We used to use Offshore Trusts for such purposes back in the noughties but the problem with a Trust is that you have someone (ie a Trustee) holding property for the benefit of 3rd parties who are inarguably beneficial owners of that property and probably/potentially entitled to the income/capital of the Trust… which, these days in many countries, often carries with it, reporting/tax consequences onshore (ie if you’re entitled to receive a Trust distribution, even if you haven’t actually received a distribution, you can be taxed on it) especially countries which have CFT (Controlled Foreign Trust) rules.
A Foundation is very similar to a Trust in that it’s set up by a Founder (like a Settlor in the case of a Trust) and managed day to day by a Councillor (like a Trustee in the case of a Trust) who manages the Foundation property for the benefit of the beneficiaries of the Foundation. A key advantage of a Foundation is that it’s a separate legal entity in its own right (ie the Foundation actually owns the assets held by the Foundation – unlike a Trustee who holds property for someone else ie the beneficiaries) and generally speaking the beneficiaries are not entitled to receive any distribution of income or capital from the Foundation unless or until such time as the Foundation Council actually resolves to pay a distribution.
What this means as a beneficiary, in the case of a Foundation, is that you may be able to defer paying tax at home on the income of any investments held by a Foundation enabling you to reinvest 100% of that income not just the after-tax component. With the power of compounding this can assist you to achieve your Capital/Net worth target/s in as little as 10 years as opposed to 30 years +!
Day to day responsibility for managing a Foundation lies in the hands of a Councillor. All Foundations allow for the Councillor’s rights to be reserved to the Founder on record of the Foundation. Most jurisdictions allow you to use a Nominee Founder. What typically happens there is, at registration, the Councillors key rights and powers are reserved in the Foundation’s Regulations to the Founder. On day 2 the (Nominee) Founder assigns those powers to you via a Deed of Assignment. Gifting you more control if you want it.
Note the ability to use (and reporting obligations in respect of) an Offshore Trust or Private Foundation for such purposes as generically described varies greatly from country to country. You should seek out local legal advice and local financial/tax advice before committing to set up or deploy an Offshore Trust or Private Foundation.
To view the Seychelles Foundations Act 2009 click on this link: https://seylii.org/sc/legislation/act/2009/32
To view the 2020 Amendments to the Seychelles Foundations Act click here: https://seylii.org/sc/legislation/act/2020/7
To view a consolidated version of the Act (current at 2021) click on this link: https://fsaseychelles.sc/legal-framework/legislations Then click on the Button on that page that says “Foundations” That button provides access to downloadable copies of the original Seychelles Foundations Act and all subsequent amendments
Would you like to know more? Then please Contact Us:
info@offshorecompaniesinternational.com
DISCLAIMER: OCI is a Company/Trust/LLC/LP/Foundation Formation Agency. We are not tax advisers or legal advisers. You are advised to seek local legal/tax/financial advice in regards to your local reporting/tax requirements before committing to set up or use an Offshore Company or other entity.
