June | 2022 | Offshore Companies International

Cook Islands Foundations

Whilst best known for its Internationally renowned Asset Protection Trusts the Cook Islands also boasts an interesting Private Foundation product. In this article we will take a close a look at the Cook Islands model of Foundation including the legal structure, key features and common uses.

Advantages and Uses

The Cook Islands Foundations Act 2012 was enacted in June 2012. It is a modern and innovative piece of legislation drawing from the experiences and features of foundation law in other financial centres, and adding Cook Islands specialist asset protection provisions.

Validity of a Foundation in the Cook Islands (“CI”)

A CI Foundation is a separate legal entity from its founder.
A CI Foundation is valid even if the law in the founder’s jurisdiction does not recognise or prohibits foundations.

Multipurpose Use

A CI Foundation can be used for charitable or non-charitable purposes, inheritance and estate planning, wealth management.

Protection from Creditors

A two year statute of limitations on claims to set aside the foundation or attack the transfer of an asset to the foundation.
Courts cannot recognise or enforce a foreign judgment against the foundation.
Stringent fraudulent transfer rules that make it difficult for creditors to bring a claim for fraudulent transfer.
A CI Foundation stands independent from the founder’s personal circumstances. The foundation cannot be void or voidable in the event of the founder’s bankruptcy, insolvency, or liquidation.

Cook Islands Foundations – Management

Founder establishes rules that govern the operation of the foundation.
Foundation is managed by a board, allowing for input from a number of relevant persons.

Foundation Supervisor or Enforcer

The CI Foundations Law recognises someone to oversee the board’s management of the foundation, an ‘enforcer’ or ‘supervisor’.

Privacy

Strict privacy laws against disclosure of the affairs of the foundation.

Cook Islands Foundations -Investment Opportunities

A CI Foundation can derive earning from investments/broad investment powers may be authorised in the foundation rules.
A CI Foundation cannot be used for regular trade or commercial activity.

Tax Exemption

A CI Foundation and its beneficiaries are exempt from paying tax in the foundation’s jurisdiction.

Application of Foreign Law to a Cook Islands Foundation

The Foundations Act 2012 specifically provides that foreign laws (ie laws other than those of the Cook Islands) shall not apply to invalidate the establishment of the CIF or any dedication of assets to the CIF.
In addition forced Heirship laws of another jurisdiction cannot be enforced.
Foreign law will not apply notwithstanding that a dedication of assets to a CIF has the effect of avoiding, defeating (or potentially avoiding or defeating) a right, claim interest, obligation or liability conferred by that foreign law.

Cook Islands Foundation – Wealth Preservation Advantages

Certainty as to the time limitation periods in which creditors must commence actions in relation to “fraudulent transfers” against Founders of CIFs. In summary, a creditor must commence an action against a Founder within 12 months of the date of transfer of assets to the CIF and against the CIF itself within 24 months of the date of transfer of assets to the CIF, in order to have legal standing to argue a fraudulent transfer by the Founder.

The creditor bears the onus of proof to show that a transfer by a Founder was done with intent to defraud that creditor. The creditor must satisfy this onus of proof to a standard of “beyond reasonable doubt”.

A CIF will continue to exist notwithstanding that the Founder of the trust may be declared bankrupt.

In the event that a creditor is successful in arguing that a transfer to a CIF was done with intent to defraud creditors, the only remedy available to the creditor is an award of damages from the assets of the CIF.

Punitive damages cannot be recovered from a CIF.

The avoidance of forced heirship rights in the home jurisdiction of the Founder will not render a CIF void or voidable.

Special purpose domestic or offshore entities can be placed underneath the CIF and take advantage of the wealth preservation features offered by Foundations Act 2012.

Background

A foundation is formed by a person known as the founder (who may be either an individual or corporate body) who provides (through an “endowment”) the assets to be administered by the foundation. The foundation’s assets are to be administered through contractual, rather than proprietary, principles.

Unlike a trust, a foundation is a separate legal entity. It is managed by a council of members. A foundation can hold assets, enter into agreements with third parties and can sue or be sued in its own name. On the face of it a foundation is similar to a corporation. However, unlike a corporation, a foundation does not have any shareholders. A foundation can have beneficiaries, similar to a trust, or it can have purely charitable purposes. Contrary to trust beneficiaries, who have equitable rights, the beneficiaries of a foundation have contractual rights in relation to the assets of the foundation.

A founder may retain some control over the foundation’s assets through reserving certain powers under its rules. Powers that are commonly reserved include powers relating to the investment strategy of the foundation and the appointment or removal of beneficiaries. The founder may also be given the power to revoke the foundation.

Registration and Rules

The Act provides a registration regime for foundations in the Cook Islands. Each foundation shall have a foundation instrument which contains its basic details including name, objects, and the registered agent in the Cook Islands. The foundation instrument is filed with the Registrar.

A foundation must also have rules that comply with the Act. Under the Cook Islands Act, while there are certain matters that must be addressed in the rules, there is significant flexibility in how the rules in general are drafted. This allows client founders and their advisors to set out clearly how they want the foundation to operate, and how they want it to benefit the beneficiaries. The rules of the foundation are not required to be filed with the Registrar, but only held by the registered agent in the Cook Islands.

The rules of the foundation provide the substantive details of how the foundation will operate. The rules will include procedures as to the establishment of the council, the appointment of registered agent, the functions of any enforcer, and the rules as to endowment of further assets. The rules may also deal with how powers can be exercised by the council, and the distribution of assets of the foundation should it be wound up and dissolved.

Asset protection provisions

Many of the specialist and proven asset protection provisions contained in the Cook Islands International Trusts Act have also been brought into the Foundations Act, and apply to a registered Foundation and its founder.

The Act states that only Cook Islands law applies to any questions as to a foundation or the transfer of assets to a foundation. This is furthered by the exclusion of foreign law and the non-recognition of foreign judgments in relation to Cook Islands foundations. Therefore, as with Cook Islands International Trusts, a creditor of a founder is forced to commence proceedings against the founder and foundation in the Cook Islands High Court.

The Act then provides for a number of barriers to any such creditor bringing proceedings in the Cook Islands High Court. These include the all-important time limits. In particular the strict 2 year time limit for bringing an action against a foundation, as well as the deemed time limits where property is transferred to a foundation before a cause of action has accrued, or where property is transferred to a foundation more than 2 years after a cause of action has accrued.

Other important asset protection provisions for foundations include the standard of proof beyond reasonable doubt, the exclusion of punitive damages, and the requirement that all remedies against a founder, and all rights of appeal, have been exhausted.

Migration, Dissolution and Termination

An overseas foundation can be moved to and registered in the Cook Islands. This allows existing foundations to take advantage of the flexibility and protections contained in the Cook Islands Foundations Act. The equivalent of the Registrar in the overseas jurisdiction in which the foundation is established must provide written confirmation that the foundation is able, under the law of that jurisdiction, to be registered as a Cook Islands foundation. The overseas foundation must also comply with the requirements of its home jurisdiction to be registered. Upon registration in the Cook Islands, the overseas foundation is to be treated as a Cook Islands foundation. Furthermore, such registration does not in any way affect the identity or continuity of the foundation’s personality.

Conversely, the Act provides that a foundation cannot transfer its registration to another jurisdiction unless allowed under the foundation’s instrument and rules. A foundation also cannot transfer if it is bankrupt, a receiver or administrator is appointed, or proceedings have been commenced relating to the solvency of the foundation. A foundation cannot be removed from the register unless it has first notified its creditors of its intention to do so.

The Act provides for a number of situations in which a foundation is to be terminated and dissolved by its council members. The foundation rules can provide for events upon which the foundation is to terminate. A foundation may also be terminated upon bankruptcy of the foundation, the completion, failure or lapse of the foundation’s purpose, and upon the making of an order by the High Court for the winding up of the foundation. The High Court may order the winding up of the foundation upon the application of any of the foundation’s council members, founder, beneficiaries, enforcer or creditors, or upon the application of the Registrar.

Cost:

Set up $4,500

From 2^nd year $2,900

Would you like to know more? Then please Contact Us:

www.offshoreincorporate.com

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.

BVI REGULAR TRUSTS

GENERAL INFORMATION

The basic principles of British Virgin Islands trust law derive from those of the English law, as supplemented by BVI statute. The principles of the English common law apply in the BVI by virtue of the provisions of the 1705 Common Law (Declaration of Application) Act (Cap 13) and those of English equity apply by virtue of the West Indies Associated States Supreme Court (Virgin Islands) Act (Cap 80).

The original British Virgin Islands Trustee Act (the “Act”), which was based on the English Trustee Act 1925, has been updated by the Trustee Amendment Act 1993, 2003 and 2013 (the “Amendment Act”).

DEFINITION OF A TRUST

The trust is a well-established concept in common law originated in England during the Middle Ages. A trust, as per the Trustee Act, refers to the legal relationship created either during life or on death by a person (the “Settlor”) who places assets (the “trust fund”) under the control of a trustee or trustees to hold the trust fund for the benefit of certain persons (the “beneficiaries”) or for the achievement of a specified purpose.

TYPES OF TRUST

Discretionary trust: is a trust where the beneficiaries and/or their entitlements to the trust fund are not fixed, but are determined by the criteria set out in the trust instrument by the settlor.

Fixed trust: A fixed trust is a trust in which persons have fixed entitlements to all of the income and capital of the trust at all times during the income year. That is, the trustee is bound to make a distribution to the beneficiaries in a fixed or predetermined manner, as set out in the trust deed.

Charitable trust: is an irrevocable trust established for charitable purposes.

Purpose trust: is a type of trust which has no beneficiaries, but instead exists for advancing some non-charitable purpose of some kind.

COMMON USES

• Administration of assets

• Private investments

• Holding vehicle of assets or properties • Shareholding participations • Succession planning • Business preservation • Recurring payments to individuals in this or future generations for subsistence, education, training, clothing and other relief • Substitute for prenuptial agreements

BENEFITS AND ADVANTAGES

• Taxation: The Trust is relieved entirely from local taxation.

• Asset Protection: The Settlor is able to provide long-term protection to his/her assets outside the country of his/her residence or domicile, free from the danger of expropriation by government agencies.

• Flexibility may be provided by including in the Trust Deed certain special clauses, i.e. the possibility of revoking the Trust, allowing the removal of the Trustee and the continuation of the Trust in another jurisdiction should it be thought that worldwide political developments make this a prudent precaution.

TAXATION

BVI trusts without any BVI resident beneficiaries are generally not liable to tax in the BVI. No estate tax, inheritance tax, succession tax, gift tax, rate, duty, levy or other charge is payable by beneficiaries who are not resident in the BVI in respect of any distribution to them by the trustee of any trust.

REVOCABLE OR IRREVOCABLE TRUST

Revocable Trust: this trust may be altered or revoked by its Settlor at any time (given the Settlor is not mentally incapacitated).

Irrevocable Trust: an irrevocable Trust, in contrast to a revocable Trust, is one in which the terms of the Trust cannot be amended or revised by the Settlor, until the terms or purposes of the Trust have been completed.

The Trust Deed should also specify if the Trust is to be irrevocable. If not, it should contain provisions setting out the manner in which its terms can be revoked or amended.

ACCOUNTING RECORDS

On March 30, 2015 the BVI Trustee (Amendment) Act No. 4 introduced the obligation for Trustees to maintain accounting records for trusts. The new obligations indicate that every Trustee shall maintain records and underlying documentation of the trust whether within or outside the BVI and retain these records and underlying documentation for a period of at least five (5) years.

The records and underlying documentation of the trust shall be sufficient to show and explain the trusts’ transactions and must enable the financial position of the Trust to be determined with reasonable accuracy.

The records and underlying documentation includes accounts and records (such as any invoices, contracts or other similar documentation) in relation to all sums of money received and expended by the trust and the matters in respect of which the receipt and expenditure takes place, all sales and purchases of goods by the trust and the assets and liabilities of the Trust.

A Trustee who, without lawful or reasonable excuse, fails to comply with this legal requirement commits an offence and is liable on summary conviction to a fine not exceeding one hundred thousand dollars (US$100,000) or to imprisonment for a term not exceeding five (5) years.

Cost would be as follows:

- Set up fee $US4,400 (plus $200 stamp duty)

This includes using our standard trust document adopted to fit the Settlor’s requirements or a trust document that has been approved by a BVI based lawyer.

- Annual trustee fee $3,300

This is the basic fee. Should there be more than a few activities, there will be an administrative charge based on either time spent or on agreed fees.

Would you like to know more? Then please Contact Us:

www.offshoreincorporate.com

info@offshorecompaniesinternational.com

BVI IBC’s ECONOMIC SUBSTANCE RULES EXPLAINED

On January 1st, 2019 The Economic Substance (Companies and Limited Partnership) Act 2018 (“ES Act”) came into force in the British Virgin Islands (“BVI”) to address tax system concerns of the European Union and the OECD. The BVI International Tax Authority (“ITA”) has been task with enforcing the ES Act in the BVI.

All Economic substance (“ES”) filings with the ITA are submitted by the Registered Agents only via the Beneficial Owner Secure Search System (“BOSSS)”, which is the existing portal used by the ITA for private filing of ultimate beneficial owners.

The rules have been refined over the course of the past 3 years. The purpose of this article is to clarify the current position in that regard.*

TARGETTED ACTIVITIES

The ES Act simply requires that Business Companies and Limited Partnerships (“Entities”) conducting specifically targeted relevant activities (as listed below) should show substance/presence in the British Virgin Islands unless they are tax resident in another jurisdiction. However, there is an exception to the rule with respect to two of the relevant activities, namely, intellectual property business and pure equity holding business in that once these types of entities do not earn any income during their financial period, they are not considered to be conducting a relevant activity.

Below are the targeted relevant activities, which are more broadly defined in the ES Act and Rules, (it is important to note that an entity can fall under more than one relevant activity at any given time, except for holding business, which will not apply as a relevant activity if the entity is conducting any other type of business activities besides holding business):

Banking business
Insurance business
Fund management business
Finance and leasing business (eg. earning interest from offering of credit)
Headquarters business (which relates to groups)
Shipping business (by sea only)
Holding business, i.e. pure equity holding of shares in other entities and earning dividend or in receipt of capital gains. (Please take note that an entity holding shares and not earning any dividend or in receipt of capital gains during the financial period, do not qualify as pure equity holding business).
Intellectual property business. (Please take note that if no income is earned from the intellectual property during the financial period, it does not qualify as intellectual property business).
Distribution and service center business (which relates to groups)

FILING/REPORTING

The ES Act requires that all Entities incorporated in the BVI must inform the ITA of their Economic Substance status, within six months after the end of their financial period, by submitting a declaration for filing through their Registered Agent in the BOSSS.

The ITA’s filing system does not allow for partial or early filings, therefore all filings must be done at the end of the financial period and only takes into account the status of the Entities at the end of the financial period, (eg. if the entity was conducting a relevant activity in the first half of the financial period and the entity changes its activities in the last half of the financial period to something other than one of the relevant activities then the entity must file as out of scope at the end of that financial period).

Discontinued and liquidated entities are required to file their declaration for their last financial period after liquidation or discontinuation. If the financial period has not ended at the time of discontinuation or liquidation, the entities must lodge their declarations with the Registered Agent for submission at the end of the relevant financial period. If an entity was conducting a relevant activity prior to discontinuation or liquidation it will be required to show substance on last financial period declaration.

Entities that were struck off of the Registry of Corporate Affairs before January 1st, 2016 are not subject to the ES filings. All other struck off Entities are obligated to file their declaration with the ITA.

The ITA is currently having discussions with other local authorities to determine the best way forward for these struck off Entities. We will provide an update as the information becomes available.

FINANCIAL PERIOD

The financial period for Entities incorporated from January 1st, 2019 is one year from the date of their incorporation. Reporting via BOSSS commences at the end of each financial period. Filings must be done within 6 months after the end of the financial period.

The financial period for entities incorporated prior to January 1st, 2019 is one year commencing no later than June 30th, 2019. Reporting via BOSSS commences at the end of each financial period. Filings should be done within 6 months after the end of each financial period.

There are also provisions available for changing the standard financial periods mentioned above, please inquire if necessary.

The filing/reporting requirement is an annual requirement to assist the regulators with their monitoring obligations.

ASSESSMENT REQUIREMENTS

The ITA has recommended that Entities obtain independent (legal) assessment of their status to ensure that they adequately comply before the filing deadline, especially if they are required to show substance, which should ideally start at the beginning of the financial period. However, entities can opt to self-assess and proceed with filing without the legal assessment. It is important to note that Registered Agents are not required to make assessments. Such assessment should be done by the directors or partners of the entities or other persons within the entity that are aware of the internal affairs of the entity, eg company lawyer or accountant.

For better understanding of the assessment process, we have created a (n internal) category system below. There are three assessment categories that an entity can fall within, as follows, (please pay close attention to the special instructions for pure equity holding Entities):

Category A: Entities that do not fall within the scope of the ES Act.

These Entities are only required to file their declaration with the ITA to confirm that they do not fall under the scope of the ES Act. A resolution of the directors or declaration of a related third party and any independent legal assessment or self assessment will be required for filing.

Category B: Entities that fall within the scope of the ES Act and are tax resident in the BVI

Entities that cannot prove that they are tax resident OUTSIDE of the BVI are automatically tax resident in the BVI and are required to show substance in the BVI as follows:

(a) the entity must be managed and directed from the BVI by;

(i) having a BVI qualified director or using an alternate qualified BVI director; or

(ii) the foreign director must travel to the BVI for meetings. It is important to note that the directors do not have to reside in the BVI but an adequate number of meetings of the directors must be held in the BVI. Therefore, it is necessary for a quorum of directors to be established in the BVI when having meetings, whether by BVI alternate director or by BVI director;

(b) the entity must have an adequate number of qualified employees (which can include the use of outsourcing);

(c) the entity must conduct the core income generating activities in the BVI (which can include the use of outsourcing);

(d) the entity must have adequate office facilities in the BVI (which can include the use of outsourcing); and

(e) the entity must have adequate expenditure in the BVI.

These entities will need to restructure to move the core income generating activities of their operations to the BVI in order to show adequate substance. It is important to note that an entity is not required to move the physical operations to the BVI, but to move functions of the operations that relates to the core income generating activities, (eg if a shipping company operates in India it is not required to move the shipping services to the BVI but it can move the billing aspect of the operations to the BVI.)

We recommend that Category B entities seek legal assistance on their restructuring plans, but it is not mandatory, the entity can decide on its own restructuring.

PURE EQUITY HOLDING BUSINESS – CATEGORY B

Pure equity holding Entities are given more relaxed substance requirements. They are only required to adhere to the BVI Business Companies Act and have adequate employees and premises for holding equity participation.

Entities conducting pure equity holding business that are receiving only dividend are considered passive in nature, therefore, having a registered agent in the BVI is considered enough substance.

Entities conducting pure equity holding business that are actively managing their participation such as re-investment of dividends, converting shares, selling shares, etc., the ITA will require evidence of more adequate substance to support such activities, such as qualified staff and office in the BVI. Pure equity holding business Entities are not required to have BVI directors but can do so if they so wish.

OUTSOURCING

Outsourcing services can be used for all Category B Entities to establish substance or a trade license can be obtained to establish an independent office in the BVI. If an entity decides to establish an independent office, it will be required to obtain a (trade) license from the appropriate authorities and subsequently register with Inland Revenue, Social Security and National Health Insurance.

Filings for Entities under Category B with the ITA should be supported by a resolution of the directors or declaration of a related third party and any independent legal assessment or self assessment. The financial information of the entity will also be required to show that the entity has adequate expenditure in the BVI in comparison with its foreign expenditure.

Category C: Entities that fall within the scope of the ES Act but are tax resident in another jurisdiction.

These entities are required to submit evidence of their tax residency, e.g. a letter from the tax authority in an EU approved foreign jurisdiction, supported by a resolution of the directors and any independent legal assessment. Please take note that the ITA will be informing the tax authority in the foreign jurisdiction, that the entity has indicated that it is tax resident in that jurisdiction.

SUPPORT SERVICES

We will be assisting with legal assessments, application for change of financial periods, outsourcing services, setting up of independent office, recruitment of qualified staff, applications for licenses, and registration with Inland Revenue, Social Security and National Health Insurance. Our fee sheet is available for review.

Would you like to know more? Then please Contact Us:

www.offshoreincorporate.com

info@offshorecompaniesinternational.com

*Information current as at March 3, 2022