We are often asked How do I go about setting up a Charity Offshore?
Charities are commonly registered Offshore as either Charitable Purpose Trusts or Charitable Purpose Foundations. See below for details.
A Purpose Trust is a particular type of trust which, unlike a conventional trust, can be formed to hold assets for a purpose without conferring a benefit on any specific person. An example of such a purpose is to hold shares in a company.
Purpose Trusts are currently used, among other things, in conjunction with asset financing transactions and securitisations.
They are also used to hold the shares in a Private Trust company (PTC) structure, where confidentiality and control issues are important. The advantage of using a Purpose Trust in such a scenario is that there are no registration or disclosure requirements of such trusts at law generally speaking. Therefore the ownership of the PTC will be confidential, and the shares in the PTC will be immune from an attack on the Settlor (ie the person who sets up the Trust).
Charitable Purpose Foundations
Any discussion about Charitable Purpose Foundations must necessarily begin with an examination of What is a Foundation?
Unlike Trusts (which are a creature of English common law) Foundations are a by-product of European civil law jurisdictions (most notably Liechtenstein) and have existed since the Middle Ages when they were used mostly for charitable purposes. These days Private Interest Foundations are more commonly established to protect family wealth (and as highly effective Tax Minimisation tools – see below).
Like a company a Private Interest Foundation is a separate legal entity (that is it can hold property & sue and be sued in its own right) and its operations are governed by a Charter and Regulations (similar to the Memorandum and Articles of Association of a company). Usually a Private Interest Foundation (“PIF”) can only be used as an asset holding entity (though it can carry out certain commercial functions depending on its country of registration).
The day to day management of a PIF is overseen by a Councillor or a Council (like a board of directors in the case of a company). However instead of shares a Foundation, like a Trust, has Beneficiaries who are ultimately entitled to the assets and income of the Foundation. Importantly the creator of the Foundation (usually called a “Founder”– see below) can still steer the direction of the Foundation post registration by being appointed as a Financial Adviser or Protector. Additionally the Founder can have certain powers reserved to him from the outset (eg the rights to appoint or remove Councillors, to exclude or change Beneficiaries or to appoint and remove Protectors).
The key difference between a Foundation and a Trust is that in the case of a Foundation the legal owner of the Foundation’s assets is the Foundation itself, a separate legal entity (usually) based in a nil tax jurisdiction. This is different to the situation of a Trust where the underling owner of trust assets are the (presently entitled) beneficiaries. This can have a significant impact in terms of tax liability (see below).
Purpose Foundations/Trusts – Legal Basis
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 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 a Foundation 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 (ie the forerunner and close cousin of the Foundation) 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.
When used in combination with a Tax Free Offshore Company (ie where the Foundation is set up to hold the shares of the Company) a Purpose Foundation can assist you to do tax effective business abroad without you having to declare yourself (or your family members) to be, at law, the underlying beneficial owners of your Offshore Company. This affords one unparalleled Tax Deferral and Asset Protection opportunities.
The down side of a Charitable Purpose Foundation is that, once registered, it can’t later morph into a Foundation with named/specific beneficiaries.
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 or Purpose Trust.