A Power of Attorney is a formal document giving another person the authority to make legally binding decisions on your behalf.
There are two types of power of attorney a general power of attorney and enduring power of attorney.
Powers of Attorney are commonly used by Traders (eg Forex Traders) to trade funds for a 3rd party.
How it works is:
(a) In the case of forex etc trading an account is opened in the name of the 3rd party investor (“the Account Owner”).
(b) The Trader sets up a tax free Offshore Company (“IBC”)
(c) The Account Owner (ie 3rd party investor referred to in a PoA as “the Principal”) signs a Power of Attorney with the Trader’s IBC which appoints at law the Trader’s IBC as the Account Owner’s Authorized Trader and attorney-in-fact (the “Agent”).
The Trader/Agent is then given full power and authority on behalf of the Principal to buy, sell (including short sales) and trade in a range of things as specified in the PoA/Authority document including for example:
- Mutual funds
- Index funds and securities
- Options (including uncovered option writing)
- Physical commodities
- Financial instruments
- Commodity futures contracts
- Financial futures contracts
- Equities and single-stock futures contracts
- Foreign commodities
- Foreign commodity futures contracts
- Forward contracts
- Contracts in unregulated foreign exchange markets, and options and other derivatives on each of the foregoing, on margin or otherwise.
In many IBC jurisdictions no form of special license will be required to form a Company of this kind.
What you will need here is:
- To incorporate a standard (eg Seychelles/Belize/Nevis etc) IBC
- To have a tailored agreement drawn up that will be signed by the 3rd party investor and the Trader’s IBC
- A tailored Power of attorney enabling the Trader’s IBC to trade funds via the Interactive Brokerage
- An Offshore Corporate Bank Account for the Trader’s IBC’s performance fees to be paid into
1. Incorporate a standard IBC
If your IBC is seen to be managed and controlled from onshore (ie where the Trader lives) it could be taxed onshore. Hence if you are the Trader, you will want the IBC to be seen to be managed and controlled from Offshore. How that can be achieved is via including a Nominee Director/Shareholder as part of the Corporate structure.
For detailed information on how that can work for you please read these pages:
How it will work practically speaking is the Trader’s IBC will trade the 3rd Party Investor’s funds (and be paid its performance fees) via the Brokerage account. If/where you are the Trader (and assuming you’ve included Nominees as part of your Corporate structure), so that you can effectively steer the Company, you would either be given a Power of Attorney or be appointed as a Consultant of your Trader IBC. For detailed information on the pros and cons of each option please visit this page: https://offshoreincorporate.com/faq/should-i-select-a-general-power-of-attorney-or-a-consultancy-agreement/
Ideally you (the Trader) would be appointed as a Consultant or as an arms’ length adviser to the IBC Director with certain areas of responsibility. In such a case you might be paid a commission (eg percentage of business or sales introduced) or a retainer or a combination of the two. As part of your brief you should also be given signing power on a bank account reporting/answerable to the Director. However that relationship is structured for legal reasons, it would need to be seen to be commercially realistic.
The income you generate from this would be paid to you (or your local company) which I imagine would be assessable income at home (but against which your CPA should be able to deduct a significant number of expenses eg home office, car, equipment, travel etc which could eliminate most onshore tax). The remainder of the profit could be held (and/or reinvested) offshore potentially tax free.
2. A Tailored Agreement Between the Investors & Your IBC
What is envisioned here is that a tailored legal agreement would be created that will in essence (a) give your Trader IBC the authority to trade funds on behalf of the investor and (b) entitle your IBC to an agreed performance fee. Usually this agreement would authorise the Broker to pay your IBC those performance fees directly.
3. A Tailored Power of Attorney Enabling You To Trade Funds Via the Brokerage
From experience the brokerage, before giving you the power to place trades on behalf of a 3rd party Investor, will need to see that you have the power at law to open and trade an account for and on behalf of the investor. To meet this requirement you will need to produce a tailor drafted Power of Attorney signed by the Principal (ie the 3rd party investor)
4. An Offshore Corporate Bank Account for your performance fees to be paid into
Of all the things you as a Trader will need this will be the most challenging to deliver. Every week we assist client IBCs to open accounts at “name” banks including HSBC Hong Kong, Barclays Bank Seychelles, Barclays Bank Mauritius, OCBC Bank Singapore etc.
For most Traders working under a PoA you will need to be very careful about what information you provide to the bank as regards the IBC’s proposed business activities. Most banks (especially the bigger/name banks) are VERY conservative and EXTREMELY risk averse. If you come straight out and tell them that your IBC is going to trade 3rd party funds in Broker’s accounts under Power of Attorney they will almost certainly ask you to show firstly that the Company has a Broker’s License or a Fund Manager’s license or a Financial Adviser’s license in the country of incorporation. Hence you will need to supply the bank with a carefully tailored business plan to maximise the chances of the account being opened.
Another consideration is banking privacy. If you live in a country which has agreed to be part of the OECD Bank Account Info Sharing Initiative (See below for details of what that is) to minimise the chances of local authorities being made aware of your relationship to or involvement with the Trader IBC then ideally you will want to open an account at a Bank in a country which has NOT agreed to be part of this initiative.
As always local laws can have an impact. Hence you should seek local legal/tax/financial advice before committing to embark on an endeavour as envisioned by the above.
What is the OECD Account Info Sharing Initiative?
In 2014 a number of countries committed in principle to the OECD Bank Account info sharing initiative. Under the initiative, a range of OECD and other countries have agreed to pass new domestic laws that will allow them to collect information on any foreign bank account holder (or any non-local underlying beneficial owner of a Corporate bank account holding entity) and then automatically exchange that information with other participating countries. The list of countries who have committed in principle to the initiative include:
Isle of Man
The Slovak Republic
Turks & Caicos Islands
The United Kingdom
The United States
If you want to avoid your interest in an Offshore account being reported to local authorities you have 2 choices:
(a) Open an account in a country which is not in the above list; and/or
(b) Set up a Seychelles Private Interest Foundation to hold the shares of the Offshore Company account holder (as this shifts legal and beneficial ownership of the Company to the Foundation by virtue of section 71 of the Seychelles Foundations Act)