As alluded to in my last article if you’re going to set up securely Offshore – particularly if you live in a country which has Controlled Foreign Corporation (“CFC”) Laws – you will probably want (and/or need) to include an Offshore Discretionary Trust or (even better still) a tax free Private Foundation as part of your Corporate Structure.
Briefly, how the dual structure works is the Company does the business ie it buys and sells, incurs debt, employs staff etc. The Foundation (or Trust) is completely passive ie it just holds the shares of the Company. It’s there to (a) get around CFC laws and (b) so that (ie in the case of a Foundation) you can honestly answer no if anyone ever asks are you the beneficial owner of XYZ Offshore Company Limited?
I’m often asked Can I set up a Trust or Foundation later?
The answer is yes you can but it might not be the smartest way to go about it. Here’s why:
- Until such time as the Company is owned by the Foundation (or Trust as the case may be) there is no question that it’s being managed and controlled from onshore and would be classified as a “Controlled Foreign Corporation”. This means almost certainly (until such time as the Trust or Foundation owns/holds the shares of the Company) you would be required by local laws to declare and pay tax at home on the Company’s earnings. If you live in such a country (ie most countries) failure to so declare would be tax evasion the penalty for which is jail time (it’s not worth the risk…AND you’ll sleep better at night).
- For a Limited Company to be validly formed shares need to be issued. If you decide to set up your Foundation (or Trust) later (ie after you incorporate your Offshore Company) you would presumably start with a Nominee Shareholder and then transfer ownership of the shares to the Foundation (or Trust as the case may be). When you do transfer the shares:
(a) A Share Sale/Purchase agreement should be entered into on reasonable commercial terms and signed by the outgoing and new shareholder
(b) The Foundation/Trust will need to be seen to have paid for the shares
(c) The price paid for the shares by the Foundation or Trust will need to be seen to be fair market value. If the company has done well in the meantime this could be quite a lot of money (which brings into question another quandary ie how do you get money to the Foundation to buy the shares???)
The bottom line is if the above boxes are not ticked the transfer could be set aside later as a sham transaction leaving tax liability in the hands of the former owner (ie you). Hence the wisest thing to do would be to form your Foundation (or Trust) before you incorporate your Tax Free Offshore Company.
Local laws can also have an impact. Hence you should seek local legal/financial advice before embarking on a venture such as that described above.