Tax: How secure is your Foundation? - Ernst & Young - Channel Islands

Tax: How secure is your Foundation?

Jersey is preparing legislation introducing Foundations following enabling legislation being passed last year. It is not known when in 2009 the law will become effective. Fast on Jersey’s heels Guernsey is also set to introduce the Foundation.

But what is a Foundation?

A private Foundation has, until now, been a structure established principally in civil law jurisdictions, such as Liechtenstein, where it is most renowned (either as a Foundation or a ‘Stiftung’). Panama, Netherland Antilles and the Bahamas have created Foundations more recently. To individuals from a common law background a Foundation has the appearance of being a hybrid between a company and a trust. It has its own legal persona, but has no owners and thus looks more like a trust.

There is a governing body of the Foundation, whose members are a cross between directors and trustees. It is governed by the Charter of the Foundation which is similar to a trust deed, and the Regulations, which can remain private and are more like Letters of Wishes. The Charter ensures the assets are administered according to contractual terms, rather than under fiduciary responsibility.  There is no concept of ultra vires when applied to Foundations. A Foundation can sue, or be sued.

The creator of the Foundation is the Founder. This is the person who gives instructions for the Foundation to be formed. This can be an individual or a legal entity. The Founder need not provide assets for the establishment of the Foundation. The Founder can be a beneficiary of the Foundation. It can retain greater powers over the administration of the Foundation than a trust would permit.

Unlike a company, a Foundation does not offer unlimited liability as it does not have shares. It offers a similar level of privacy.

A beneficiary may have no rights in the assets of the Foundation.           

A Foundation does not require beneficiaries and can exist without them.

In civil law jurisdictions Foundations have historically been sold to individuals from a common law jurisdiction as if they were trusts.

What will Guernsey and Jersey Foundations look like?      

A Foundation in the Channel Islands will be required to file its Charter with the Register of Companies in Jersey or the Guernsey Company Registry. It will be required to make similar filings to a company, although it is unlikely that annual returns will be required.

The Foundation will be governed by a Council of members. At least one of the Council members will be required to be a regulated person.

It can exist for an unspecified number of years.

The main difference between a Jersey and Guernsey Foundation is a Jersey Foundation must have a Guardian. The Guardian will be responsible for holding the Foundation’s Council to account and ensuring that the Council acts in accordance with the Charter and the Regulations.

In addition a Jersey Foundation may be restricted from owning real estate in Jersey and from engaging in commercial trade.

Should a UK resident set up a Foundation?

Her Majesty’s Revenue and Customs (HMRC), the UK tax authority, does not encounter Foundations frequently. There is no reference to Foundations or Stiftung in UK tax law. In the HMRC manual for settlements and trusts it says ‘Foundations………….may have the some characteristics of charities, charitable trusts or family settlements.’‘   

Broadly, therefore, they have been regarded as trusts, and due to their jurisdictional bases, as offshore trusts. As a result the various pieces of anti avoidance legislation applied to offshore trusts may be applied to Foundations.

Given the above, and following the Finance Act 2008 legislation concerning longer term UK resident non-domiciled individuals, and the preferential treatment of assets held in trust over those held simply at overseas company level, the adoption of treatment of a Foundation as a trust would be preferable. But there is nothing in UK tax statute to guarantee this and HMRC’s treatment of a new Foundation from the Channel Islands is not at all clear. There are sufficient similarities to a corporate vehicle for the anti-avoidance legislation relating to foreign companies to apply.

In view of this we would suggest that UK residents, whether domiciled there or non-domiciled, should consider using a Foundation with great caution or that they should assume no UK tax deferral or mitigation would be available. Trusts have still got a large part to play in UK family and tax planning.

So who would use a Foundation? 

At a time when the Channel Islands are on the ‘White List’ of G20 ‘tax havens’, and Liechtenstein is on the grey list, Jersey and Guernsey should be ‘reaping the hay while the sun shines’ and selling this new offering to individuals in civil law jurisdictions who are used to this concept and for whom Foundations are a part of every day life.

In these territories trusts are an unknown and misunderstood concept and can cause tax problems. Foundations, however, are well established and frequently used in tax mitigation structures throughout Europe.

For more information on common uses of Foundations please contact Alison Vine (01481 717452) or your usual Ernst & Young contact.