Foundations have long existed in civil law countries where the concept of an Anglo-Saxon trust is unfamiliar. But as competition for a larger slice of the global wealth management cake has intensified in recent years, several, mainly offshore, common law jurisdictions have accommodated foundations laws into their own suites of offshore legislation in order to attract new money from a rapidly increasing population of wealthy individuals and families in emerging economies such as China, Russia, and in Latin America.
Globally, foundations come in all shapes and sizes and can be used for a wide variety of purposes. In the context of wealth management, the objective of a foundation is much the same as that of a trust – essentially protecting the family silver from the prying eyes of the ever-greedy onshore tax man or attack from another source. The manner in which a foundation is established and run, however, is quite distinct from a trust.
Unlike a common law trust, a foundation is a legal entity more akin to a company and as such, it is usually entered onto the Companies registry in the jurisdiction concerned. Foundations are formed by a founder who provides the initial assets of the foundation, otherwise known as the endowment. This highlights another area where foundations differ from trusts in that the assets are held for the purposes set out in the foundation’s constitutive documents and are administered according to contractual rather than fiduciary principles. Whereas trust assets are held by a trustee, a foundation has a council which acts much like a company board and which is responsible for fulfilling the purpose of the foundation, although there are no shareholders. Beneficiaries have contractual rights to enforce the operation of the foundation in accordance with its constitutive document – rather than proprietorial rights in its assets.
Foundations have been in existence in Europe since the 1920s and notable jurisdictions with foundations laws include Austria, Liechtenstein, the Netherlands and Sweden. They are also to be found in Asia and Latin America, for example in Panama, and aspects of some of these countries’ laws are described briefly below:
In Austria, the private foundation is known as the Privatstiftung. Under Austrian law, a grantor must endow the Privatstiftung with assets of at least EUR 70,000 in the form of cash or in kind. If capital is raised as a contribution in kind, an audit is required. However, In Austria private foundations which meet certain criteria currently enjoy a number of fiscal advantages such as exemption from gift and inheritance tax laws in certain circumstances, corporate tax breaks on dividend income, withholding tax credits and the option to take advantage of tax treaties.
Traditionally, Liechtenstein foundations were formed along the following principles:
No public registration is necessary, except that a copy of the Foundation Deed is lodged with the authorities. It need contain only very general statements about the purpose of the Foundation, while detailed rules are set out in private bye laws.
Founder's rights are transferable, and they normally include the right to terminate the Foundation or amend the bye laws.
Commercial activities are not permitted except in so far as they are in pursuit of the Foundation's non-commercial goals.
A Foundation is normally administered by what amounts to a board of trustees.
Liechtenstein’s foundation laws were overhauled by new legislation approved in 2008, which went into effect in April 2009. The purpose of the reforms was to modernise the existing legislation and bring Liechtenstein foundations into line with international practice and to clarify certain aspects of the law in the wake of various court rulings which had tended to create confusion and uncertainty. While the new law is very similar to the old one, it is now presented in a much clearer structure.
As a result of the reforms, the protection of the foundation assets is subject to new rules, as are the supervision of foundations and foundation governance. The non-transferability of the founders’ rights as a further new key feature entails greater legal certainty and clarity.
The “deposited” foundation, which need not be registered in the Public Registry and has thus been an object of criticism, has been retained. The government justifies the retention of this type of foundation by noting that it serves to protect the confidentiality of the founder if he wants to engage in long-term asset planning in the interest of his family. The exemption from the registration requirement only applies to private-use foundations, however, not to commercially operating foundations, which as a rule are limited to the mere management of assets.
The Principality has argued that a switch to a general registration requirement for all foundations, including private-use foundations without a commercial purpose, would significantly diminish the attractiveness of the Liechtenstein foundation in an international comparison.
The Private Foundation Law 1995 governs private foundations in Panama. The founder establishes the foundation by depositing a notarised private foundation charter at the Public Registry; or the Charter can be executed before the Notary Public. The Charter must specify the names of the Foundation Council (who administer the foundation on behalf of the beneficiaries), the property of the Foundation, its domicile, the name of its Panamanian agent and other details; but the names of beneficiaries and principles of operation can be contained in separate Regulations which do not need to be filed.
The minimum capital requirement is USD10,000. No accounts are necessary and an audit is not required. As with all Panamanian entities, tax is only levied on income generated within Panama. Foundations are subject to the same capital taxes and annual registration as are Corporations.
Panamanian law specifically excludes the operation of foreign 'forced heirship' rules or judgements against foundation assets. Panama itself has abandoned these typical civil law provisions in its own legislation.
Common Law Foundations
As mentioned above, foundation laws are no longer seen just in civil law countries, and a number of common law jurisdictions have developed, or are in the process of developing, their own equivalents. Notable examples include the Bahamas and the British Crown Dependencies of Jersey and Guernsey. These laws are described briefly below:
Foundations were introduced by the Foundations Act 2004 and accompanying regulations. Under this law, there are no perpetuity period rules applicable to Bahamian foundations, which immediately provides for continual unending succession if it is desired by the founder. A Bahamian foundation is not subject to forced heirship laws of a foreign jurisdiction.
A Bahamian foundation is a distinct legal entity which is convenient for ‘proper law’ questions. Assets placed within the foundation are owned solely by it, and a change in a Bahamian foundation’s governing body does not change the legal ownership of the foundation’s assets. There is no statutory requirement for an external audit unless the foundation’s charter so provides.
A foundation established in another country may redomicile in the Bahamas; and a Bahamian foundation may redomicile into another country, provided such a move is permitted in that country.
The registration process for a Bahamian foundation is comparable to that of a company registration, making it a legal entity that must be filed with the Registrar General of the Bahamas. Like that of a company, the name of the Bahamian foundation must be reserved at the Registrar General’s office prior to submission of the necessary documentation. The registrar will confirm that the foundation name is valid for use and that the name has been reserved for a period of 90 days.
Officers of the foundation must keep proper records and accounts, which can be inspected by any officer, foundation council member, founder, auditor or any other supervisory person at any time. However, confidentiality provisions restrict any person acquiring information from disclosing such information relating to the foundation, without the expressed consent from the founder and the beneficiaries, or as required by law, or a Bahamian court.
In June 2009, Jersey's Privy Council approved an order allowing Foundations to be set up in Jersey - the first of the Crown Dependencies to bring in a genuine foundation product. As a result, the Foundations (Jersey) Law 2009, entered into force on July 17, 2009.
The regulations permit foundations to migrate in and out of Jersey. They also provide for existing Jersey companies to convert to foundations.
A foundation must have regulations. These regulations must:
Establish a council to administer the foundation’s assets and to carry out its objects;
Provide for the appointment, retirement, removal and remuneration (if any) of its members;
Set out how the decisions of the council are to be made and, if any decision requires the approval of any other person, specify the decisions and that person; and
Set out the functions of the council, and, if they must or may be delegated or exercised in conjunction with any other person, the extent to which this must or may be done.
In particular, the regulations of a foundation must set out a procedure that ensures that a qualified person is appointed to be the qualified member of its council as soon as reasonably practicable if its qualified member dies, retires, or otherwise ceases to act or to be able to act.
Whilst similar in design to foundations in other jurisdictions, the Jersey structure introduces the concept of a ‘guardian’ with oversight over the council’s activities in relation to the foundation and ensures that it achieves the broad objectives outlined in its constitutive documents.
A foundation must have a council to administer the assets of the foundation; and to carry out its objects. The council of a foundation may have one or more members and must include a qualified person. However, although the council of a foundation may include more than one qualified person it may not have more than one qualified member at any one time.
An act of a member of the council of a foundation is valid despite any defect that may afterwards be found in the appointment of the member; or the member’s qualifications.
A beneficiary under a foundation has no interest in the foundation’s assets; and is not owed by the foundation or by a person appointed under the regulations of the foundation any duty that is or is analogous to a fiduciary duty. However, if a beneficiary under a foundation becomes entitled to a benefit under the foundation in accordance with the charter or the regulations of the foundation; and the benefit is not provided, the beneficiary may seek an order of the Royal Court ordering the foundation to provide the benefit.
The beneficiary must seek the order within the period of three years from the time when the beneficiary became aware of his or her entitlement to the benefit, provided they have reached the age of 18.
Guernsey’s government has agreed in principle to the introduction of foundations in 2012 and launched a six-week consultation on the proposed law in April 2011, which invited views on a number of key areas, including: the precise nature of the foundation structure; initial capital requirements; the extent of founder powers; the consideration of fiduciary duties; taxation; and market demand for foundations.
Upon the launch of the consultation, Peter Niven, the Chief Executive of Guernsey Finance, the body charged with promoting the island’s financial services industry, said that the introduction of foundations will provide another tool for practitioners to meet the needs of international clients.
“In particular, we expect the foundation structure will be attractive to clients based in civil law jurisdictions in Europe and also further afield in the emerging markets of China, Russia and Latin America where the trust concept is less familiar than in common law countries such as the US, Canada and the UK,” Niven said. “I’m hopeful that by early next year Guernsey practitioners will be able to offer a foundation which enables clients to preserve and enhance their wealth and assets through a highly-regarded structure in a reputable jurisdiction.”
Russell Clark, head of Carey Olsen’s trust and fiduciary department, has noted that the draft legislation means that Guernsey will be able to offer something distinct from its competitors.
“In developing the proposed law the draftsman has constructed something novel,” said Clark.
“The core strengths of foundation legislation in other jurisdictions have been incorporated with features that will enable flexibility, but the law is quite distinct from that in some of our competitor jurisdictions. I am confident that Guernsey will be able to offer a credible alternative to private clients wishing to migrate existing foundations to Guernsey or establish them here. I encourage organisations to contribute their feedback on this critical new development which promises to deliver growth to the Island’s financial services sector.”
The Future of Common Law Foundations
While it is still very early days in the life of foundations laws in common law jurisdictions, doubts have been cast over whether these structures will really take off as a concept. In the Bahamas, where foundations legislation has been in place for about seven years, interest in these structures appears to have been lukewarm. In an article originally published in the STEP Journal, Timothy J. Colclough, Assistant Vice President, Head of Business Development & Custody Butterfield Bank (Bahamas) Limited, observes that, since its birth in 2004 “it’s fair to say the Foundation has been under utilised by both local and international practitioners.” One reason for this, Colclough notes, is that the trust is so well established and understood that it “is, and will continue to be the main tool used by practitioners in this area”.
Jersey’s experience, however, indicates that there may be a brighter future for the common law foundation. Here, the first two foundations structured in Jersey were formed by offshore law firm Mourant du Feu & Jeune on the day the law was introduced, on July 21, 2009. By September 2010, 57 foundations had been formed in Jersey, and these structures were being created at the rate of about five per month. It is difficult to gauge whether these numbers can be viewed as success or failure, as the product is still so new, and somewhat unusual. The fact that there has not been significant interest in the migration of foundations to Jersey from more traditional jurisdictions such as Panama and Liechtenstein would suggest the market for common law foundations is perhaps not a vast as first thought, although one could also conclude that more needs to be done to promote these structures in the target markets.
Other factors include the nature of the legislation itself in common law jurisdictions, and this is something that Guernsey is paying particular interest to as it seeks to draft a workable and attractive foundations law. The consultation paper notes that there has been academic criticism of foundations legislation in some competitor jurisdictions because they are too similar to companies to be viewed as genuine foundations by a civil law court. “That creates a risk that these entities could be treated as companies rather than as foundations in some civil law jurisdictions, which would create uncertainty and undermine the rationale for using a Guernsey foundation,” the paper states. Addressing these concerns has led to the Guernsey legislation being “significantly different” to that which has been introduced elsewhere by competitor jurisdictions. Guernsey is also considering a number of other major policy questions, such as the extent of the foundation council’s fiduciary duties, when and in what form the endowment should take place, and the reservation of powers.
Time will tell, however, if investors really do want something different, or whether they will prefer to stick to the tried and trusted.