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Introduction: The History Of Offshore Trusts

It's a fairly well known fact that the trust originated in England many hundreds of years ago, and that its purpose was to preserve assets against depredations occurring through death, matrimonial and family squabbles, spendthrift descendants and the like. Taxation at death was one of the incidents that trusts were effective against, but they were not particularly designed to guard against the taxation of income or capital during the settlor's life, because such taxes were not a major threat to wealth at the time, and anyway a domestic trust was a taxable person in itself.

Income tax was first levied in England at the beginning of the 20th century, and in many countries had become worth avoiding by mid-century; but initially at least the best way of avoiding it was to turn income into capital, which was not so heavily taxed. It was only when capital taxes of various types became significant that the offshore trust came into its heyday.

Very rich people had begun to use offshore trusts in the first half of the century, but at least as much because of the additional asset protection that they offered, simply by being in a different jurisdiction, as because they were tax efficient.

The administrative overhead and other complications of dealing with an offshore location were initially very great, so that at first only conveniently close-by jurisdictions like Jersey (Channel Isles) for the Brits and the Bahamas (for Americans) developed as 'offshore' jurisdictions. The first trusts legislation in the Bahamas, surprisingly, dates from 1893. The great expansion of trusts, both in terms of number of jurisdictions and volume of business, came later when telecommunications, air transport and the end of capital controls opened up the world and gave freedom to investors and the owners of capital.

At all events, by say 1980, offshore was burgeoning in response to horrific tax rates, and tax avoidance had taken over as the main driver of offshore growth. In this process, and as more and more countries laid claim to the worldwide income and assets of individuals during life and at the end of it, the trust played a key part. But in two respects at least the traditional English trust was lacking: first in its perpetuity rule, which limited the duration of a trust to 'life in being' plus 35 years, or to 80 years, in order not to permit the alienation of property for more than one generation after death of the settlor; and secondly in its abhorrence of 'spendthrift' clauses, ie wording which prevents a creditor from 'seeing through' the trust to obtain settled assets if the settlor is a beneficiary.

In the US, and in the main island offshore jurisdictions, which all inherited English trust law (since almost all of them were British originally) perpetuities were legislated away during the 1980s and '90s - no-one wants to see assets reverting to family members who may still be living in the country from which the settlor had removed them, with disastrous tax consequences. During this period, tax authorities in high-tax countries gradually began to attack the offshore trust, either through specific legislation or through general anti-avoidance provisions, and as this process whittled away at the tax advantages of offshore trusts, asset protection began to take over as the predominant motive for offshore settlements. The 'spendthrift' problem stood in the way, particularly for non-common-law families, who had to cope with 'Code' country legislation which often incorporates forced heirship provisions and specific creditor protection (both usually absent in common law jurisdictions).

Initially, rich 'continentals' used different techniques to protect their assets, but in time they grew to like the friendly Anglo-Saxon trust, and in the latter part of the 20th century as trust law began to be implanted into the foreign soil of one 'Code' jurisdiction after another, the common-law jurisdictions needed to follow and passed laws which specifically excluded forced heirship and creditor protection provisions. The US itself has largely removed anti-spendthrift wording from its trust legislation - unlike in the unitary UK, there is a kind of onshore offshore in the US because of its federal structure, and there has been a competition between states to offer good trust regimes to residents in other states, and for that matter to compete against the offshore 'offshore', which is nowadays practicable because after the enactment of Section 679 of the Tax Code, the IRS treatment of offshore trusts is now worse than its treatment of onshore trusts.

Even without perpetuities and with asset protection features, the bare offshore trust came to be seen as vulnerable and by the turn of the century was much more likely to be used as part of a more complex framework involving corporate features and multiple jurisdictions than on its own. It's not right in fact to say that a plain trust is ineffective: in the Cook Islands, which may have been the first jurisdiction to offer asset protection trusts per se, only one trust has been penetrated by creditors in 20 years, and that was due to a weakness in the drafting of the governing law which has subsequently been corrected.

The trend towards complexity also reflects growing corporate interest in the trust, and the tendency for the more advanced offshore jurisdictions to offer structures suited to particular purposes - hence the 'purpose' trust. A trust which is suitable for one purpose may well not be suitable for another, and the original English trust law was one more time not ideal for purpose trusts, which has led to a third round of adjustment of trust legislation in many jurisdictions.

The Report

Offshore Trusts Guide: Introduction

Offshore Trusts Guide: Jurisdictions

Bahamas Barbados Bermuda British Virgin Islands Cayman Islands Cook Islands Cyprus Gibraltar Guernsey Isle of Man Jersey Liechtenstein Madeira Malta Mauritius Monaco Nevis New Zealand Panama Seychelles Turks & Caicos Vanuatu


Offshore Trusts News

Netherlands To Split Tax Agency
Wednesday 15/1/2020
On January 11, 2020, Dutch Minister of Finance Wopke Hoekstra informed the House of Representatives about the Government's plans to restructure the tax authorities.

Switzerland Simplifies Process For German WHT Refunds
Wednesday 15/1/2020
The Swiss Government has said that from January 31, individuals and legal entitles domiciled in Germany will be able to use an online Swiss application to request a refund of Swiss withholding tax.

Korea Enacts 2019 Tax Revision Bill
Wednesday 15/1/2020
The Korean Government has announced that the 2019 Tax Revision Bill was enacted on January 6, 2020, with a number of new measures added to the existing proposals.

IRS Launches Gig Economy Tax Center
Wednesday 15/1/2020
On January 9, 2019, the United States Internal Revenue Service announced the launch of a new Gig Economy Tax Center, which is intended to help taxpayers meet their tax obligations through more streamlined information.

Nigeria Offers Grace Period For Obtaining Tax Clearance Certificates
Wednesday 15/1/2020
The Executive Chairman of Nigeria's Federal Inland Revenue Service, Muhammad Nami, has signed a notice providing companies with an extra 30-day window to obtain a tax clearance certificate.

German FinMin Outlines 2020 Tax Changes
Tuesday 31/12/2019
The German Ministry of Finance has outlined a number of tax changes that are due to take effect in 2020 and 2021.

Luxembourg's 2020 Budget Approved By Parliament
Tuesday 31/12/2019
On December 19, 2019, Luxembourg's Chamber of Deputies approved the Government's Budget for 2020, which among other measures includes important changes to the validity of advanced tax rulings.

Tax Extenders Passed In US Spending Package
Monday 23/12/2019
On December 17, 2019, the United States House of Representatives passed a year-end spending package, which includes legislation extending numerous expired and expiring tax provisions, and repealing certain taxes introduced to help fund the Obamacare health care reforms.

Nigeria To Begin Tax Enforcement Campaign
Monday 23/12/2019
On December 17, 2019, Nigeria's Federal Inland Revenue Service issued a seven-day notice to tax defaulters and announced that it will soon begin a nationwide tax enforcement campaign in order to pursue those with unpaid taxes.

Belgium To Expedite VAT Refunds For Start-Ups
Tuesday 31/12/2019
On December 18, 2019, the Belgian Federal Public Finance Service announced that start-up companies can request accelerated refunds of value-added tax credits from January 1, 2020.