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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

Ukrainian Corporate Tax Reform Plans Shelved
Friday 14/12/2018
Ukraine has reportedly postponed consideration of a bill that would reform the country's corporate tax system to shift the burden of tax from company profits to distributions.

UK Urged To Drop Plan To Extend Offshore Tax Limitations Period
Friday 30/11/2018
The UK Parliament's Economic Affairs Finance Bill Sub-Committee has proposed that provisions should be stripped from the Finance Bill that would extend the time limit on assessing offshore tax to 12 years.

UK Urged To Push Back Making Tax Digital Agenda
Friday 30/11/2018
In a new report released on November 22, 2018, the UK's Economic Affairs Committee called for a one-year delay to the implementation date of Making Tax Digital for VAT.

Germany's Bundestag Approves VAT Reforms
Friday 16/11/2018
Germany's parliament, the Bundestag, has approved the introduction of new value-added tax rules for online marketplaces.

UK To Shutter Second Home Tax Avoidance 'Loophole'
Friday 9/11/2018
The UK Government has announced its intention to tackle the use of a commercial property tax (business rates) exemption, intended only for small businesses, by second-home owners to avoid paying residential property tax (Council Tax) on those homes.

UK Announces Digital Tax, Corporate Tax Reforms In New Budget
Friday 2/11/2018
The UK's 2018 Budget includes changes to tax rules for companies, and notably for multinational groups to conform with the EU's Anti Tax Avoidance Directive. Most significantly, the UK has decided to move ahead of the EU in announcing that it will apply a tax on the turnover of certain digital businesses.

Jersey Tables Legislation For New Economic Substance Rules
Monday 29/10/2018
The Jersey Government has announced that it will release for public consultation guidance notes on the introduction of a new economic substance requirement for certain taxpayers to access Jersey's tax regime.

Australian SME Tax Cuts Now Law
Monday 29/10/2018
Legislation to reduce Australia's small business tax rate received Royal Assent on October 25.

Canada To Push Ahead With Carbon Tax Plans
Monday 29/10/2018
Canada's federal Government has announced that it will impose a carbon price in Ontario, New Brunswick, Manitoba, and Saskatchewan in 2019.

EU Tells Italy To Revise 2019 Budget Plan
Friday 26/10/2018
On October 23, 2018, the European Commission issued a request to the Italian Government that it revise its draft budgetary plan for 2019 because it breaches European Union fiscal rules.