Wealth Management and Asset Protection: Guernsey Foundations Guide
By Lowtax Editorial
13 June, 2013
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 incorporated 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. Guernsey is the latest jurisdiction to begin offering foundations, and is the focus of this feature.
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. 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, 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 foundations 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.
Background to Guernsey Foundations Law
Guernseys Commerce and Employment Department published a consultation document on draft legislation providing for the proposed introduction of the foundation company form in Guernsey in April 2011.
Announcing the consultation, Carla McNulty Bauer, Minister, Commerce & Employment Department, said: The States have already approved in principle the introduction of foundations in Guernsey and have directed the preparation of the necessary legislation. The release of this consultation document is the next step in bringing this innovative legal structure into effect. Foundations will provide the financial services industry with a new structure that will provide greater flexibility for its clients. This is an opportunity for the finance industry to have an input at a key stage of the development process.
The consultation was designed to ensure that the proposed Law would meet the needs of the finance industry whilst also ensuring that Guernsey maintains its international reputation as a premier jurisdiction for financial services.
The consultation in particular invited responses on:
- The precise nature of the foundation structure;
- Initial capital requirements;
- Extent of founder powers;
- Consideration of fiduciary duties;
- Taxation; and,
- Market demand for foundations.
The launch of this consultation on the draft legislation is an important step towards the introduction of foundations into Guernsey law, said Peter Niven, then Chief Executive of Guernsey Finance the promotional agency for the islands finance industry.
Our wealth management industry has grown a reputation for its high standards and significant expertise in using trust and company structures and the introduction of foundations will provide another tool for practitioners to meet the needs of clients, Niven added. 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.
The Foundations (Guernsey) Law, 2012 was approved by Guernseys legislative assembly, the States, in July 2012 and given the green light by the UK Privy Council on January 7, 2013. The Guernsey Registry began accepting applications for the formation of Guernsey Foundations from January 9 this year.
Key Features of The Guernsey Foundation
The Guernsey foundation is an incorporated entity with a separate legal personality. However, it does not have shareholders to whom the board are accountable. Instead, the foundation holds assets (in its own name) on behalf of beneficiaries, particular purposes, or both, in accordance with the foundation's constitution.
The foundation's constitution comprises a charter setting out the foundation's purposes, initial assets and duration (which may be unlimited) as well as rules prescribing, among other things, the functions of the council and procedures they must follow. There are no 'trustees' and instead, council members perform a similar role by having a duty to the foundation to act in good faith, and cannot, without express authorisation, profit directly or indirectly from their position.
Guernsey has taken note of the fact that some clients may worry about confidentiality because as foundations are registered entities, they are, unlike trusts, publicly visible. In Guernsey, limited details are available to the public, although full disclosure must be made to the registrar whereas in other jurisdictions, the whole charter is commonly visible. However, Guernsey's approach also means that this limited visibility offers the benefit of being able to prove the foundation's existence quickly when dealing with third parties.
In Guernsey, the founder's role is flexible but perhaps more restrictive than in some other jurisdictions. However, Guernsey has taken an approach which will be more familiar to those versed in the traditional civil law model where the foundation not only has a separate legal personality but also a legal personality that is independent of the founder. This may also help to clarify the appropriate tax treatment for the founder in their own country of residence.
A particular innovation of the Guernsey foundation is the ability for beneficiaries to be classed as either being 'enfranchised' or 'disenfranchised'. Enfranchised beneficiaries will have rights to certain information regarding the foundation, whereas disenfranchised beneficiaries are not entitled to any at all. Where there are disenfranchised beneficiaries then the foundation is required to have a guardian with a duty to act in good faith and en bon père de famille.
A foundation is also useful for corporate entities looking to create an orphan structure where the assets of a particular entity can be held in a foundation, rather than having a parent company and being an asset on that company's balance sheet. This means that the foundation may be used in investment fund structuring as well as for other corporate purposes.
Foundations are subject to corporate tax in Guernsey, but this is currently set at 0%, and no other taxes or fees apply. However, Guernsey Foundations are not intended for use in the United Kingdom because of uncertainty over how the UK tax authority, HM Revenue and Customs, will treat such entities.
Establishing a Guernsey Foundation
With effect from January 9, 2013, a Guernsey licensed Fiduciary (a person who is licensed under the Regulation of Fiduciaries Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law 2000) can register a Foundation in Guernsey.
In order to complete an application, the licensed fiduciary must complete the application form and file the following with the Registrar:
- a copy of the Charter;
- a declaration signed by the founder or the resident agent that the details contained within the Charter are correct and an accurate reflection of the purposes of the Foundation;
- a declaration as to whether there are, or are intended to be, any disenfranchised beneficiaries;
- the names and addresses of the proposed Councillors together with their written consent to act;
- the name and address of the proposed Guardian (if appropriate) together with their written consent to act;
- the name and address of the Resident Agent (if any);
- the address of the registered office in Guernsey;
- the necessary fee (see the fee schedule below).
Registrations take a maximum of 24 hours to complete. However, for a higher registration fee a two-hour registration is also available. Initial and ongoing annual registration fees are as follows (except for Guernsey registered charities):
- Initial registration GBP100 (24 hours); GBP350 (2 hours);
- Annual renewal fee GBP500.
By way of comparison, registration fees for Jersey Foundation companies are as follows: initial registration fee of GBP200 (or GBP400 for a same day registration) and annual registration fee of GBP150 plus GBP100/200 to be registered as an International Services Entity for goods and services tax purposes.
Registration of Foundation Officials
The foundation officials are the persons who will act either as a councillor or a guardian. They can be a body corporate or a natural person.
The Registrar requires that these persons have first registered with the Guernsey Registry in order that a unique identity number can be allocated.
Where a body corporate will be acting, those bodies corporate already incorporated or registered in Guernsey under either the Companies Law or Limited Partnerships Law need take no further action, as the registration number allocated to them will be utilised for these foundation purposes. For those bodies corporate registered overseas it will be necessary to complete the Overseas Corporate Body application form. The Registry will then allocate a number which will be issued to the body corporate.
Natural persons already registered with the Guernsey Registry to act as a director need take no further action under Guernsey Companies Law as the number previously allocated will be used for these foundation purposes. Natural persons not already registered with the Guernsey Registry as a person/director must complete the Person/Director registration form. The Registry will then add the person to its in-house person register and allocate a number which will then be issued to the person.
These forms can be submitted to the Registry either online by a corporate services provider via the www.greg.gg online services portal, by post, or in person at the Guernsey Registry.
There is no fee charged for these person registrations.
Early Interest Shown in Guernsey Foundations
According to Fiona Le Poidevin, the current Chief Executive of Guernsey Finance, interest in the new vehicle had been growing even before the Foundations Law came into force.
"We've been hearing from a number of industry practitioners over the past few months that there has been a great deal of interest in the Guernsey foundation. As well as clients looking to set up a foundation, much interest has come from clients who have foundations currently domiciled in other jurisdictions and are looking to migrate these to Guernsey, she said following approval of the legislation by the UK Privy Council.
"We believe Guernsey's expertise in servicing private clients means that we are especially well placed to administer complex structures due to the heritage we have in providing trust and corporate services as well as, of course, our reputation for being a well regulated and transparent international finance centre."
Indeed, three foundations were registered upon the opening of the Guernsey Foundations Registry at one minute past midnight on January 9.
Among these three early registrants was the Ogier Active Foundation, which has been established by Ogier, the leading offshore law firm, to fund sports and social events for staff. Every year, a number of events are organised by Ogier's in-house sports and social committee, many of which involve fundraising elements. Any funds that are raised are donated to Ogier's Charity of the Year (elected by the staff of Ogier each year), based in Guernsey.
Managing Partner William Simpson said: "We are very excited to have registered one of the first Guernsey foundations under the Foundations (Guernsey) Law, 2012. The Law represents an exciting new development in Guernsey's private wealth and estate planning services and we anticipate that foundations will be of interest to existing as well as new clients, particularly those in 'emerging markets.'"
The other foundations registered at 00.001am on January 9 were The Male Uprising in Guernsey Charitable Foundation (MUG) and The Adyton Foundation. A fourth application was also received by the Guernsey Foundations Registry on January 9, from The Falcon Foundation.
MUG, which was registered as Guernsey's first foundation, is a local charity set up to raise awareness of male cancer in the Bailiwick of Guernsey. Appleby Managing Partner Gavin Ferguson, who is also a founder of MUG, said: "We are pleased to be involved in this landmark transaction for Guernsey and to be at the forefront of Guernsey's state of the art Foundations Law. The Law is likely to be of considerable interest to a wide variety of clients, in particular for those from civil law countries less familiar with trusts."
At the time of writing, a total of seven foundations are registered with the Guernsey Registry, suggesting early enthusiasm for these vehicles may have petered out. However, it is still early days in the life of Guernseys Foundations Law, and with individuals and families emerging economies of Asia and Latin America including regions containing predominately civil law jurisdictions seeking alternative wealth management solutions, Guernsey is well placed to meet these demands.
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