The foundation is an entity which has been used for some time in Civil Law jurisdictions to manage assets transferred by the founder for family or charitable purposes. When considered from a common law perspective, the foundation resembles something of a hybrid between a trust and a company. As such, it is a useful tool in planning for tax mitigation, succession and asset protection.
The use of foundations is becoming more widespread and the concept has recently been adopted by a number of common law jurisdictions, particularly Jersey.
What is a Foundation?
A foundation is the dedication of property for a specific purpose. It can be established by individuals and other legal persons (such as companies) and has the benefit of its own legal personality. A foundation is created by the transfer of assets by the founder to achieve a specific purpose. That purpose is typically to manage wealth for a particular family or families across generations, although the purpose may also be charitable. There is no anti-perpetuity requirement and a foundation may therefore exist indefinitely subject to the terms of its constitution.
The Board or Council
Like a company, a foundation will have a Board or Council which will act like a Board of Directors in ensuring the objectives of the foundation are met. The original Board will be appointed by the founder and the latter will typically reserve rights to appoint or dismiss Board members, or to revoke the foundation entirely (careful structuring is required in this regard from a tax perspective as described below).
Many jurisdictions require a resident professional (qualified) Board member.
The Foundation Deed or Charter
The foundation is governed by means of the foundation deed or charter, which functions like the articles of a company. The deed must typically include:
- The name and domicile of the foundation
- The purpose or purposes
- The method for appointing / dismissing Board members
- Provisions dealing with the appointment of assets if the foundation is dissolved
The deed is commonly a public document which is filed with the registrar in the jurisdiction of incorporation. However, in many jurisdictions the deed need only set out the most basic statutory requirements, with the more detailed provisions of the constitution of the foundation being reserved for a second, non-public document known as the regulations. The regulations would typically include the constitution of the Board and details of current or future beneficiaries.
The above documents are commonly drafted to ensure that the founder retains significant influence in the management of the foundation and the selection of beneficiaries; this aspect must be considered carefully for tax structuring purposes.
A foundation may have a guardian (similar to a trust protector). The guardian ensures that the Board carries out its duties, and can have power to approve or disapprove any Board decision, or to sanction any decision which is not permitted by the charter. A carefully chosen guardian provides an extra safeguard for the founder.
What is the tax treatment of a foundation?
A foundation is not typically subject to tax in its place of domicile as such jurisdictions are typically low or zero tax territories. However, the local tax laws will still need to be taken into account when establishing a foundation, as well as the taxing rights of any overseas territories from which the foundation derives income.
The tax analysis of the founder and/or beneficiaries in their home jurisdiction will be an important consideration. Civil Law jurisdictions are likely to have clear tax rules regarding the taxation of foundations, their founders and beneficiaries, whereas there may be no clear interpretation in common law jurisdictions. In the UK, for instance, a foundation can be taxed as either a trust or company depending on the facts of the case. The distinction can be very important and the foundation must therefore be structured correctly from the beginning.
The single factor which is most likely to affect the tax treatment is the degree to which the founder retains control of the management and assets of the foundation. In the UK, certain foundations with a high degree of founder control have been viewed in the past as mere nominee arrangements. If viewed as a trust, attribution of income and gains may also take place where the founder is seen to have retained an interest, depending on the tax laws of the country of residence. If the foundation is viewed as a company, management and control issues may be important in establishing the (non-)residence of the foundation.
Because of their hybrid nature, foundations can provide the ideal opportunity for tax planning but the constitution of each must be carefully considered to achieve the desired result.
How do foundations compare with Trusts?
Foundations have typically been more attractive than trusts for residents of civil law jurisdictions due to the fact that they are clearly defined and recognised entities for the purposes of local law.
The other main advantage of a foundation over a traditional discretionary trust is that of retention of control by the founder. A settlor of a trust, although he can reserve certain rights for himself, has ultimately given over the assets to the trustees. A founder of a foundation, on the other hand, has rights given to him by the deed or charter and regulations, which can be extensive.
Other important distinctions are:
- The foundation must be incorporated and its charter will be a public document.
- The foundation is a separate legal entity.
- A trust must have beneficiaries which have rights to enforce the trust against the trustees. A foundation does not require beneficiaries. If there are any, they have very limited rights. The Guardian ensures that the Council is administering the foundation in accordance with the objects; the beneficiaries have no recourse.
- A trust may still be preferable where there is a possibility of claims by forced heirs, although some jurisdictions offer similar protection for foundations.
- Trusts remain more flexible than foundations. In particular, the migration of a trust is a relatively simple matter of appointing new trustees. Migration of a foundation is a more complex matter and only a limited number of territories permit the use of them.
Where can a foundation be incorporated?
Foundations are currently available in Jersey, Anguilla, Antigua, Austria, Bahamas, Cyprus, Liechtenstein, Malta, Netherlands Antilles, Nevis, Panama, Saint Kitts and Switzerland.
The foundation is a useful planning tool for those who wish to transfer assets into a separate entity for the benefit of others, but wish to retain a higher level of control than might be possible with a trust. Foundations are particularly attractive for residents of civil law jurisdictions where they are widely recognised. The constitution of a foundation needs to be considered carefully, particularly with regard to the tax treatment of the founder and any beneficiaries in their country of residence.