Michael Betley, Managing Director, Trust Corporation of the Channel Islands Limited, looks at how private wealth advisors are using cell companies for more bespoke structuring solutions.
Guernsey pioneered the corporate cell concept and its application and innovation continues as the cellular approach becomes more understood.
The traditional use of cell companies, to simplify and commoditise insurance products and segregate asset classes for investment funds, still dominates but increasingly private wealth advisors are using cell companies for more bespoke structuring solutions.
A cell company can create underlying cells which can hold assets and liabilities segregated from those assets or liabilities held in other cells. This ring-fencing is fundamental to the cell company concept; segregation ensures that cellular assets are only available to creditors and shareholders of that cell. This creates greater certainty and significantly improves on the more traditional single company, multi-class 'umbrella fund' holding different asset classes. Legislation in Guernsey has developed beyond the Protected Cell Company (PCC) with the introduction of the hybrid Incorporated Cell Company (ICC). The PCC and ICC models are very similar but there are significant differences. The PCC establishes underlying cells which do not have their own legal personality; the core and its cells are together a single entity. Each cell is part of the corporate body but can act independently of the other cells, which allows segregation of each cell's affairs. An ICC creates distinct cells, which are each separately incorporated so that each cell can conduct business, own assets and incur liabilities in its own right. As a consequence, the ICC strengthens the cellular proposition where assets and liabilities need to be more robustly ring-fenced. The versatility of the Guernsey legislation means that a PCC can convert to an ICC and ICC cells can be hived off and become independent.
The cellular approach can offer greater administrative and accounting ease with corresponding cost savings. The savings in repeat transactions are particularly significant especially for collective investment funds and securitisations where the initial structure and core documents can be rolled out very quickly; follow on transactions become highly efficient. Legislation now allows cell companies to undertake any business although licences will be required if conducting regulated business. This new freedom of use expands the potential of the cell company offering and creates an exciting tool for the private client and corporate adviser.
Group Company Structures
The cell company offers structural efficiency, economies of scale, flexibility and control, which makes it a highly attractive alternative to the traditional parent/subsidiary group relationship. For accounting purposes, cells do not have to have consolidated financial statements; specific groupings of cells can be consolidated for audit purposes so that unrelated economic interests can remain separate and confidential. Migration provisions allow cells to be transferred out and converted into a different type of corporate vehicle so the cells, rather than assets, can be sold. Similarly, foreign companies or other types of Guernsey company can be migrated and/or amalgamated into the cellular family making the framework highly versatile.
Private Trust Companies and Family Office Solutions
Through an ICC or PCC private trust companies (PTCs) can now act both as trustee and establish the structural ownership of underlying cells which will hold the various assets. Each cell can be established to own different types of assets or to segregate income from capital. The cells can be owned by the same or different trusts separating beneficial interests while allowing the administration to be performed by the PTC administrators; ultimately creating management efficiency and structural mobility.
When considering the family office environment, ICCs can be used either in isolation or in combination or encompass the wider family interests. The family office may wish to separate out certain functions or contractual responsibilities, for example, different cells can be used for employment of staff, treasury management, investment advisory services and joint venture, or pooled, investment projects. Some family offices offer a multi-office facility to other families which can use the cellular approach to separate its own family facilities with those of third parties. The Multi-Purpose Vehicle Each cell of an ICC has its own constitution.
This offers the potential to allow cells to have different share classes where voting rights (control) can be held separately from dividends rights (enjoyment). This hybrid opportunity creates enormous potential for families to manage their own affairs through an ICC where enjoyment rights can be separated from direct ownership. The ability to have cells incorporated differently (for example, limited by shares or by guarantee) provides the opportunity of creating structures similar to the European Anstalt (Establishment) or Shftung (Foundation). Coupled with the use of common law trusts, the combination creates a powerful range of options.
The cell company structure also enables individuals to house all their interests within a single administrative framework. Different cells can own different types of assets or contractual obligations, which can contract or lend to one another (in the case of an ICC but not a PCC). Therefore an entrepreneur, with a varied range of interests, can consolidate these affairs within a single structure – (such as an ICC) combining consultancy services or contractual obligations with asset ownership and administration.
Cell companies offer a unique way of exploiting intellectual property portfolios. The intellectual property rights (IPR) can also be registered in Guernsey; this enhances ownership value and protection from misuse.
The introduction of specific image rights legislation is likely to boost the popularity of managing IPRs through cell companies. Income and royalties can be segregated as can different contracts; jurisdictional franchises or IPR leases can be undertaken from different cells; sports celebrities can separate out their offering between different cells for example, product placement, foreign earnings, image rights, branding and product development.
Real Estate Ownership
With Real Estate Ownership at parent level you have the potential of consolidating single ownership if that is desirable or the core can merely be the manager of the property and the underlying cells can have different ownership. Consolidating property ownership through cells will ease bank borrowing, collateralisation and even securitisation of rental streams. Cells can 'float'; specific cells can be migrated or converted into other types of company. This disengagement process offers the ability to sell or transfer cells in isolation, if preferred, rather than transferring the property, should that be desirable.
Investment and Private Funds
Pooled family investments can be established as a private fund with either a single manager or advising different cells holding specific family portfolios. Open-Ended Investment Companies (OEIC) can be structured using cell companies enabling different clients the ability to pool assets, through their own cells, under the same
or different mandates: offering economies which were previously unavailable. Different cells can also have different rights allowing shareholders access to specific types of investment returns.
Tax Planning Opportunities
The cellular approach allows the tax adviser to undertake both straightforward and highly complex tax planning arrangements especially if coupled with the use of other structures. For the UK non-domiciliary foreign income can be segregated and capital repatriated through the use of different cells. Capital gains tax can be deferred while assets are managed actively at cellular level similar to an investment fund. For inheritance tax and succession planning cellular shares can be transferred to children allowing them access to future capital while income shares can be held in separate cells allowing flexible and strategic allocation of entitlements.
It can be seen that the cell company approach affords enormous new structuring and planning opportunities either on their own or blended with other types of traditional vehicles. Ownership via a trust or foundation can create further longevity through the separation of ownership and enjoyment of benefits. In addition, the ability to manage the corporate framework yet retain flexibility creates a cost effective and highly versatile solution.
Originally published by IFC Review, August 2013.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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