The advantages of private foundations

The advantages of private foundations

A private foundation is a corporate entity with separate legal personality, but which has no owners, and therefore does not issue shares or other ownership interests. It is established by a founder who contributes initial funds or assets to the foundation.

The foundation is governed by its constitutional documents, which typically consist of a charter and bylaws, and a governing body called directors or council members. There will typically also be a guardian or enforcer who is empowered to supervise the directors to ensure they are complying with the foundation charter and bylaws, and with their duties as directors under applicable law.

The foundation’s charter or (more likely) bylaws will identify the foundation’s beneficiaries, if any, or its purpose, along with all other rules by which the foundation and its directors are to be governed. Those rules may include, for example, guidance as to how the foundation is to invest and manage its assets, how it is to distribute them to beneficiaries through generations or otherwise use them towards the foundation’s stated purpose, and how decisions are to be made by the foundation’s directors, among other things.

Private foundations have a long history in the civil law world as useful vehicles for family wealth management, estate planning and asset protection across multiple generations. They are used for many of the same purposes as trusts in the common law world, and are indeed sometimes viewed as trust substitutes.

A private foundation offers certain advantages over a trust structure which make them very useful in the context of wealth and succession planning, which include:

  • A foundation is a corporate entity with legal personality, which can own its own assets, contract in its own name, and which enjoys limited liability, but can carry out the functions of a trust, including a purpose trust. In order for a trust structure to achieve a similar result, a holding company is required in addition to the trust itself, resulting in a greater administration burden.
  • Foundations are more readily recognized and accepted by financial institutions, asset registries (land registries), and contractual counterparties in many more parts of the world than trusts (including Europe, Asia and the Middle East). There is also growing formal recognition of private foundations in common law jurisdictions, some of which have introduced their own foundation laws.
  • Beneficiaries are not required to have rights to receive information from the foundation, allowing for much greater confidentiality than a typical trust structure.
  • There is very limited, and sometimes no, publicly available information regarding a private foundation. The foundation’s bylaws typically contain the detailed terms governing the foundation, and the bylaws need not be filed with any regulatory body.
  • Foundations are not burdened by the often antiquated and seemingly arbitrary legacy of common law rules that afflict trusts, such as the rule against perpetuities or the right of beneficiaries to collapse a trust under what is known as “the rule in Saunders v. Vautier”.
  • The directors of the foundation are not subject to the equitable common law duties to which trustees are bound. They owe no fiduciary obligation to beneficiaries, only to the foundation itself. Similarly, beneficiaries need not be given any standing to enforce the terms of the foundation, and need not have any rights or entitlements from the foundation whatsoever.

Because of their corporate status and limited liability, foundations are useful for holding higher risk assets which may attract claims. A trustee, by contrast, may be wary about accepting such assets or may charge greater fees to hold and manage them.

Foundations offer the same, or potentially greater, asset protection benefits as trusts. Since claims must be made against the foundation itself (as opposed to a trustee), there is less direct concern around liability of directors (as opposed to trustees who do have that concern).  Also, civil law jurisdictions may not recognize the existence of a trust and simply attribute trust assets to the settlor for purposes of, for example, a divorce settlement.

Foreign private foundations for Canadians

In view of the above, a Canadian may wish to consider a private foundation where there is a desire not to extend information and enforcement rights to beneficiaries, minimize potential for claims, where the foundation will be investing, banking, or holding assets outside of the common law world, or where a founder and founder’s family resides in a civil law jurisdiction.  As discussed below, a foundation may also be useful in a tax planning context.

While the benefits of private foundations are compelling in the right circumstances, it is important to consider how the Canadian courts view foreign private foundations, and consequentially how they are viewed from a Canadian tax perspective. As noted, private foundations do not exist in Canadian law.

The approach taken by the Canadian courts when faced with a foreign legal entity which does not exist under Canadian law is a two-step approach, whereby it first examines the characteristics of the entity as defined under the applicable foreign laws and the entity’s own constitutional documents, and then compares those characteristics with those of entities recognized under Canadian law. The foreign entity will be treated as the type of Canadian entity it most closely resembles. Using that type of analysis, a Canadian court will treat a foreign private foundation as either a corporation or a trust.

There are many potential factors that will influence a court’s and the Canada Revenue Agency’s (CRA) determination that any particular foreign private foundation is more analogous to a corporation or a trust. These include such things as how the foundation is controlled, any rights reserved by the founder, who can enforce the foundation’s terms, the nature of beneficiary rights, duties of directors, how the foundation is described under local laws, and how the foundation actually functions in practice.

The CRA has stated expressly that the most important attributes to consider are the nature of the relationship between the various parties and the rights and obligations of the parties under applicable law and the foundation’s constitutional documents. The Canadian courts, in the very limited jurisprudence that exists on the subject, have also focused on the nature of the relationships and the respective rights and duties among the parties to the foundation in order to arrive at their determination.

The hallmarks of a trust relationship will include such things as a trustee’s fiduciary duty towards beneficiaries, the existence of beneficiary rights, and a beneficiary’s ability to enforce its rights against the trustee (among other things).

A foreign private foundation can be structured in a manner that creates similar relationships to a trust, or in a manner that does not. Since it will be a case-by-case analysis, it is not possible to achieve absolute certainty as to whether any particular foreign private foundation will be treated as a corporation or a trust by a Canadian court (or the CRA).

The analysis, however, can be predictably and materially influenced by how the foundation is structured. The Canadian legal and tax treatment of a foreign corporation (and a Canadian shareholder) is materially different from the legal and tax treatment of a foreign trust (and a Canadian beneficiary).  Therefore, thoughtful structuring of the foundation is key from a Canadian planning perspective.

With the right planning at the outset, a foreign private foundation can be part of a stable, efficient and effective wealth management, protection, and succession plan for Canadians. Private foundations are available under the laws of several jurisdictions worldwide, including notably Liechtenstein, The Netherlands, The Cayman Islands, Panama and the UAE. Specialist advice is essential.

Source article

If you would like to discuss whether a private foundation structure is right for you, please contact us. 

private foundation

James Bowden

Afridi & Angell
Tax-Driven Changes in Residency

Tax-Driven Changes in Residency

Tax-Driven Changes in Residency

For those with sufficient assets, tax-driven relocations and changes in residency have become commonplace. They began to occur in earnest in the 1990s and have increased in popularity ever since. In the past 1-2 years in particular, the popularity of residency changes for tax reasons has seen a marked rise. This has been driven by several factors, which include: the steady reduction in other viable international tax planning strategies as the OECD continues to press aggressive reform, more mobile lifestyles brought about by COVID-19, and the expectation of an increased tax burden especially for the wealthy (also brought about by COVID-19, at least in part).

In short, more people have begun to enjoy more mobility, and the comparative tax advantages of relocating have never been greater. As we have stated in prior inBriefs, for Canadians, changing their country of tax residency is almost certainly going to be the single most effective tax planning strategy they can adopt, with both immediate and long-term benefits.

The opportunity to attract such mobile, wealthy people is also very appealing to potential recipient countries, who stand to gain economically from an influx of wealthy immigrants. Competition for economically beneficial immigrants is high. Many countries have established residency programs and tax incentives specifically intended to attract economic immigrants. Some of the most popular destinations in recent years have included the UAE, Portugal, Greece and Italy, among many others including some Caribbean nations.

The models adopted by these countries typically require the applicant to make an investment in the country, often in real estate, in exchange for medium- or long-term residency (and sometimes a path to citizenship over time), and access to a favourable tax regime.  The amount of the investment varies greatly from country to country (from EUR 200,000 to EUR 3,000,000). [There are other paths to residency aside from investment in some countries, such as through employment or establishing a business.  In the UAE, for example, you may establish a company for significantly less cost than the cost of investing in real estate, and arrange for the company to sponsor your UAE residency.]

The favourable tax regime will be one of two models: the requirement for an annual lump-sum payment of tax irrespective of actual income each year (e.g., Italy, Switzerland), or, access to a low or no tax environment without the lump-sum in exchange for having made an initial investment (e.g., Portugal, Greece, UAE).

Deciding where to seek your new residency can be complex and should take into account many factors, not only taxation. There are publicly available resources which help you to evaluate potential destination countries according, breaking down some of the more relevant factors on a country-by-country basis, and even offering rankings of countries by popularity for their tax residency offerings. [ For example, see the popular Henley & Partners indices and reports which rank investment immigration programs, and perceived quality of different residencies and citizenships:  Https://Www.Henleyglobal.Com/Publications ]

The conditions of residency and favourable tax treatment usually do not require significant “days in country”, so extensive travel is permitted, but you would need to avoid spending so many days in another country that you are deemed tax resident there as well. The residency status granted normally gives you and your family the ability to live, study, and work in the destination country (and, for EU destinations, these rights would apply anywhere in the Schengen region).

From a tax planning perspective, it is crucial to carefully evaluate your assets and your expected sources of income before settling on a destination for tax residency, and to obtain professional advice as to how your specific assets and income will be taxed there. There are always exceptions to the favourable tax treatment offered by each jurisdiction. For instance, some may provide that only passive income from foreign sources will enjoy low/no tax, and only if there is a double taxation treaty in place with the foreign source country (in which case, income from assets located in offshore jurisdictions may not qualify, nor income you generate if you are working in your new country of residence). Also, assets located in the country you are moving away from may continue to impose tax on income and gains on those assets, despite your non-residency.

As such, the change of residency journey will almost always include a restructuring of your assets, and planning your sources of income, in order to achieve the desired tax-efficient result. As part of the planning, it can often be helpful to make use of trusts in low/no tax jurisdictions as a vehicle in which to hold appreciating or income-producing investments. Distributions from trusts can generally be structured in a manner which attracts little or no tax, depending on whether the distribution is out of trust income or trust capital.

International planning using trusts can be complex and requires cooperation among advisors in your new country of residence, your country of origin, the country in which the trust is established, and every country in which there is a beneficiary of the trust. Trust distributions to a beneficiary will be treated differently depending on where each beneficiary resides.  However, despite some complexity in the planning phase, trusts remain by far the most popular wealth planning vehicle for good reason, as the benefits of their use can be significant.  For example:

  • Tax efficient distributions: payments from a trust to its beneficiaries can be managed so as to attract less overall taxation, or no taxation, if the trust has been planned and structured properly. This can include tax-free distributions to Canadian resident beneficiaries, if properly planned.
  • Wealth accumulation: trusts in low/no tax jurisdictions often have very long lifespans, or are permitted to exist indefinitely. As such, they can accumulate investment gains with little or no tax over a long period, and can effectively preserve and grow capital. As such, capital can effectively be sheltered in the offshore trust indefinitely, with distributions made to beneficiaries as and when desired so that only those distributions are subject to tax when received (assuming the recipient is subject to tax).
  • Transition of wealth: for the above reasons, it is often very advantageous to structure an inheritance through an offshore trust, where the capital can be better preserved, grown and distributed much more efficiently than if the inheritance were given directly to beneficiaries.
  •  Creditor protection: trusts have long been a popular vehicle for asset protection. Since the trust legally owns the assets, the settlor’s creditors cannot seize them (subject to some exceptions where there are concerns around defrauding creditors).  And, since beneficiaries usually only have discretionary interests which are not vested, the creditors of the beneficiaries have nothing to seize either. Trusts are also a useful tool to keep wealth outside of the net of “family property” or similar definitions which determine what a spouse is entitled to upon separation, divorce or death.
  • Flexibility and control: trusts are flexible enough to allow you to transfer legal title to assets and grant beneficiaries economic benefits to or from the assets, without transferring control over the assets. This flexibility to retain control can be useful for many reasons, including in situations where beneficiaries may not be ready to responsibly manage the assets, or, in the context of a family business, where you may not yet know which child or children will be involved in the business upon succession. Often of most interest to settlors is the ability to continue to control the management of the trust’s investments, rather than handing over control to a trustee and institutional investment manager.
  • Estate planning benefits: trusts have a great many benefits in the context of an estate plan, including all of those noted above in this list, along with additional benefits such as the ability to place trust assets outside of the scope of a forced heirship regime, and the fact that trust assets will not be made subject to probate and estate administration procedures which are complex, time-consuming and sometimes expensive.

Once you have selected a destination and have considered how to structure your assets and income in order to achieve a tax-efficient result, you may also need to carefully plan your emigration from your current place of residency. For Canadian residents, there are tax consequences of ceasing to be a resident and there may be planning opportunities to reduce the impact upon your exit. Advance planning is especially important if you own shares in one or more private companies.

In light of the above, it is important that you select an experienced advisor who not only has local expertise along with an international network and capabilities, but who can also mobilize other professionals in your country and your new country of residence (and a suitable trust jurisdiction) in order to provide you with cohesive and complete advice. It is typical to require legal counsel and tax accountants in at least two countries, along with valuation experts and professional trustees, in order to provide complete advice on a tax-driven relocation.

If you would like to explore a change in residency and the potential tax advantages, please do not hesitate to contact us.

private foundation

James Bowden

Afridi & Angell
Family business succession through an Austrian perspective

Family business succession through an Austrian perspective

Family business succession – We all know the topic from numerous books, movies and TV series. Thomas Mann’s “Buddenbrooks”, HBO’s “Succession” or books about real business families such as the Krupps or Henkel – the rise and sometimes also the fall of these families, their companies and the personal fates associated with them fascinate and move a large number of people.

The Importance of Family businesses

Whereas some publications just serve the peoples sensationalism (Thomas Mann excluded) the real part of the fascination with family businesses lies in the fact that they are actually an essential part of many people’s lives. Family businesses are part of families. Around 1.9 million people in Austria are employed in family businesses. The owner family usually has a decisive influence on both social and political issues in the region in which it operates.

Numerous charitable projects are initiated and supported by family businesses. Family businesses assume responsibility far beyond their companies, for the families of their employees and for the region, and thus represent an important backbone of the Austrian economy.

It must be acknowledged that family businesses are such attractive employers and business partners precisely because the owner family represents a stable constant with handshake quality that is also willing to assume responsibility and which actions are strongly based on values.

The successful handover

In the coming years, more family owned companies will be handed over than ever before. Also, the fact that Austria currently does not levy gift or inheritance tax encourages the transfer of family assets.

Austria provides for several corporate options to structure family businesses. Depending on size and owner family partnerships, companies with limited liability or even private foundations may be a suitable solution. Such corporate structures may be supported by a family-charta or family boards in order to safeguard that the family’s principles remain recognized in strategic business decisions.

If we now consider that, in addition to the question of who should take over the company, family businesses also have to decide how the values and ideas that have historically grown in the company, which have made the company what it is, which have virtually created the company’s own, family DNA, should be continued and lived by the next generations, the question of a “successful handover” quickly reaches a level of complexity that goes beyond questions of corporate law and taxation.

The family dialogue

The good news is that one can trust that despite the complexity of these issues, the owner family itself knows the answers to these questions best.

Indispensable to this is the willingness for an open dialogue about the possible structuring of a succession within the family. Within this dialogue the family can exchange ideas about common values and goals. The next generation is called upon to contribute its ideas and wishes just as much as the handing-over generation. In the best case, old and proven ideas should be complemented by new ones to form a future-proof whole.

One product of such an exchange can be a family constitution, which represents a kind of morally binding intergenerational contract. Another product of such an exchange can be the assignment to a lawyer and tax advisor to examine and implement the very structuring desired by the family.

The great advantage of this approach is that the family members involved will be much more accepting a solution worked out independently in this way than a solution presented to the rest of the family by one family member’s advisor.

Of course, an experienced advisor can assist families in drafting a family constitution and/or structuring a succession plan. However, such a consultant should by no means act in an advisory capacity, but should be the facilitator of a constructive and thus value-creating dialogue within the family.

Conclusion

There is a reason why family businesses have been so successful and innovative for generations – each owner family was able to find its own unique way to success. This fact should give trust in the succession structuring process and shall also guide and strengthen the next generations. https://schindlerattorneys.com/

 

private foundation

Philipp Hoyos

Schindler Attorneys
private foundation

Clemens Schindler

Schindler Attorneys
Daniela Jöbstl

Daniela Jöbstl

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How to protect and spread your wealth optimally

How to protect and spread your wealth optimally

Showing ways and solutions to the High Net Worth Individuals to protect and optimise their assets. Wealthy people – the so called High Net Worth Individuals – keeping their property on a foreign account are currently under a general suspicion of tax evasion. The case involving Uli Hoeneß appears to prove the opinion of all those who see a close correlation between a growing bank account and declining moral standards.

Protecting and spreading the wealth in an optimum manner within the framework of legal regulations

There are several substantial reasons for having one or more accounts abroad. Risk-diversification spreading of wealth, corporate and financing strategies, holding companies, family or succession planning, alternative life planning are aspects that are equally as valid as the differing taxation in the various countries. And last but not least: keeping costs as low as possible is the main aim of most companies. This also applies to the building up of wealth. More precisely this point includes the minimising of tax burdens within the statutory framework and making use of admissible forms of creative leeway.

The current debate

The current debate does not consider the fact that, in all countries outside of Germany, the taxes paid are those required by the corresponding state. For example, a person buying an apartment in New York may have the transaction processed via a US company with its headquarter in the Cayman Islands. This case the purchase money is invested legally and in an optimum manner from a tax perspective and future rental income fed into the fiscal cycle.

People buying a ship with taxed money may possibly operate it under a foreign flag – e.g. Malta or Cayman Islands –and channel the purchasing price and the operating costs via these countries, as social insurance charges, taxes etc. are cheaper under these flags than with a German or Swiss flag. Do you know of a cruise ship operating under a German flag?

In the same way as every citizen looks for favourable purchasing prices in the internet, internationally operating companies utilise competition between tax systems. This means tax optimisation within the limits of applicable law.

Also allowed is complying with one’s own wish for discretion and investing one’s money outside Germany. People living in small towns who have built up wealth or acquired wealth through the sale of their company, do not necessarily wish to keep the whole of the large amount with the local savings bank. Keeping one’s private old-age provision from taxed assets in countries with lower taxes than in Germany is likewise a rational approach. Additionally, the euro is no longer the first choice currency of many people with respect to long-term investments. Diversification is the solution.

People should also give consideration to controls on capital transactions. In Europe, nobody must reckon with a repetition of the common practice of the 1950’s to 1980’s. Capital interrelations are too strong to allow this. Nevertheless, measures aimed at limiting the daily amounts of money available at cash dispensers or for bank transfers can no longer be fully excluded. The only protection in such cases is an internationally diversified portfolio.

Spread the wealth in an optimum manner

Of course, there will always be those who wish to avoid the charges completely and who therefore evade tax. This has always been the case and this is clearly not our aim. However, the overwhelming majority aims to use the above perspectives to spread their wealth in an optimum manner, protect it and ensure their liquidity. They pay tax on their wealth but reduce the tax burden with the approval of the legislators. As long as there is competition between tax systems, as long as global income is not recorded and taxed everywhere, it will be legal and correct to apply the rulings created by the law and to diversify. That too is globalisation. https://www.heuking.de

Dirk W. Kolvenbach is a German attorney at law and Senior Partner with HEUKING KÜHN LÜER WOJTEK in Zurich and Dusseldorf. Further, he is the head of the Practice Group “Private Clients” and a renowned specialist in all Private Clients matters (e.g. succession, asset protection and transaction).

Dirk W. Kolvenbach

Dirk W. Kolvenbach

Heuking Kühn Lüer Wojtek

heuking.de

private foundation

Gerd D. Kostrzewa

Heuking Kühn Lüer Wojtek

heuking.de