Category: Private Client

Background

On 25 July 2012 the States of Deliberation, Guernsey’s Parliament, approved the projet de loi The Foundations (Guernsey) Law, 2012 (the “Law”). The Law came into force on 7 January 2013.

The Law is divided into three parts – the substantive law and two schedules. The first schedule deals with administrative matters, such as the establishment of foundations and their registration. The second schedule deals with migration of foundations, their revocation, dissolution and termination.

The Key Difference Between a Trust and a Foundation

The main difference between a trust and a foundation is that in the case of a trust the Settlor gifts assets to a Trustee to hold for the benefit of the Beneficiaries under the terms of a Trust Deed. A foundation on the other hand creates a separate legal entity with its own legal personality, distinct from the Founder(s), Council or Beneficiaries. A foundation has a number of characteristics that are similar to those of a company as it has separate legal personality and a management board known as a Council. On the other hand it is entirely independent and has no shares and no members, nor any concept of share capital.

An important legal distinction is that with a foundation there is no separation of the legal and beneficial title of property; with a trust there is such separation.

Registration

A foundation comes into being on registration by the Registrar.

In order to register a foundation the following documents and information need to be provided:

• The Charter
• A declaration signed by the Founder (or his agent)
• The names and addresses of the proposed Councillors and their consents to act
• The name and address of the proposed Guardian (if any) and his consent to act
• The address and telephone number of the registered office of the foundation in Guernsey
• The registration fee.

Provided that the name is not unlawful or already taken and the purpose is not contrary to the Law of Guernsey, the foundation will then be registered, given a number and a Certificate of Registration. At this point the foundation becomes a legal entity separate from its Founder, the foundation officials (the Councillors and any Guardian) or Beneficiaries. The Registrar has discretion regarding whether or not a foundation will be subject to an annual renewal process and, like a company, a foundation can have perpetual existence.

Key Features of a Guernsey Foundation

• The Council

A Guernsey foundation is managed by a Council comprised of at least two Councillors, unless the constitution permits a single Councillor. If neither of the Councillors, nor the Guardian, is a Guernsey licensed fiduciary, the Foundation will require a Guernsey resident agent to hold the foundation’s records within the jurisdiction.

• The Constitution: Charter and Rules

The core document by which a foundation is governed is its Constitution. The Constitution comprises two parts: the Charter and the Rules. The Charter must contain the name and purpose of the foundation, a description of its initial capital or endowment and, if it is a foundation with a limited duration, the duration must be stated. It may contain anything else that the Founder wishes to include.

The Rules set out the operating provisions of the Foundation and detail the functions of the Councillors, deal with the procedures for the appointment, retirement and remuneration of Councillors and any Guardian, and identify the default Beneficiary. The rules may also specify other matters, such as how the assets of the foundation should be applied and how Beneficiaries may be added or excluded. They may also impose obligations on a Beneficiary or contain protective measures to terminate a Beneficiaries’ interest, for example if he becomes insolvent.

• The Founder

The Founder of a Guernsey foundation determines the purpose of the foundation, decides the foundation’s Constitution and provides it with initial capital. The Founder (or his agent) must also detail his name, as the Founder, to the Constitution of the Foundation by signing it. It is also the Founder’s role to appoint the initial Councillors and any Guardian and to have the foundation registered. The Founder can either be a Councillor or a Guardian (but not both simultaneously) in addition to being a beneficiary.

• Guardian

In situations where there are disenfranchised Beneficiaries or where there is only a purpose but no individual Beneficiaries, a Guernsey foundation must have a Guardian. The Guardian’s function is to enforce the purposes of the foundation on behalf of disenfranchised Beneficiaries or, where there are no Beneficiaries, in substitution for them. Foundations that have Beneficiaries but no disenfranchised Beneficiaries are not required to have a Guardian. The Founder may act as Guardian. The Guardian will be named in the Register and may not serve on the Council at the same time. He must maintain accurate accounts and records during his guardianship.

Reservation of Powers by the Founder

The Founder can only reserve limited powers to himself, such as the power of amendment or revocation of the Constitution, or of the purposes of the foundation. Such powers can be reserved only for the duration of the Founder’s life (if he is a natural person) or for 50 years from the date of establishment, in the case of a legal person, after which point the reserved powers will automatically lapse. This does not preclude the Council from delegating certain functions to the Founder.

Duties Owed

The Council of a foundation owes its duties to the foundation itself. The Council does not owe any duties to the beneficiaries of the foundation.

Councillors have a duty to act in good faith. They also have a duty not to profit (otherwise than as permitted by the Constitution), to preserve the property of the foundation, to give information to the Guardian and enfranchised Beneficiaries, to maintain accounting records and to be impartial.

A Guardian also owes fiduciary duties to the Founder and the Beneficiaries to enforce the Constitution.

Types of Beneficiary

A Beneficiary of a foundation is someone who is entitled to benefit from that foundation. Beneficiaries must be identified by name or by their relationship to another person. The Law provides for enfranchised and disenfranchised Beneficiaries.

An enfranchised Beneficiary is entitled to a copy of the Constitution, records and accounts of the foundation and to apply to Court to change the purposes or revoke or dissolve a foundation.

Subject to the terms of the Constitution disenfranchised Beneficiaries are not entitled to any information. This is a novel feature of Guernsey foundations and is not found in any other jurisdiction. It may well be attractive for family arrangements where there is a desire to protect the younger generation from the potentially corrosive effects of the knowledge of substantial wealth. Once the reason for a disenfranchised Beneficiary’s classification (such as age) disappears they may then become an enfranchised Beneficiary.

Additional Information

If you require any additional information please contact John Nelson at the Dixcart office in Guernsey: advice.guernsey@dixcart.com.

Why are Swiss Holding Companies so Popular?

There are many reasons why Switzerland is a favoured location for international business. These include:

• Political, financial, social and economic stability.
• A favourable fiscal environment.
• Geneva and Zug are major centres for commodity trading.
• Excellent business support structures and a wide variety of professionals including: lawyers, bankers, accountants, insurance companies, inspection companies and corporate service providers such as Dixcart.
• A high quality and multilingual local workforce.
• Location in the centre of Europe, enabling real time communication with Europe and within the same working day as the US and Asia.

Tax Efficiencies

Various tax exemptions or concessions exist for holding companies in relation to federal and cantonal taxes when specific criteria are met. These advantages are described below.

Geneva

There are 26 cantons in Switzerland, with Geneva being one of the most important financially. This information note considers the tax advantages that are available to holding companies located in Geneva, Switzerland.

• CANTONAL TAX EXEMPTION

The Swiss tax system grants holding companies privileged tax status at the cantonal level when the following three conditions are met:

1. The company articles must state that the main activity of the company is the long-term management of equity investments.
2. The company must not have any operating business activity in Switzerland. Certain activities are accepted. These include: management of the company and its investments, providing services on behalf of a consolidated group, debt financing of subsidiaries and/or the holding and exploitation of intellectual property.
3. In the long term, either the company’s participations must represent 2/3 of the assets in its balance sheet, or the income derived from such participations (dividends/capital gains) must represent at least 2/3 of its total income. The shares of corporations, limited liability companies and cooperatives are considered to be participations, as well as certificates of participation.

When the above conditions are met, no income tax is levied at the cantonal level. This also means that income from dividends, interest, royalties, commissions and management fees are exempt from cantonal income tax.

• CONCESSIONS RELATING TO FEDERAL TAX

At the federal level income is subject to an effective tax rate of 7.83%.

However, dividend income derived from, and capital gains made on, the disposal of qualifying participations are subject to a participation deduction, which generally results in a complete tax exemption.

Dividends

• Company tax on dividends received

A participation deduction provides relief from taxation on dividends received from qualifying participations.

Qualifying participations are:

1. a participation of at least 10% of the equity (capital stock), OR
2. a participation with a market value of at least CHF 1 million.

For dividend income purposes, there is no holding period requirement.

• Withholding tax on distributed dividends

A Swiss holding company is generally required to withhold 35% tax on dividends paid to its shareholders.

Tax treaties, however, can reduce or eliminate the withholding tax on distributed dividends and Switzerland has an extensive double tax treaty network of more than 100 double tax treaties.

Switzerland also has a bilateral agreement with the EU, giving access to the EU Parent/Subsidiary and Interest/Royalties Directives.

In addition, withholding tax is reduced to zero on dividend distributions when the following conditions are met:

1. The parent company holds at least 25% of the Swiss subsidiary and has held this minimum percent for at least two years.
2. The shareholder company is based in the EU.
3. Both companies are subject to corporate tax and both are limited company structures.

Capital Gains

The participation deduction detailed above for dividends is also valid for capital gains on the sale of qualifying participations.

The participation sold has to represent at least 10% of the company’s equity (capital stock) and has to have been held for a least one year prior to the sale.

International Pressure and the Future

Switzerland is reviewing its corporate taxation system in response to growing international pressure.

It is anticipated that certain regimes, for example the special cantonal tax regime for holding companies, may be abolished.  However, many cantons such as Lucerne, Schwyz and Zug already have business-friendly low corporate income tax rates.

Geneva has announced that it will reduce cantonal tax rates to retain its attractiveness to companies.

Changes are scheduled to come into force on 1 January 2018.

Additional Information

If you require any additional information relating to Swiss holding companies, please speak to your usual Dixcart contact or the Dixcart office in Switzerland: advice.switzerland@dixcart.com.

Guernsey is one of the leading tax-free jurisdictions for the administration of international private wealth. Although a Crown Dependency and represented internationally by the UK Government, it is autonomous and has its own Parliament and its own tax regime. The island uses the British pound but also issues its own banknotes.

Guernsey’s finance industry benefits from a firm foundation of political and economic stability and the island boasts a sophisticated and comprehensive legislative and regulatory infrastructure. Guernsey is highly regarded by Governments and Regulators worldwide for rigorous compliance with international standards and its quality of regulation. Thanks to a long track record of fiscal prudence, Guernsey has an enviable AA+ credit rating and tight management of public spending ensures that Guernsey can remain a leading tax-free jurisdiction for international private wealth.

Guernsey’s Relationship with South Africa

For decades Guernsey has been establishing and managing private structures for individuals and families across the African Continent. Professionals on the Island have been advising clients on transactions with a wide ranging focus, from corporate work in the natural resources, mining and energy sectors, through to funds and infrastructure projects, as well as private wealth management and personal relocation.

Many well known South African firms have established a presence in Guernsey including banks such as FirstRand Bank and Investec and insurance companies such as Momentum and Old Mutual. Guernsey’s proven stability, proximity to London and access to all the major markets have been key factors in attracting organisations to establish a presence on the island.

Services Available in Guernsey

The services available, include:

• Private wealth management through discreet structures for individuals of African origin who are resident as expats elsewhere in the world.
• Hedging of private wealth value by holding assets in a strong currency (£, $, € etc).
• Establishment of robust vehicles for the preservation of family wealth.
• Establishment of trading and/or holding companies for business outside of South Africa as part of an international business operation.
• Establishment of corporate vehicles for investment into the development of natural resources in Africa.
• Fund establishment and administration aimed specifically at Southern African portfolio investors.
• Through the Channel Islands Securities Exchange (CISE) the opportunity to raise capital from international investors and in addition easy access to the London financial markets.
• Many South African residents use Guernsey as the destination for their annual foreign investment allowance of R 10,000,000. This enables them to hedge against the fluctuations of the Rand and to manage a proportion of their family wealth outside of South Africa.
• Guernsey is regarded as an immigration destination for individuals seeking to move to Europe and to establish international businesses.

Structures Available in Guernsey and Popular with South African Clients

• Guernsey Companies

Guernsey excels in offering traditional services to private clients and being at the forefront of new developments. With modern Company Law and a cutting edge Registry, Guernsey is a leading jurisdiction for company formation.

Standard limited liability companies remain the most popular choice; however some families now prefer the ‘cellular’ approach, using either a protected cell company or an incorporated cell company. Such companies have been used to divide assets and liabilities between family members, or to provide for different assets to be held separately – for example, real estate, a traditional portfolio, trading assets (with potentially significant liabilities).

Companies have also been structured to separate control from economic ownership, allowing younger members or a wider family group to benefit, while control is retained by selected individuals. A company limited by guarantee is particularly appropriate for this purpose, as it recognises a class of member who may have no interest in the capital of the company, while at the same time allowing for the issue of shares.

South African clients have also found open-ended companies attractive, particularly for holding family businesses, allowing family members to add to or withdraw from the capital of the company, usually subject to the directors’ consent. Such companies are frequently used in conjunction with a trust at shareholder level.

• Trusts

The concept of a trust originated in medieval times, under Anglo-Saxon law, but their usage has now spread worldwide, particularly to those countries such as South Africa, which have Common Law as a basis for their legislation.

The principal reasons to use an international trust remain; the protection of assets and passing wealth across generations in a controlled and effective manner. However, consideration must be given to the tax liabilities of the settlor, including Donations Tax in South Africa.

• Private Trust Companies

A particularly interesting way of providing involvement for the family, or certain members, at trustee level, is the establishment of a private trust company (PTC) to act as trustee of the family trust.

These structures have become the vehicles of choice for owning and administering the assets of wealthy families. The PTC might be owned by one or more family members or by another trust. In principle it allows involvement in the management of one or more trusts by way of board membership, thus giving the family a greater element of control over the disposition of the family wealth.

• Private Limited Partnerships

Private limited partnerships have proved particularly popular as a means of one generation retaining control, via the General Partner, and another generation gradually receiving benefit through the transfer of limited partnership interests. The responsibilities and role as General Partner may be passed over at an appropriate time in the future.

• Foundations

Many of the above concepts will be easily recognisable in South Africa with its Common Law heritage.

In 2013 Guernsey introduced legislation allowing for the creation of foundations, which are a Civil Law concept. Foundations have some characteristics that are similar to those of a company, with a separate legal personality and a management board known as a Council. The foundation model allows flexibility in drafting to confer corporate status and to provide maximum confidentiality. Foundations are entirely independent and have no shares and no members, nor any concept of share capital. This gives the governing body, the Council, very wide power to manage the assets of the foundation.

Zero Taxation

All of the structures above are,  in principle, not subject to Guernsey taxation. This is provided that the income generated arises outside of Guernsey and those who benefit also reside outside of Guernsey.

Why Choose the Dixcart Group in Guernsey?

Dixcart is an independent group that has been in existence for over forty years assisting a large proportion of individuals and businesses from Eastern and Southern Africa. We have ten offices worldwide including an office in Johannesburg, South Africa, and several senior members of staff of South African origin throughout the Group.

In considering structures for South African clients it is essential to ensure that the use of such structures does not trigger unintentional tax consequences in South Africa. We therefore work very closely with our clients’ advisers to ensure that any structure put in place is appropriate and that each client clearly understands his/her South African reporting obligations.

Dixcart has the experience and expertise to manage every aspect of international private wealth, including:

• Cost effective creation of Guernsey based structures to assist with international trade, investments and estate planning.
• Maintenance of assets in a politically stable, professional environment and in a hard currency.
• Supporting individuals moving overseas through various residences schemes, some of which offer the additional advantage of a passport.
• Aircraft, ship and yacht ownership services, such as registration and tax advice.
• Unquestionable integrity and discretion.
• An established presence in several jurisdictions to provide exponential opportunities for private wealth management and export business solutions.

For additional information regarding the Dixcart Group or to find out more about the benefits that the jurisdiction of Guernsey has to offer please contact John Nelson john.nelson@dixcart.com or Steven de Jersey steven.dejersey@dixcart.com at our Guernsey office.

Dixcart Trust Company Limited Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission

Guernsey registered company number: 6512.