An Introduction to Foundations 18 th January 2011

1. An Introduction to Foundations 18th January 2011

2. John Rimmer Partner Trusts and Private Client Practice Group Isle of Man

3. An Introduction to Foundations • What is a foundation? • What does the Isle of Man’s Foundations Bill say? • When might foundations be of interest?

4. But first of all… Foundations and Concealers

5. Not everyone’s cup of tea… Richard Murphy, on the introduction of Jersey foundations:- “Another toy for the tax abusers to play with. At cost to society at large. And Jersey seriously ask us to believe that they’re in the “cooperative, respectable, transparent and well regulated group” of jurisdictions. The evidence on the ground is quite the opposite: they are dedicated to providing structures for offshore abuse; abuse that can only be designed to undermine the legislation or regulation of another jurisdiction behind a deliberate, legally backed veil of secrecy that ensures that those from outside Jersey making use of its regulation cannot be identified to be doing so. I wonder if Jersey Finance have read 1984?”

6. But what is the view abroad? Reuters Financial Regulatory Forum ANALYSIS-Global rich want trusts, Swiss banks stay wary May 26, 2010 19:28 BST By Chris Vellacott and Lisa Jucca “ZURICH, May 26 (Reuters) – Rich bank customers are showing a growing interest in Anglo-Saxon trusts as a way to structure their wealth, but Swiss private banks are reluctant to up their offer as international pressure on tax disclosure builds. … … many Swiss private bankers remain wary of trusts as such structures could attract more unwelcome attention from foreign tax authorities, and there is an intrinsic conflict of interest for trustees between their loyalty to the client and to the bank that employs them…”

7. What is a Foundation? • Absent from English law • Common in civil law countries – especially Liechtenstein, Austria, Panama • New kids on the block: Bahamas (2004), Jersey (2009)

8. Key aspects of a foundation • Foundation: self-owning legal person formed by the dedication of property for specified purposes • Person – like a company • Dedication of property – like a trust • Self-owning – like neither (except guarantee members?)

9. Establishment of a foundation • Charter, instrument or memorandum of formation – the public statement of establishment • By-laws or rules – internal government of the foundation

10. The Isle of Man Foundations Bill http://www.tynwald.org.im/papers/bills/main.shtml • Legal nature of the foundation in Manx law (clauses 15,35): • Legal person • Capable of suing/being sued • Holds assets for its objects

11. The Isle of Man Foundations Bill • Capacity: as individual (clause 36) • Trade: only if incidental to objects (ibid.) • Existence: until termination date or event (clause 17) • Must have (1) a foundation instrument and (2) foundation rules (below)

12. Foundation instrument • Statutory requirements including stating name and objects • For objects, can refer back to rules

13. Foundation rules • Must provide for council (clause 12) • Must provide for a registered agent (clause 13) • May provide for enforcer (clause 14) • Initial assets (if any)(clause 15) • Winding up and term (clauses 16-17) • Other matters…(clause 18)

14. The Council • Compulsory • To administer assets and carry out objects • Duties to act • In good faith • Furthering the interests of the foundation • With reasonable care • Company Officers (Disqualification) Act 2009

15. Registered Agent • Compulsory • Class 4 licence-holder

16. Beneficiaries • No proprietary interests (clause 30) • But express rights to enforce rights

17. Founder • Can reserve powers • Powers are assignable

18. Rights to information • Rules automatically disclosable to council members, registered agent, enforcer, founder – not beneficiaries (clause 21) • Must provide certain information regarding foundation to “person with sufficient interest” • Application can be made for disclosure (clause 31)

19. Foreign law excluded • Clauses 37 and 38

20. Administration and Registry • Parts 3 and 4 of Bill • Administrative obligations of foundation, including:- • Documents to be kept and where • Obligation to keep accounting records • Right to demand accounts • Annual return • Amendment • Register

21. Powers of the Court • Application by person under clause 51 if they have “sufficient interest” • Orders can be made:- • Requiring compliance • Requiring foundation to carry out its objects • Amending foundation instrument • Giving directions • Appointing representatives of unrepresented persons • Appointing/dismissing registered agent • Acting on behalf of defaulting persons • Appointing/removing person appointed under rules

22. Other bits… • Power to make regulations • Application of bankruptcy rules • Defined as corporate taxpayer for section 120 of income tax Act 1970

23. Why might you want one? • Estate planning vehicle for a “civilian” (especially non-Hague Convention) • “Orphan” vehicle (e.g. for PTC) • In commercial structures to hold or control application of assets • Charities

24. Voting vehicle • To hold assets other than for investment • Greater founder control? • More robust to allegation of sham