The use of offshore private foundations for wealth management and protection purposes is on the rise. While foundations have civil law origins, a growing number of common law jurisdictions have enacted legislation providing for foundations. Foundations have proved to be attractive because:
- analogous to trusts, they provide for tax planning, asset protection and ‘outside estate’ succession planning consequential on the divestment of ownership and control of assets by a founder;
- a foundation is less complicated than a trust;
- foundation assets are owned by the foundation itself, rather than a trustee;
- in contrast to the settlor of a trust, the founder of a foundation is more able to influence foundation matters without undermining the structure;
- in contrast to the position with a trust, the founder of a foundation is generally better able to limit potential claims by beneficiaries;
- they have strong asset protection features; and
- foundations are typically more cost-effectiveness than trusts.
Unlike a trust (which may only operate and hold property through a trustee), a foundation is a separate legal entity, capable of entering into legal relations and holding property in its own right. Analogous to a company’s board of directors, a foundation is managed by a board of councillors (otherwise known as the council). A foundation’s council administers foundation assets for the benefit of the beneficiaries in accordance with the terms of the charter and regulations. While foundations have numerous similarities to companies, a key difference is in respect of ownership. A company issues shares to shareholders, who purchase shares to become the company’s owners. In contrast, a foundation is ‘ownerless’. The founder gratuitously transfers (donates) assets to the foundation, and the foundation itself becomes the sole the legal and beneficial owner of foundation assets (ie neither the founder nor beneficiaries have any ownership interest). In short, the major benefits of foundations flow from the divestment of ownership and control of assets by a founder, which enables for tax planning, asset protection and ‘outside estate’ succession planning. While IBCs have been used extensively in the holding of offshore assets, with the steadily increasing global emphasis on exchange of information we are seeing a shift to greater use of stronger legal structures. More clients are looking to dual structure investment holding vehicles, using trusts or foundations in conjunction with offshore companies.
Seychelles foundations are provided for under the Foundations Act 2009. Seychelles foundations are becoming increasingly popular among private clients and financial services professionals worldwide. A Seychelles foundation is established: (i) by a written charter signed by one or more founders and filed with the Registrar (the Seychelles International Business Authority); and (ii) on the issuance of a certificate of registration by the Registrar upon registration of the foundation. Seychelles foundations offer enhanced privacy, as there is no mandatory requirement to file with the Registrar, or to include in the foundation’s charter, the name and address of the foundation’s councillors, beneficiaries or protector (if any). On filing of a charter in Seychelles, the Registrar will generally register the foundation, and issue its certificate of registration, on a same or next day basis. Seychelles foundations are highly cost-effective, as a competitive fee of only US$200 is payable to the Registrar on registration. A ‘renewal’ fee of US$200 is payable annually thereafter to the Registrar (due on the day before the foundation’s initial registration anniversary date).
The Registrar is not permitted to register a foundation unless the charter requires the foundation to have initial assets of a value of not less than US$1 or the equivalent thereof in any other currency. This low minimum foundation asset requirement provides for ease and speed of foundation formation and is in contrast to the high minimum asset requirements in a number of foundation jurisdictions. Additional assets may be subsequently donated to a foundation. A foundation is exempt from Seychelles: (i) business tax on its income and profits; (ii) withholding tax; and (iii) stamp duty (except in relation to any permitted lease of Seychelles real estate for its own office use).
The founder of a Seychelles foundation is the person who subscribes his or her name to the charter establishing a foundation, acting either on his or her own account or on behalf of another, and who endows the foundation with its initial assets. Accordingly, a nominee founder is permissible. A founder may be a natural person or a corporate entity. A founder may reserve, in the foundation charter or regulations, to the founder or for other persons, various rights, such as the right to appoint or remove councillors, protectors and beneficiaries. The founder may, in the foundation charter or by written instrument, assign or transfer all or any part of his or her rights, powers and obligations to another person.While a Seychelles foundation must have a charter, it may adopt regulations. Regulations will typically provide for: (i) the name and address of each initial councillor; (ii) the name and address of each beneficiary or the designation of future beneficiaries; (iii) the distribution of assets by the councillors; and (iv) the name and address of the protector (if any). A foundation’s regulations (unlike its charter) are not filed with the Registrar and are therefore not publicly accessible. Therefore, to preserve privacy, regulations are almost always adopted, so as to provide for beneficiary identification and entitlements in a foundation’s regulations, rather than in the charter. The objects of a Seychelles foundation may be charitable, non-charitable or both, and may be to benefit one or more beneficiaries, or to carry out a specified purpose, or to do both. The objects of a foundation are not permitted to include the carrying on of business in Seychelles, except so far as may be necessary for the carrying on of the foundation’s business outside of Seychelles. A foundation’s council is responsible for carrying out the foundation’s objects and for the management, administration and distribution of the foundation’s assets. A Seychelles foundation must have a minimum of one councillor, who may be a natural person or corporate entity. Unlike in a number of jurisdictions, there is no mandatory requirement for the appointment of a Seychelles resident and licensed councillor. Naturally, for tax planning reasons, it is common for a foundation’s council to be situated in a tax-friendly jurisdiction, such as the Seychelles. However, the absence of an obligatory resident councillor requirement enables for Seychelles foundations to be administered from other financial centres. A beneficiary under a Seychelles foundation has no ownership or other interest in the foundation’s assets. A founder may be a foundation beneficiary but not the sole beneficiary, although it is permissible for a founder to be a sole beneficiary during his or her lifetime if the charter or regulations provide for the designation of one or more beneficiaries in the event of the founder’s death or legal incapacity.
Foundation assets do not become the assets of a beneficiary unless distributed in accordance with the provisions of the foundation’s charter or regulations. The appointment of a protector (otherwise known as a guardian) is optional. In contrast, a Seychelles foundation is required at all times to have a registered agent in Seychelles, being a Seychelles company which holds a foundation services licence issued by the Seychelles International Business Authority under the International Corporate Service Providers Act 2003. A foundation must also have a registered office situated in Seychelles, the address of which shall be the same as that of its registered agent. The role of registered agent is a non-fiduciary position, usually limited to the filing of documents with the Registrar on the foundation’s behalf, keeping of the foundation’s register and acting as a point for service of documents on the foundation.
Strong Asset Protection
The Foundation Act 2009 contains robust provisions protective of foundation assets, making it very difficult for persons seeking to ‘attack’ a foundation, such as creditors of the founder. The Foundation Act 2009 provides that a transfer of property to a Seychelles foundation is not void or otherwise liable to be set aside by reference to a foreign rule of forced heirship or any other foreign law; and a judgment of a foreign court will not be recognised or enforceable in Seychelles in so far as it is inconsistent with such provisions. Additionally, and again notwithstanding any foreign law to the contrary, a transfer of property to a Seychelles foundation is not be void or otherwise liable to be set aside by reason of the founder’s bankruptcy or the liquidation of the founder’s property or in any claim by a creditor of the founder. The Foundation Act 2009 only provides very narrow exceptions for creditors of a founder to attack a foundation, namely, where a claimant creditor of the founder proves that the founder was insolvent, or intended to defraud the creditor, at the time when the founder transferred property to the foundation, the Seychelles Supreme Court may declare that the transfer of property was void to the extent necessary to satisfy a proven claim of the creditor of the founder. The foundation protection position is further strengthened in that the Foundation Act 2009 provides that a founder’s creditor claim against foundation property is barred on the expiry of two years from the date of the transfer of the property to the foundation. Pursuant to the terms of a foundation’s charter, the founder is able to limit or broaden the extent of a beneficiary’s entitlement to information relating to the foundation, including its assets. For example, if so desired by founder, a charter can restrict a beneficiary’s right to information to a copy of the charter. On the other hand, for example in the case of adult beneficiaries, a founder may prefer to allow beneficiaries access to the regulations and financial information in respect of the foundation’s assets. Furthermore, the charter or regulations of a foundation may provide that a beneficiary shall forfeit his or her benefits or rights or potential interest under the foundation in the event that he or she challenges: (i) the establishment of the foundation; (ii) the transfer of any assets to the foundation; (iii) the foundation’s charter or regulations or any provision thereof; or (iv) any decision of the councillors, any protector or the founder.
Amendments to Seychelles Foundation Law
The Foundation (Amendment) Act 2011, which amended the Foundations Act 2009, came into force on 27 December 2011. The Foundation (Amendment) Act 2011 provides for more comprehensive provisions relating to foundation accounting record keeping. While a foundation is not required to prepare or file annual accounts or to appoint an auditor, it is required to keep or cause to be kept proper accounting records that: (i) are sufficient to show and correctly explain the foundation’s transactions; (ii) enable the financial position of the foundation to be determined with reasonable accuracy at any time; and (iii) allow for accounts of the foundation to be prepared (notwithstanding that the foundation is not required under the Foundation Act 2009 to prepare accounts). A foundation’s accounting records may be kept inside or outside of Seychelles as the councillors think fit. However, where a foundation does not keep its accounting records at its registered office, it is required to give written notice to its Seychelles registered agent of the address of the place at which its accounting records are kept. The Foundation (Amendment) Act 2011 also revised the Foundations Act 2009 in relation to the keeping of an internal foundation register. A foundation is required to keep, at its registered office, a register of its councillors, founders, beneficiaries, registered agent, any protector and any person authorised as an agent or power of attorney holder of the foundation. The foundation’s register is not open to public inspection but is open to inspection by the founder, any councillor, any protector and the registered agent of the foundation. The Foundation (Amendment) Act 2011 also introduced a new section 111A into the Foundation Act 2009, which provides that a councillor of a foundation may apply to the Supreme Court of Seychelles for directions in relation to the manner in which the council is to act with respect to a decision affecting the foundation.
It is clear to see why Seychelles foundations are attracting considerable interest. They offer flexibility, enhanced privacy, cost-effectiveness and administrative ease combined with robust asset protection features. The global market is increasingly recognising the merits of Seychelles as an international financial centre. Seychelles registered 16,485 tax-exempt companies (IBCs) in 2011 (up from 14,779 in 2010), which ranks it as one of the most popular offshore company jurisdictions worldwide. Seychelles is on the OECD’s “white-list” and has a growing network of double taxation avoidance agreements. In the last ten years the global financial services industry has faced unprecedented regulatory tightening. In such challenging times, a key reason for Seychelles’ success as a finance centre has been striking an effective balance between sound regulatory practice and market attractiveness. I am sure Seychelles is well placed to steadily capture an increasingly significant share of the global private foundation market.