WHAT IS A FOUNDATION?

 

A foundation is a legal entity which shares the characteristics of both a company and a trust. The term “foundation” has a lengthy history generally referring to an institution which is public in nature or which is set up to serve the public. The concept of a private interest foundation began in 1926 when the Principality of Liechtenstein enacted laws enabling the setting up of foundations for the benefit of persons and families. Liechtenstein is a tiny independent, neutral country situated between Switzerland and Austria and for many years had a monopoly in the field. Liechtenstein foundations have been very popular with individuals from civil code jurisdictions where the Anglo Saxon trust concept was not understood well. In recent years other jurisdictions have enacted legislation to give recognition to and facilitate the establishment of foundations.

 

ELEMENTS OF A FOUNDATION

The basic elements of a foundation are shown in the table below:

	Foundation	Company	Trust
Ownership	The foundation itself	Shareholders	Trustees own assets
Legal Personality	Yes	Yes	No a trust is a relationship
Control	Foundation council	Board of directors	Trustee
Governance	By-laws or establishment letter	Articles of association / shareholders agreement	Trust deed, letter of wishes
Additional Protection	Founder or protector	None	A protector may be appointed
Life	Indefinite	Indefinite	Usually limited
Activity	Asset holding, making distributions	Trading, investing, etc to earn profits and pay dividends	Asset holding /distribution for beneficiaries
Costs	Relatively expensive	Fairly inexpensive	Moderately expensive

A foundation is essentially an asset holding structure but of course assets held may include shares of companies which are actively engaged in trading or investing. A foundation does have a legal personality that is recognised as an entity which can contract in its own name. This differs from a trust where the trustee (usually a trust company) is responsible. Although trusts are generally referred to by name (often referring to the settlor or the purpose of the trust) they are actually relationships whereby the trustee, an individual or a company holds assets subject to the provisions of a trust deed drawn up to reflect the wishes of the settlor. See the Zetland Guide to Trusts for further information.

 

FOUNDATION JURISDICTIONS

As with any offshore situation it is important to consider the full legal and regulatory background of the jurisdiction chosen to host the structure. As mentioned earlier Liechtenstein was a pioneer in legislating the use of private interest foundations and that country has an exceptionally robust confidentiality regime. In 1995 Panama also introduced legislation (modelled on Liechtenstein) to allow foundations, followed in 2003 by Saint Kitts.

Other jurisdictions are also reportedly considering legislation including Jersey which is expected in 2007. The following table gives comparisons of major elements of foundations in the three leading jurisdictions, Liechtenstein, Panama and St Kitts.

	Liechtenstein	Panama	St. Kitts
Types of Foundation	Registered or unregistered	Revocable (if Charter allows it) or Irrevocable	Ordinary (if not exempt) or Exempt (not liable for tax in St Kitts)
Minimum Capital	CHF 30,000 (approx $US22,000) must be paid up or in kind	$US10,000 which need not be paid up in advance	No minimum capital requirement
Taxation	0.1% on declared net assets subject to minimum of CHF 1,000 (approx $US700)	Taxable on domestic income only	Taxable on domestic income only
1st year Fees	From CHF 12,000 (approx $US9,000)	From US$5,000	From US$2,000
2nd year Fees	From CHF 8,000 (approx $US6,000)	From US$3,000	From US$1,500
Accounting	No audit requirement but returns must statement of asset must be made for annual capital tax	No requirement	No requirement
Governance	Foundation council with at least one individual qualified local member. Protector.	Foundation council which may be an offshore company or natural person. Protector.	Foundation council which may be an offshore company or natural person. Guardian.
Confidentiality	No disclosure of founders or beneficiaries on public record.	No names on public record. Secrecy extends to employees and foundation members.	No names of beneficiaries or founders on public record.
Purpose	Support of family, charitable or ecclesiastical	Contribute to the cost of upbringing, education as well as general maintenance or members as established in the Regulations.	Typically for the cost of raising children, benefit of family or other natural legal persons
Creditors	Only foundation assets available to creditors in satisfaction of foundations own debts.	Only foundation assets available to creditors in satisfaction of foundations own debts. Specific protection of creditors for 3 years from date of contribution in case of fraudulent conveyance.	Only foundation assets available to creditors in satisfaction of foundations own debts
Language	German	Spanish	English

SETTING UP A FOUNDATION

When planning any new offshore structure as a first step clients must take competent tax and legal advice in their jurisdictions of residence, citizenship and domicile. Other issues to be considered in connection with a foundation include:

• The assets to be transferred into the foundation
• The composition of the foundation council
• Any special provisions in the foundation regulations
• The practicalities of foundation administration

Zetland will work with a client’s advisers and give suggestions as to the structuring of a foundation and subsequent operations