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24 February 2014
Jersey’s new law relating to the creation of foundations as an alternative to trusts confers many benefits on clients more familiar with operating under civil law. By Alex Ruffel and Phil Howarth
Jersey has a new foundation law that was recently approved by the States and came into force on Friday 17 July. Potentially this law could bring a flood of work to the island and to the wider investment and legal community in London. The Jersey law follows its predecessors in other offshore jurisdictions, such as the Foundation Law in Monaco, introduced in 1923, the Foundation Law of Liechtenstein in 1926 and the Panamanian Law of 1995.
With increasing international wealth coming from civil law countries, many of which are rich in oil and minerals, Jersey can now provide foundations to clients more familiar with the foundation, a creature based on civil laws as opposed to trusts based on common law. Clients from civil law countries are less familiar with the concept of giving away one’s assets without retaining any control or legal interest, and so perhaps have been put off having a trust.
Potential customers include high-net-worth families wanting to pass their wealth on to the next generation but retaining an element of control, or wealth planning for entrepreneurs, successful businesspeople, philanthropic organisations and charities.
Regulations have been passed to enable continuance of foreign foundations into Jersey, so it is also hoped to lure business away from other jurisdictions such as Liechtenstein or Panama, which may lose out to Jersey’s more up-to-date law. The Jersey Financial Services Commission and law draftsman have ensured that Jersey foundations will be subject to Jersey’s high standards of anti-money laundering and codes of practice, as every Jersey foundation will require a Jersey-qualified member to sit on the foundation council.
Essential elements of the foundation are:
- The founder: broadly someone who has requested the establishment of the foundation and provided benefits or funds to the foundation, but they need not necessarily be the person who has provided the bulk of the funds. The name of the founder does not require to be stated in the charter.
- The guardian: the foundation must have a guardian (Article 13.1). Generally, a guardian could be compared to a protector in a trust and will have specified powers under the law or regulations. The guardian will have supervisory powers and will be able to hold the council members to account to ensure they carry out the purpose for which the foundation was created.
- The foundation council: this must consist of one or more members and must include a Jersey-qualified person under the law (Articles 20 and 21). One of the main benefits over a trust is that the foundation council can consist of family members who may or may not be the persons who have donated funds to the foundation. This could be very attractive to high-net-worth clients who wish to retain an element of control, for example over the investment decision-making process and the addition or removal of beneficiaries.
- Beneficiaries: beneficiaries of a foundation, unlike with trusts, have no beneficial interest in the foundation’s assets and no duties are owed to them. Consequently, beneficiaries cannot get together to break the structure, as in Saunders v Vautier (1841), which is important to clients who wish to provide enjoyment of the fruits of their wealth but to protect the wealth itself. Another benefit is that there are no issues of validity with foundations as there are with trusts - for example a foundation does not need to have the three certainties in place to make it valid and properly constituted, so there can be no sham arguments. The valid existence of a foundation depends solely on the issue and maintenance of its certificate of registration.
- Tax: when setting up a foundation where the founder, beneficiaries or assets have UK connections, it is crucial to consider UK tax when drafting the constitution.
With their civil law origin, foundations are not presently recognised as an entity in UK tax law, but there is a body of experience arising in relation to foundations in other jurisdictions. Generally, the approach has been to consider the characteristics of a foundation and apply either the corporate tax regime or the regime relating to trusts, depending upon which it resembles. As there are different codes for different UK taxes, it is also possible that the foundation will be treated as a company for one tax and a trust for another.
The impact of how a foundation is drafted can be significant. For example:
- the tax effect arising from the involvement of a founder in decisions will vary depending on whether the foundation is analogous to a trust or a company;
- for inheritance tax, the potential advantages and tax exposure are greater where the foundation is treated as a trust rather than as a company; and
- capital gains can be taxed on the founder or the beneficiaries, depending on how the foundation is drafted and treated.
In summary, then, there is an element of uncertainty as to the UK’s tax treatment of Jersey foundations.
However, the new Foundation Law allows significant latitude in drafting the constitution of a foundation, which provides the opportunity to establish the foundation in a way that is most efficient for both the founder and the beneficiaries.
Alex Ruffel is a partner at LG and Phil Howarth is a director of STM Fiduciaire, Jersey