11 June 2013
In this briefing, we will provide a general summary of the key features of Guernsey foundations, including their creation and administration, and we will explore some of the issues which will be of interest to those considering setting up a Guernsey foundation, including issues of control for the founder and confidentiality.
The Foundations (Guernsey) Law, 2012 (the "Foundations Law") came into force on 8 January 2013.
The introduction of foundations into Guernsey law is an exciting development and it is hoped that they will be employed for a range of purposes in a number of fields, including private wealth management, succession planning and philanthropy. It is anticipated that the Guernsey foundation will be of interest to those who may be unfamiliar or uneasy with trusts and the separation between legal and beneficial ownership that is central to the existence of a trust. They will also appeal to those familiar with civil law foundations as they share many characteristics with such foundations. In addition, the Foundations Law includes a number of unique provisions that will offer clients from all backgrounds an innovative and flexible structure which may be more suitable to meeting their individual requirements than a trust or company.
Structure - the basics
- A foundation is an asset holding vehicle, with or without beneficiaries (but always with a purpose).
- A foundation has legal personality, separate and independent from its founder, and may contract, hold assets (including land) and sue in its own name.
- There is no separation of legal and beneficial ownership of assets (the foundation owns the foundation assets).
- A foundation does not issue shares and has no members.
- Guernsey foundations are registered at the Guernsey Registry and have a continuous existence until removed from the register.
- Only a limited amount of information in respect of a Guernsey foundation is available to the public.
- Foundations share some similarities with both companies (e.g. legal personality and registered) and trusts (e.g. no shares and may have beneficiaries) but they are not a hybrid of the two - foundations are distinct legal structures.
The Foundations Law itself
The Foundations Law is a sophisticated and detailed piece of legislation conveniently divided into three parts: the substantive law and two schedules, the first schedule detailing the procedures for establishment and registration and the second schedule dealing with migration, revocation, winding-up and termination. This format will be familiar to those with a civil law background and all users of the legislation will find it accessible, practical and comprehensive.
Any one or more persons (the "founder") may create a Guernsey foundation by endowing it with its initial capital, subscribing their name(s) to the constitution of the foundation and complying with the requirements of the Foundations Law in respect of establishment and registration. The initial capital may comprise any property and there is no minimum value imposed on the initial capital.
Guernsey foundations are registered on the register of foundations (the "Register") maintained by the registrar of foundations (the "Registrar") at the Guernsey Registry (where the registers of Guernsey companies, limited partnerships, trademarks and image rights can also be found). Registration is made by filing certain documents with the Registrar, including the charter (see below), a declaration signed by the founder or the resident agent (see below), the names and addresses of the proposed councillors, guardian (if any) and resident agent (if any) and the address of the registered office of the foundation in Guernsey. Only a Guernsey licensed fiduciary (ie a person licensed by the Guernsey Financial Services Commission to carry out regulated fiduciary activities) may apply to register a foundation. A fee is payable upon registration and an annual renewal fee is payable thereafter. Registration takes a maximum of 24 hours although an expedited 2 hour registration is available for an additional fee. The registered foundation is allocated a registration number, entered on the Register and issued with a certificate of registration. (Full details of the registration procedure and applicable fees can be found on the Guernsey Registry's website: http://guernseyregistry.com.)
The Register is divided into two parts: Part A and Part B. Part A contains the name and registered number of the foundation, the name(s) and address(es) of the councillors, the name and address of the guardian (if any) and the details of the foundation's registered office. Part A of the Register is part of the public records of Guernsey and may be searched by the public on the Guernsey Registry's website. Part B of the Register contains a statement of the purpose of the foundation and all declarations and documents filed with the Registrar under or for the purposes of the Foundations Law (e.g. the charter) - this part of the Register is not publicly available and remains confidential.
The overall establishment costs of a foundation are comparable to those of a Guernsey company or a Guernsey trust (although note that for a Guernsey trust there are no registration fees).
A Guernsey foundation may have one or more founders and there are no restrictions in the Foundations Law as to who can be a founder. Once a Guernsey foundation has been created, the founder does not have any interest in it by virtue only of endowing it with its initial capital or further property.
Whilst the founder provides the initial capital, further property may be endowed by any person (not necessarily the founder) if permitted by the constitution.
A Guernsey foundation is managed by its council which must comprise at least two councillors unless its constitution permits a single councillor.
Any person including the founder or a body corporate may be appointed as a councillor but this is not a requirement. There is no requirement for a councillor to be regulated in Guernsey (or elsewhere) so the founder is free to select who will be responsible for the management and administration of the foundation (for example, a trusted adviser and/or a family member could be appointed as councillors). Any person who is to be a councillor (or a guardian) must be a fit and proper person to hold that position (and the Foundations Law provides guidance for determining whether a person is fit and proper). A councillor may not also be a guardian.
The councillors have a duty to the foundation to act in good faith in the exercise of their functions. They must execute and administer the foundation and must exercise their functions under it in accordance with the provisions of the Foundations Law and, subject to those provisions, in accordance with the terms of the constitution and only in advancement of the purpose of the foundation.
If a foundation has a purpose with no beneficiaries or has any disenfranchised beneficiaries (see below) the foundation must have a guardian in relation to the purpose or the disenfranchised beneficiaries. Otherwise, if the charter so permits, a foundation may have a guardian but is not obliged to.
Either the founder or a body corporate may be appointed as a guardian but this is not a requirement. The guardian may not also be a councillor.
The guardian has a duty to the founder and the beneficiaries to act in good faith and en bon père de famille to enforce the constitution and the purpose and in the exercise of his functions. In the exercise of his duty, a guardian may bring an action against the council unless the constitution provides otherwise.
If at any time no foundation officials (ie none of the councillors or guardian) of a Guernsey foundation are Guernsey licensed fiduciaries, the foundation must have a resident agent. The resident agent must be resident in Guernsey and a Guernsey licensed fiduciary. The resident agent will need to comply with its duties as a licensed fiduciary which include anti-money laundering obligations. In order to comply with such duties, the resident agent may request copies of the records of the foundation and any other documents or information necessary.
A Guernsey foundation may or may not have beneficiaries, ie persons who may benefit from the foundation. A beneficiary must be identified in the constitution by name or their identity must be ascertainable from the terms of the constitution by reference to a class or a relationship to another person (e.g. the children of the founder). The constitution may provide for the addition or removal of a person as a beneficiary or for the exclusion from benefit of a beneficiary either revocably or irrevocably. A founder or foundation official may also be a beneficiary.
Uniquely, the constitution of a Guernsey foundation may differentiate between enfranchised beneficiaries and/or disenfranchised beneficiaries. Enfranchised beneficiaries have considerable rights: they are entitled to copies of the constitution of the foundation, to disclosure of records and accounts of the foundation on written request to the council and to make any application to the Royal Court of Guernsey to request an order to prohibit a change to the purpose of the foundation or the winding up of the foundation. Disenfranchised beneficiaries are not entitled to the above, unless the terms of the constitution provide otherwise. The constitution may provide for a disenfranchised beneficiary to become enfranchised and vice versa. This gives the founder a considerable amount of flexibility in structuring the foundation, for example the constitution can distinguish between family members so that only those that meet certain conditions (in terms of age or involvement in the family business, for instance) are enfranchised beneficiaries.
As noted above, where a foundation has disenfranchised beneficiaries, the foundation must have a guardian.
The constitution of a Guernsey foundation comprises two parts: its charter and its rules. The Foundations Law prescribes the information that must be contained in each document. If information required to be in the rules is contained in the charter, that information does not need to be contained in the rules and if all information required to be in the rules is contained in the charter, then the foundation need not have any rules. (A foundation must always have a charter which is submitted with the application for registration but it is not publicly available.)
This must state the name and purpose of the foundation, contain a description of the initial capital of the foundation, state the duration of the foundation (if it is to subsist for a limited period only) and contain a declaration by the founder (or his resident agent) that the founder wishes the councillors to comply with the terms of the charter.
The charter may also contain any matter that is otherwise required or permitted to be in the rules or that the founder thinks fit.
The charter may be amended only if the charter so provides or the Royal Court of Guernsey so orders or, in a limited number of circumstances, if the Registrar so permits.
As noted above, whilst the charter is filed with the application for registration, it is not made publicly available and remains confidential. It may be disclosed but only in limited circumstances, e.g. as part of a criminal investigation.
The rules must prescribe the functions of the council, detail the procedures for the appointment, resignation and removal of councillors and any guardian and, if the councillors or guardian are to be remunerated, make such provision as the founder thinks fit in respect of remuneration.
The rules may also deal with various administrative matters including the manner in which the property of the foundation may be distributed, accumulated or applied, the endowment of further property upon the foundation, the addition or removal of beneficiaries, the appointment and removal of foundation officials, investment decisions, use of the foundation's assets, the termination of a beneficiary's interests and provision for a default recipient (see below). In addition, the rules can contain any other matter that the founder thinks fit.
The rules may be amended only if the constitution so provides or an application is made to the Royal Court of Guernsey by or on behalf of the founder or a foundation official to rectify any error, defect or omission in the rules.
There are a number of ways in which the founder can retain control in respect of the foundation and its assets, notwithstanding that he has divested himself of property endowed upon the foundation. As noted above, the founder can select the councillors and, where applicable, the guardian. The founder can also control the flow of information to beneficiaries by differentiating between enfranchised beneficiaries and disenfranchised beneficiaries.
In addition, the founder can reserve to himself limited powers under the constitution provided certain requirements are met. The founder can reserve a power to amend, revoke or vary the terms of the constitution or (subject to certain limitations) the purpose of the foundation in whole or in part and he can reserve a power to terminate the foundation. In each case the reservation of powers must be set out in full in the charter and the powers may only be reserved during the founder's life (if the founder is a natural person) or for a period not exceeding 50 years from the date of establishment of the foundation (if the founder is a legal person such as a company).
The Foundations Law permits a considerable amount of flexibility in the drafting of the constitution of a Guernsey foundation and the founder can work with the draftsman of the constitution to ensure his requirements are met, for example in terms of the way in which investment decisions are made, what happens to the foundation's property when the foundation is wound-up and the mechanics for the appointment and removal of foundation officials.
As noted above, only limited information in respect of a Guernsey foundation is publicly available; the purpose of the foundation and the administrative provisions of the foundation are not made available to the public.
Further, the founder can restrict the information which is provided to beneficiaries by making them disenfranchised beneficiaries or by including provisions in the constitution to make an enfranchised beneficiary become a disenfranchised beneficiary in prescribed circumstances.
A Guernsey foundation is wound-up by the council on the occurrence of any of the winding-up events specified in the Foundations Law, including the expiry of its duration (if it is limited in duration), the happening of any event specified in the constitution, the foundation no longer having any property or assets, bankruptcy, failure of the purpose of the foundation or by order of the Royal Court of Guernsey. Upon winding-up, the assets are distributed first to creditors and then, subject to the provisions of the constitution, to the person named as the default recipient in the constitution.
Once the foundation has been wound-up it is terminated by an application being made to the Registrar for its removal from the Register. The foundation is terminated on the date of its removal from the Register following which it no longer exists or has legal personality.
An overseas foundation (ie a foundation with legal personality currently established under the law of any place outside of Guernsey) may apply to the Registrar to be registered as a Guernsey foundation provided that it is authorised to do so by local law, it complies with any applicable local legal requirements and it is not bankrupt or being wound up (or similar). It is also possible for a Guernsey foundation, if permitted under its constitution, to apply to the Registrar to be removed from the Register for the purposes of becoming established as a foundation with legal personality under the law of a place outside of Guernsey.
The tax status of Guernsey foundations is yet to be formally confirmed but it is expected that they will be taxed in a similar manner to Guernsey companies, ie they will be taxed at 0% on income save for income derived from certain sources, notably income from the ownership of lands and buildings which will be taxed at 20%. It is anticipated that legislation dealing with the taxation of Guernsey foundations will be put in place later on in 2013.
Uses of Guernsey foundations
The flexible and innovative nature of the Guernsey foundation will enable it to be used for a variety of purposes, including those listed below:
- private wealth management (e.g. to hold and manage family assets);
- holding and controlling interests in private businesses;
- succession planning;
- charitable and/or philanthropic purposes;
- special purpose vehicle for holding assets in a range of transactions;
- to hold shares in private trust companies;
- as a family office.
The above list is by no means exhaustive.
Why a Guernsey foundation
The Guernsey foundation is a flexible and innovative structure which can be utilised for a variety of purposes and its constitution can be tailored to meet the founder's particular requirements. The Guernsey foundation is sufficiently similar to foundations found in civil law and other common law jurisdictions to be easily recognisable to those familiar with foundations but different enough to offer clients a unique structure (the distinction between enfranchised and disenfranchised beneficiaries is an original concept not found elsewhere).
Guernsey is a well-regulated, reputable and politically stable jurisdiction. It is recognised internationally as having an experienced and knowledgeable body of private wealth practitioners, including fiduciary service providers, lawyers and accountants. These factors, and the flexibility and accessibility of the Foundations Law, will no doubt be attractive to clients and their advisers and the Guernsey foundation will provide another option to consider when determining the type of structure and the jurisdiction which will be most suited to their particular requirements.