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According to Dr. Johanna Niegel, the functionality, ease of use and real-time purpose of Purposeful Trusts and Foundations , is the following:
The legislation process presently taking place in the various common law jurisdictions is driven by the needs of today’s international client who simply wants to have multiple estate and tax planning tools available in various international jurisdictions, be it common or civil law jurisdictions. Foundation concepts have been stretched, sometimes close to their limits, and there has also been a reception of trust law into private foundations, in particular, also with a view to foundation purposes and ‘purpose foundations’. The enactment of new foundation laws worldwide has now reached a stage where one can go so far as to speak of foundations of the first and the second generation.
Since 2017, there has been an unprecedented wave of new foundation legislation in common law jurisdictions across the world. New statutes were enacted and brought foundations to regions of the world that had previously ignored or disregarded the concept. Notable entries were Abu Dhabi, Dubai, Gibraltar and the Cayman Islands. The question for this piece is whether Cyprus, as a relatively fledgling member of the EU but a common law jurisdiction and cognizant of its retained position in the offshore world, can prepare for, and enact an effective foundation model.
There is no single legal definition of a foundation, however it may be described as a legal entity which is created when a person provides assets for a specific purpose. The foundation holds the assets for purposes set out in its constitutive documents and it is administered according to contractual rather than fiduciary principles – the latter being principles that are more understood to underpin trusts and the former foundations. The foundation is a distinct legal entity but unlike a company, it has no shareholders. Often called therefore an orphan structure.
The Essential Foundation Models
P. Panico in his comprehensive article Private Foundations and Trusts – Just the Same but Different identified three distinct types of Foundation:
- The Classic Foundation: The first is more akin to the trust and therefore struggles with its inherent limitations and origin;
- The Dutch Foundation: The Dutch foundation legislation reserves a limited role to both founders and beneficiaries, which emphasizes the ‘orphan’, or ownerless, aspect of a Dutch stichting which has made it popular in corporate arrangements such as private pension funds, securitization transactions, and syndicated loans. One might argue that this ownerless notion underpinning the Dutch concept is a fiction too far;
- The Common Law Foundation: The Common Law is perhaps best seen in the UAE model legislation and has particular uses – locally and internationally – due to its effective hybrid corporate and trust structure. While this arguably amounts to the notion of a new generation of Foundation, these are distinctions without much of a core philosophical difference.
The UAE model appears to be an example of a transcendent classic structure and is welcome for that and arguably reflects the legal and commercial reality and rationale for the foundation. Cayman Islands actually makes legislative reference to Foundation Companies, but that is outside the scope of this article, other then to say the reality is that it is a company with a few minor modifications.
To quote P. Panico: The creation of a special type of company with limited intersections with trust law is intended to reduce the potential for litigation which many practitioners identify as a major problem with trusts, especially after the settlor’s death.
Foundations are structures that can be used in similar circumstances to traditional family trusts but are familiar to clients and intermediaries with a civil law background. As Foundations – unlike trusts – have a legal personality, they will, in accordance with some jurisdictions, be entered onto a public register which will be administered by a central Registry – a point on which Cyprus, as well as the EU, has struggled. Foundations, however, are akin to companies in terms of their ability to transact what one might call normal business, something which trusts are really less amenable to. It is perhaps important to note that this may indeed be the true reason for Johanna Niegel stating that we have entered the second generation of foundation development. To put it simply, a foundation does what a trust and a company cannot to satisfy the various parties concerned within it, particularly beneficiaries, however they are differentially defined.
One now has a slight hesitation with P. Panicos statement above of the true intentions of this new wave of foundation structures internationally, given this commercial realpolitik.
With the proliferation of terms and styles, it seems prudent to look at the core common features.
Common Foundation Features
Generally speaking, foundations have the following commonalities:
- They have a legal personality and in many jurisdictions, are inscribed on a public register;
- They are formed by a founder who provides the initial assets of the foundation known as the endowment;
- They hold assets for the purposes set out in their constitutive documents and are administered according to contractual rather than fiduciary principles;
- They are run by a council (or a board) which is responsible for fulfilling the purpose of the foundation;
- They have no shareholders and may or may not have beneficiaries depending on the purpose of the foundation;
- Beneficiaries (of the foundation) have contractual rights to enforce the operation of the foundation in accordance with its constitutive document – rather than proprietary rights in its assets, or equitable rights such as are available to the beneficiaries of trusts.
- They may have an advisor or protector if its rules so provide.
Readers with a mind on trust concepts will unsurprisingly tick most of these as applying to trusts.
Their Relevance to Cyprus
It will be argued that the natural limitations of trusts and the patchwork quilt of company law legislation in Cyprus makes it a perfect candidate for the introduction of a foundation system.
Of course, at present, a Foundation, indeed a trust, can be integrated into a corporate structure, but it is in a sense fictional and unnecessarily complex.
The Issue of the Company Beneficial Owner Register in Cyprus and the EU
In cases where the shareholding structure of a Cyprus company leads to foundations, as with other similar legal arrangements, as a beneficial owner(s), the information submitted in the Beneficial Owner Register is the following:
- Name of the foundation;
- Registration number (if any);
- Nature and extent of the beneficial interest;
- Business address;
- Country of jurisdiction of the foundation.
It must be noted that due to the recent decisions of the CJEU public access to the Beneficial Owner Register in Cyprus has been withdrawn. It will be necessary to constantly monitor if this situation changes.
Specifically the Department of the Registrar of Companies and Intellectual Property announced that based on the relevant Decision of the Court of Justice of the European Union (CJEU), dated 22/11/2022, in the co-litigation cases C-37/20 and C-601/20, access to the Register of Beneficial Beneficiaries for the general public was suspended from 23/11/2022.
In accordance with the above Decision of the CJEU, which provides access to the general public to information about with the Beneficiaries of a legal entity, is invalid as it constitutes a serious interference with the fundamental rights to respect for private life and protection of personal data, which are respectively guaranteed in Articles 7 and 8 of the Charter of Fundamental Rights of the European Union.
The relevant information to the competent and supervisory authorities and the Unit, as referred to in the Directive K.D.P. 112/2021 article 12 and in the amending Directive K.D.P. 116/2022 will continue to be provided with the current procedure according to the official Cyprus announcement.
The relevant information to the obliged entities will be provided with the applicable procedure by additionally providing a Responsible Declaration to confirm that the details of the Beneficial Beneficiaries are requested in the context of taking the due diligence measures.
Provided that, the obligation of companies and cooperatives to submit and update the data of the Beneficial Beneficiaries is not affected by the above and still exists.
Bearing that important point in mind, foundations additionally can be structured so that they are revocable or irrevocable. The status can be documented in the articles of incorporation as well as in the foundation charter. Be aware that a failure to make a clear distinction may result in the foundation being considered revocable since there is no evidence to the contrary.
The situation is the opposite when it comes to a trust. Like a foundation, a trust may be set up as revocable or irrevocable. In fact, you will have to declare which option you want when the trust is established. It’s not unusual for a trust to be considered irrevocable if it’s not expressly identified as revocable.
In Cyprus the Cyprus Securities and Exchange Commission (the ‘CySEC’) , established and maintains a Beneficial Ownership Register of Express Trusts and Similar Legal Arrangements (the ‘Register’), in which information regarding express trusts, similar legal arrangements and their beneficial owners is submitted.
To this end, the CySEC, according to the Directive for the Prevention and Suppression of Money Laundering Terrorist Financing (Beneficial Ownership Register of Express Trusts and Similar Legal Arrangements), has developed a System (CYPRUS TRUSTS BENEFICIAL OWNERS REGISTRY – ‘CyTBOR’) through which the Register is kept. In particular, through CyTBOR, registration, disclosure, management, keeping and updating of information on beneficial owners of Express Trusts and Similar Legal Arrangements as well as access to the Register is carried out.
This detail is necessary given that trusts, companies AND foundations have to a greater or lesser extent confidentiality of beneficial ownership as ONE of their underpinnings. Arguably trusts in the main, but foundations too and to a lesser extent companies. Cyprus is no different in that motivation.
Offshore foundations are not as widely understood or used as other offshore vehicles such as companies and trusts. This has allowed them to escape a lot of the scrutiny that these other vehicles have faced, and as such they have remained highly favourable offshore vehicles. They offer much of the same level of control and management capabilities as offshore companies with the asset protection benefits of offshore trusts.
An offshore foundation is a separate legal entity formed outside of the founder’s country or state of residence. The “founder” is the person who establishes the foundation. In most offshore jurisdictions, it is possible to have more than one founder.
In addition, a foundation includes some or all of the following parties/elements:
- Foundation Council: the council is made up of a group of people who are responsible for managing the foundation in accordance with its purpose as laid out in the charter. They perform actions such as distributing and administering the foundation’s assets, signing legal agreements, and making investments on behalf of the foundation. They have a legal duty to act in the best interest of the foundation.
- Beneficiary: A foundation may have a beneficiary or beneficiaries, but it is not compulsory. It depends on the specific purpose of the foundation. If the purpose is to benefit a specific individual/s, then the beneficiary is the person for whom the foundation is created to benefit (usually financially).
- Purpose: The purpose of the foundation is the reason or cause for which it was formed. We have discussed some of these purposes above. There is generally a good amount of flexibility in the allowable purposes of a foundation, but it must be such that it fulfils the criteria of a foundation under the laws of the jurisdiction in which it is formed.
- Guardians/protectors: Guardians or protectors are an optional position in a foundation. Their duty is to ensure that the council acts in accordance with the foundation’s charter.
How To Set Up An Offshore Foundation
A foundation is held together by a legally binding document known as the “charter”. The charter outlines the founder’s wishes for the foundation (i.e., its purpose and proposed activities).
It contains the following information:
- The name of the foundation.
- The foundations domicile (where it operates). This would usually be the same as the jurisdiction in which it is registered.
- The initial capital transferred to the foundation, which must meet a minimum threshold depending on the jurisdiction.
- The names and addresses of the members of the foundation council.
- The purpose of the foundation (i.e., its objectives), must be within allowable limits.
- The way in which the beneficiaries (if any) are determined.
- The duration of the foundation’s existence, which can be perpetual.
- The way in which the foundation’s assets are to be used and how it will be liquidated in the case of its dissolution.
Why a Foundation and not a Trust
There are also a few areas where foundations may be preferred over trusts. First, foundations provide an attractive alternative to trusts for wealthy individuals from civil law jurisdictions where the concept of a trust (the split of legal and beneficial ownership referred to above) is not familiar and indeed to many is uncomfortable.
Secondly, foundations are incorporated and have separate legal personality. Both the legal and beneficial title to foundation property is held by the foundation itself. This means that any beneficiaries of foundations do not have any interest in the foundation property. Also, as foundations have separate legal personality, they can enter into contracts with third parties themselves. This would be attractive to many considering developing business interests or acquiring assets, such as property, in Cyprus This differs from a trust which is not a separate legal entity and therefore it is the trustee of a trust rather than the trust itself which enters into contracts. Further, foundations are increasingly being used as philanthropic vehicles holding significant wealth that is then applied to philanthropic purposes. The fact that the foundation is incorporated often makes it a more attractive choice to a trust, particularly if the philanthropic activities are taking place in jurisdictions that do not recognize trusts. This is merely mentioned, as the focus here is on the foundation as a business tool.
Thirdly, the regulations can be drafted so that there is no requirement for beneficiaries of a foundation to be provided with any information about the foundation. This contrasts with a trust, where a beneficiary would ordinarily be entitled to certain basic information in relation to a trust.
Finally, a beneficiary under a foundation has no interest in the foundation’s assets and is also not owed fiduciary duties by the council of the foundation or the guardian of a foundation. This differs to a beneficiary of a trust who is owed fiduciary duties by its trustee. This can make a foundation an attractive vehicle to hold certain types of assets, such as those that are depreciating or high risk. Fiduciary duties are considered of a stricter and higher order than duties of parties to a foundation or indeed Directors and officers of a company. One would argue this is no succor to the qualified beneficiary of a foundation.
The Cyprus International Trust
The obvious question would be how Cyprus has addressed the issue, subconsciously or not, and does it obviate the need for a Foundation Law and system in Cyprus. The closest approximation Cyprus has is the Cyprus International Trust.
A Cyprus International Trust (CIT) is governed by the Cyprus International Trusts Law of 1992 (as amended) (“CIT Law”), which has undergone recent amendments in order to modernize the concept of trusts in Cyprus and attract a wider range of high net worth individuals. Trustees are required to be licensed in Cyprus to act as a trustee pursuant to the Law Regulating Companies
Providing Administrative Services and Related Matters of 2012 (as amended) (“ASP Law”). If the trust deed is stamped more than 30 days after the date of creation of the trust a late payment penalty is charged. The amount of the late payment depends on the length of the delay. – On 23 February 2021, Cyprus incorporated the provisions of the 5th Anti-Money Laundering EU into its domestic legislation. This was implemented by amending the Prevention and Suppression of Money Laundering and Terrorist Financing Law whereby it was resolved to create the register of beneficial owners of express trusts and similar legal arrangements, which will be administrated by the Cyprus Securities and Exchange Commission (“CySEC).
- Requirements: In order to qualify as a CIT the below statutory requirements must be met. – The settlor is not a permanent resident of Cyprus during the year preceding the year of establishment of the trust. – The beneficiaries are not permanent residents of Cyprus during the year preceding the year of establishment of the trust, but relocation to Cyprus the year after the establishment of the trust is permitted. – At least one trustee is a permanent resident of Cyprus. Registration – The details of the CIT and its beneficial owners and classes of beneficiaries are submitted to CySEC. However, this register is closed to all but government statutory authorities. – There is a one-off registration fee of €30 when the CIT is registered in the register of trusts maintained by CySEC.
- Benefits: Asset Protection A CIT may be used to protect assets and will not be void or voidable in the event of the settlor’s bankruptcy or liquidation. The CIT may be set aside by the settlor’s creditors if it is proven to the satisfaction of a Cyprus court that the CIT was made by the settlor with the intent to defraud his/her creditors.
- Preservation of Wealth: A CIT facilitates the long-term management and preservation of family wealth by ensuring a gradual distribution of income and capital to children and grandchildren by the trustees, without burdening the children with the responsibility of managing the family wealth themselves.
- Taxation: Income, gains and profits from non-Cyprus sources are exempt from income tax, capital gains tax, special defence contribution or any other taxes in Cyprus. Worldwide income, profit and gains are taxable in Cyprus only where the beneficiary is a Cyprus tax resident; beneficiaries who are non-residents of Cyprus are taxed only on Cyprus sourced income in accordance with Cyprus income tax laws. Dividends received by a CIT are not taxable and not subject to any withholding tax in Cyprus. – There is no estate duty or inheritance tax in Cyprus.
Assets can be added to the CIT at any time. The CIT’s assets are permanently separated from the settlor’s personally owned assets. The trust property can include Cyprus immovable property and all kinds of assets situated anywhere in the world. The CIT can be a shareholder in a Cyprus or foreign company. The Proper Law of the CIT is that of Cyprus. Any question regarding the validity or administration of a CIT is subject to the laws of Cyprus without reference to foreign legislation if the chosen law of the CIT is the law of Cyprus.
The CIT or the dispositions of trust assets may not be challenged on the grounds that they are conflicting with the laws of another jurisdiction, e.g., regarding family and succession issues, or on the grounds that the other jurisdiction does not recognise the concept of trusts if the chosen law of the CIT is the law of Cyprus.
- Reserved Powers: Certain powers can be reserved to the settlor, but the trustee’s legal discretion cannot be compromised.
- The Protector: A protector(s) may be appointed to oversee the activities of the trustees and to provide comfort to the settlor and/or the beneficiaries.
- Duration: There are no limitations on a CIT’s duration, apart from when the trust deed specifically provides to the contrary
- Cyprus Private Trust Companies: A Private Trust Company (PTC) is a private company with its sole purpose being to act as a trustee of a specific CIT or a group of related CITs. The trustee decisions of the CIT are made by the board of the PTC. – PTCs are attractive for high net worth individuals and families who want to retain control over the management of the trust, as the settlor can appoint his trusted advisors to the PTC Board. – The shares of a PTC do not have to be held by the client directly, but rather can be held via another corporate vehicle, such as a purpose trust. A Cyprus PTC is exempted from the requirement to hold a trust business licence. This exemption is built on the principle that the Cyprus PTC only provides trust services to the family trust and its related trust(s) and that it does not solicit trust business from, or provide trust services to, the public. – A PTC can still benefit from the trustee licence maintained by AGP Law by setting up a PTC as a subsidiary of AGP Law for each specific CIT.
Why a Foundation and Not a Cyprus Company?
As already stated there are numerous difficulties of Cyprus Companies Law, particularly given its historical nature, patchwork development and interaction with newer laws and the influence of EU membership. A few examples indicate why, even now, it would struggle where a foundation would not.
A prime example is a that approaching a partial division solely from a Companies Law perspective is to ignore the Income Tax Laws of Cyprus.. Often, companies that opt for partial division want to ensure that the re-organisation is tax cleared, a most natural consideration for any Board of Directors. This is possible due to an EU Directive , which was transposed into Cypriot law in 2007 by amendment of Section 30 of the Income Tax Law . This is where the whole partial division venture becomes conflicted.
The Companies Law’s adaptability to the corporate and business realities of splitting a company’s operations, personnel and functions to optimise its performance meets the Income Tax Law’s rigidity in safeguarding against re-organisations used as a means to evade tax obligations .
According to the Income Tax Law , a ‘partial division’ is a division in which a limited liability company, without being subject to a liquidation procedure or dissolution, transfers one or more business units to one or more existing or new limited liability companies, leaving at least one business unit in the transferring company. The shareholders of the company undergoing the partial division should, as consideration, receive newly issued shares in each receiving company in proportion to their shareholding. Consideration may also be paid in cash. Any cash paid cannot exceed 10% of the nominal value or, in the absence of a nominal value, the share of the paid-in-share capital in proportion to the issued shares.
There is also the minor issue of the requirement of substance as these impacts on relationships with non-Cypriot business partners and service providers, such as banks. Substance requirements are an issue that is often addressed with overseas clients as they are usually not based in the Republic of Cyprus.
Clients that wish to take full advantage of the benefits afforded to companies incorporated in Cyprus need to comply with the below requirements:
Management and decision making must be made in Cyprus;
- Have a local employee on payroll;
- Having an office in Cyprus;
- Having a local telephone line.
Therefore, it seems that the Cyprus International Trust can accomplish a great deal, but it is still not a comfortable trading structure, unlike a Foundation, which has enough of a corporate appearance to trade effectively. The Cyprus Companies legislation has clear issues that seem intractable without a fundamental overhaul.
The Cyprus Companies Law is an archaic and unappealing entity and has been based on the Companies Act of the UK of 1948. Modifications related to public companies and floatation have been tacked on as amendments, not just the difficulties briefly identified.
If the Cyprus Foundation does not accomplish the tasks that others appear to have achieved, in whatever format, particularly the UAE Foundation, serious consideration should be given to a NEW Companies Law, so that the legal essence remains but commercial reality is recognized and embraced.
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The information provided by A.G. Paphitis & Co. LLC is for general informational purposes only and should not be construed as professional or formal legal advice. You should not act or refrain from acting based on any information provided above without obtaining legal or other professional advice.