The Foundations (Guernsey) Law, 2012

Trusts & Trustees (2013) 19 (6): 591

1 July 2013

Trusts and Trustees > 2013 - Volume 19 > Issue 6, 1 July > Articles

Trusts and Trustees

Matthew Guthrie

Solicitor in England and Wales (non-practising), Senior Associate International Trust & Private Client Group, Mourant Ozannes, PO Box 186, 1 Le Marchant Street, St Peter Port, Guernsey, GY1 4HP. Tel: +44 1481 731 424; Fax: +44 1481 727 935; Email: matthew.guthrie@mourantozannes.com.

Matthew advises trust companies, international families and high net worth individuals on the Guernsey legal aspects of wealth structuring and asset protection through trusts, foundations and other vehicles.

Matthew also advises on all Guernsey law aspects of international pension schemes, employee benefit trusts and share option schemes for multi-national corporations.

Prior to joining Mourant Ozannes he was an associate in the Private Client department of a leading London law firm.

Matthew is a member of STEP and holds a degree in history from Cambridge University.

© Oxford University Press 2013

Abstract: The Foundations (Guernsey) Law, 2012 (the Law) came into force in Guernsey with effect from 8 January 2013 with the first Guernsey foundations being registered on 9 January 2013. This article will summarize the key provisions of the Law and will consider some of the unique features of Guernsey foundations.

Private Client

Introduction

When the 2012 edition of Private Foundations: A World Review was published, Guernsey was still in the process of preparing draft legislation to permit the incorporation of private foundations in Guernsey. This legislation was approved by the States of Guernsey on 25 July 2012, ratified by the Privy Council on 12 December 2012 and came into force on 8 January 2013.

What is a Guernsey foundation and how is one established?

Guernsey foundations have much in common with private foundations in other jurisdictions. They will principally be used as vehicles to hold private wealth, for philanthropic purposes and in certain fund and corporate structures where an ownerless entity is sometimes required. Guernsey foundations are incorporated bodies with separate legal personality and as such can sue and be sued in their own name. The property which is endowed on the foundation is vested in the name of the foundation itself. The constitution of a Guernsey foundation is divided between a charter and a set of rules. The charter is required to set out the foundation's purpose, its duration (if this is to be limited), and the initial endowment. The rules are required to detail how the foundation is to operate and to prescribe the functions of the foundation's council and the procedures for appointing and removing councillors and the guardian (if any). The rules will also often include provisions as to how the foundation's assets are to be applied, how meetings of the foundation's council are to be conducted, and details of the foundation's beneficiaries (and their respective rights and obligations).

A foundation is established by submitting the requisite details/documentation to the Registrar in Guernsey (in practice, the Registrar for companies in Guernsey as well) together with the payment of a fee of £100 and its existence is then evidenced by inclusion on the Register of Foundations. As at the end of January 2013, five foundations had been incorporated in Guernsey. The application to the Registrar must include a copy of the charter, the names and addresses of the first councillors, details of the resident agent and/or guardian (if either or both are to be appointed), and confirmation of the registered office in Guernsey. Details of the circumstances where a guardian and resident agent are required are considered further below.

While it is necessary for a copy of the charter to be submitted to the Registrar when a foundation is registered in Guernsey, the charter is not a matter of public record. The register of foundations is divided

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into Part A and Part B, with only the former being searchable by the public. Part A of the Register will include the name and registered number of the foundation, the name and addresses of the councillors and guardian (if any) and the foundation's registered office. Part B of the Register will include a statement of the purpose of the foundation together with copies of documents filed in relation to the foundation. There is no requirement for the foundation's rules to be registered with the Registrar.

The remainder of this article will consider some of the key features of the Law including the reservation of powers to the founder, beneficiaries' rights, the 'firewall' provisions, the migration and winding up of foundations and the regulatory and tax considerations.

Reserved powers

It is possible for a founder to reserve powers to himself when establishing a Guernsey foundation and thus to retain a degree of control over the foundation. There are, however, limitations on the ability to reserve certain fundamental powers, such as the right to amend, revoke or vary the constitution, the purpose of the foundation, or the right to terminate the foundation. Where the founder is a natural person, such powers can only be reserved during the founder's lifetime. Where the founder is not a natural person, there is a 50-year time limit on the reservation of such powers. However, as an alternative to reserving powers in his capacity as founder, it is possible for the founder to be the sole councillor of the foundation (or for a company owned by the founder to be the sole councillor) and to instead grant such powers to the council. This would, of course, entail a consideration of how such powers might be exercised by the council after the founder's death.

Beneficiaries and the role of the guardian

A Guernsey foundation can have beneficiaries or a purpose or both. Where there are no beneficiaries or the beneficiaries are 'disenfranchised', the foundation must have a 'guardian' whose duty is to enforce the constitution and purpose of the foundation. The concept of disenfranchised beneficiaries is considered further below.

The role of the guardian is analogous to that of an enforcer of a non-charitable purpose trust. The guardian's duties are owed to the founder and to the beneficiaries and he is required to act in good faith and en bon père de famille (akin to acting as a prudent man of business). This is a similar duty to that imposed on a trustee under the Trusts (Guernsey) Law, 2007 (the Trusts Law) and is well understood in Guernsey. It should be noted that it is not necessary to have a guardian where all of the beneficiaries of the foundation are enfranchised.

The provisions regarding the disclosure of information relating to a Guernsey foundation have much in common with the provisions included in the Trusts Law. As such, there is an obligation on the council at the written request of the guardian, any enfranchised beneficiary or (subject to the terms of the constitution) the founder to provide full and accurate information as to the state and amount of the foundation property within three months from the date of such request. Where a founder is restricted by the constitution from seeking such information, he may apply to the Royal Court for an order requiring disclosure. For the Royal Court to grant such an order it must be satisfied that the provision of the information is necessary or expedient for the proper disposal of a matter before the Court, for the protection of the interests of any beneficiary or for the proper administration or enforcement of the foundation. One of the key differences between the provisions in the Trusts Law and the Law is that it is now possible to have 'disenfranchised beneficiaries' in Guernsey. One of the reasons that the Law has been drafted in this way

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and why the Trusts Law has not is that a foundation's council owes its duty of care to the foundation itself and not to the beneficiaries. In contrast, the trustee of a trust owes his duties to the beneficiaries.

A disenfranchised beneficiary is defined as any beneficiary who is not entitled to the information about the foundation specified in section 32(1) of the Law, namely, copies of the constitution and the records and accounts of the foundation. If there are disenfranchised beneficiaries, this must be stated when applying for the foundation to be registered. As such, it is now possible in Guernsey to establish a structure where the beneficiaries do not have any rights to information or standing to apply to the Royal Court to enforce the terms of the foundation. It is permissible to draft the foundation's rules such that a beneficiary can become an enfranchised beneficiary or a disenfranchised beneficiary depending on the relevant circumstances. For instance, a founder may wish to prevent the beneficiaries from being able to obtain information about the foundation until they turn 30 years (and in the absence of such a mechanism, they would become entitled to the information at age 18 years). Alternatively, the mechanism might be used as a stick rather than a carrot and could provide for a beneficiary to become a disenfranchised beneficiary if convicted of a criminal offence. Enfranchised beneficiaries' rights extend beyond simply a right to information about the foundation and the right to apply to Court for directions. For instance, enfranchised beneficiaries have standing to object to the migration of a foundation out of Guernsey and to precipitate the winding up of the foundation.

Firewall provisions

The 'firewall' provisions in the Law have much in common with the equivalent provisions in the Trusts Law. In broad terms, the Law provides that all questions arising in relation to a Guernsey foundation or any disposition of property thereto are to be determined according to Guernsey law and without reference to the law of any other jurisdiction. It further provides that no endowment upon a Guernsey foundation is liable to be set aside because it defeats the rights of any person by reason of a personal relationship to a founder or any beneficiary or by way of foreign heirship rights. The equivalent provision in the Trusts Law is often cited as a key strength for Guernsey as a trust jurisdiction. Where a client is considering establishing a foundation due to concerns over forced heirship rights in the jurisdiction in which he is domiciled, utilizing a Guernsey foundation may be a solution.

Migration

It is possible to migrate a foundation to Guernsey and for a Guernsey foundation to be migrated to other jurisdictions. The pre-requisites for migrating a foundation to Guernsey are that migration is permitted under the law of the place it is currently established and that it is not subject to bankruptcy or other insolvency proceedings. It is then a case of submitting details of the foundation to the Registrar together with confirmation of its proposed registered office in Guernsey and the name by which it is to be known. The Registrar will require evidence that the migration of the foundation is permitted under the foreign law and this will typically be provided by way of a legal opinion (although the Law is not prescriptive in relation to this). For a migration of a foundation away from Guernsey, a similar procedure has to be followed. It should be noted that a foundation cannot be migrated out of Guernsey unless the foundation's constitution permits this and the foundation is not subject to bankruptcy or other insolvency proceedings. There are some additional requirements to be met where a foundation is leaving Guernsey and these include a requirement to give written notice to all creditors and all 'participants' (being the founder, any enfranchised beneficiaries and the guardian). The

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creditors and participants have the right to apply to the Royal Court to prevent the foundation from being migrated out of Guernsey if this would unfairly prejudice their position. It is anticipated that there may be some overseas foundations which look to migrate to Guernsey over time and in particular those where the administration is already carried out in part by a Guernsey fiduciary company.

Winding up

The Law contains detailed provisions about the winding up of Guernsey foundations. An application to wind up a Guernsey foundation can be made by the founder, a participant (being the guardian or an enfranchised beneficiary) or a creditor. For example, an enfranchised beneficiary might apply to the Royal Court for the foundation to be wound up on the grounds that the council has not administered the foundation in accordance with the requirements of the Law or on the grounds that the foundation was established by mistake. Where a foundation is wound up, its assets are distributed first to the liquidator in payment of his fees, then to any other creditors and finally in accordance with the terms of the constitution. As such, it is usually advisable to include a provision in the rules detailing how the foundation's assets should be applied in the event it is wound up. For instance, an ultimate default beneficiary might be named or alternatively the foundation's assets could be distributed equally among the surviving beneficiaries as at the date of liquidation.

Regulatory requirements

The provision of company and trust administration services in Guernsey is a regulated activity under The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 (as amended) (the Fiduciaries Law). The Law has extended the ambit of the Fiduciaries Law and acting as a foundation official (being a councillor or guardian) is now a regulated activity. As such, only licensed fiduciaries (or their employees) may act as a guardian or councillor from within Guernsey.

There is also a restriction so that only a Guernsey licensed fiduciary may apply to register a foundation. However, there is no requirement for a Guernsey foundation to have a Guernsey licensed fiduciary represented on the foundation council and if the councillors are resident outside of Guernsey, they will not be subject to the Fiduciaries Law. As such, where a founder wishes for the council to be made up exclusively of family members or where he wishes for the administration to take place in another jurisdiction (for instance, by his family office in his home jurisdiction), this can be achieved.

This differs from Jersey where a Jersey licensed fiduciary is required to be a member of the council of a Jersey foundation (referred to as a 'qualified member'). The rationale behind this requirement is to ensure compliance with Jersey's anti-money laundering regime. However, in the recent Jersey case of Dalemont v Senatorov [2012] JRC061A the inability of a qualified member, who was in a minority on the council, to obtain information about the foundation's assets was roundly criticized by Jersey's Deputy Bailiff.

Guernsey has taken a different approach to this issue. Where a Guernsey foundation does not have a licensed fiduciary as either a guardian or a councillor, the only additional Guernsey requirement is for there to be a resident agent appointed in Guernsey. The resident agent must be resident in Guernsey and be a Guernsey licensed fiduciary. The resident agent is entitled to request copies of the foundation's records

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and any other necessary documents from the council. Ultimately, if the requested documentation is not provided, the foundation can be struck off the Register. Copies of the foundation's records must also be maintained at the registered office in Guernsey by the council.

These safeguards have been built into the Law to enable Guernsey to continue to comply with its international obligations in relation to anti-money laundering and the prevention of terrorist financing. There is also a requirement for the councillors and any guardian to be a fit and proper person in order to hold such office (which is broadly the same as the requirement to hold the office of director of a Guernsey company).

Tax

One of the issues which frequently faces practitioners in common law jurisdictions is how foundations should be treated from a tax perspective and specifically whether they should be taxed as companies or as trusts. Indeed, this is often cited as a reason why practitioners are loathe to utilize foundations in structures which will have a UK connection. As at the date this article was submitted, the States have yet to formally confirm whether foundations in Guernsey will be taxed locally as companies or as trusts.

In Guernsey, where a trust has neither a settlor nor beneficiaries resident in Guernsey, it will not be subject to income tax in Guernsey unless it receives Guernsey source income (which excludes bank deposit interest). This is an extra statutory concession granted by the Director of Income Tax and this is the basis on which the vast majority of trusts with Guernsey resident trustees are taxed.

Companies incorporated in Guernsey are taxed under the so-called 'zero-ten' regime. Broadly speaking, companies which do not receive any Guernsey source income other than bank deposit interest (which is exempt) are subject to tax at 0 per cent. Certain businesses (such as banks) are themselves taxed at 10 per cent while rental income in respect of Guernsey real property is taxed at 20 per cent.

As such, regardless of whether or not foundations in Guernsey are taxed in the same manner as trusts or companies, they will almost certainly not be subject to income tax in Guernsey unless there is some other form of connection to Guernsey. However, whichever of these two routes is chosen may have an impact on the long-term prospects of Guernsey foundations as wealth management vehicles for families based outside of Guernsey. The reason for this is that Guernsey's zero-ten regime (and that of Jersey and the Isle of Man) has been the subject of a review by the EU Code of Conduct on Business Taxation in recent times. This led to all three jurisdictions repealing their deemed distribution provisions which operated to prevent local residents from reducing their income tax liability by retaining income within a company. In contrast, the tax treatment of trusts is outside of its ambit.

Conclusion

Guernsey foundations are likely to be employed in similar structures to foundations in other jurisdictions such as Jersey, Liechtenstein, and Panama. Foundations are often used as charitable vehicles, in private wealth management and asset protection structures and in corporate structures.

A foundation can be an alternative to using a company limited by guarantee as a charitable vehicle, an alternative to using a trust to hold family wealth and as an alternative to a purpose trust to create an orphan vehicle. It is anticipated that foundations will principally appeal to clients from a civil law background where the concept of a trust, and with it the separation of legal and beneficial ownership, is not well understood.

There is, of course, no case law in Guernsey yet in relation to foundations and it may well be some time before there is. However, as certain key provisions of

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the Law (such as the firewall provisions, enfranchised beneficiaries' rights to information and their right to apply to Court) borrow heavily from the Trusts Law, it is anticipated that Guernsey's body of trust case-law will be of assistance in interpreting the legislation and this should provide comfort to those looking to Guernsey as a jurisdiction for their foundation.

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