Offshore Foundation: Benefits and How to Setup?
- Last updated on . Written by Offshore Protection.
An offshore foundation may be the perfect legal vehicle to help ensure that your assets are protected and your taxes minimised. It can also be used for various purposes in the areas of estate planning, asset protection, and wealth preservation.
In this article, we outline what exactly an offshore foundation is, its various uses, its general structure, and the best places to establish one.
Table of Contents:
- What Is An Offshore Foundation?
- Top Uses Of An Offshore Foundation
- Types Of Offshore Foundations
- Structure Of An Offshore Foundation
- How To Set Up An Offshore Foundation
- Where To Set Up An Offshore Foundation
What Is an Offshore Foundation?
A foundation is a stand-alone legal entity that is used to hold, protect, and distribute assets in the form of grants.
A foundation (aka “private foundation” or “private interest foundation”) has its background in civil law, although foundation laws have recently been added to some common law offshore jurisdictions. It is a special type of tax-exempt organisation that does not operate as a stand-alone public charity, but instead makes donations to other charities or causes. These donations are called “grants”.
A foundation is allowed to make grants for the following purposes:
- To fund an organisation’s general operating expenses
- To fund a specific program that an organisation is running
- To individuals, provided they follow the IRS rules for a tax-exempt foundation
A foundation does not have members or shareholders, but is created by a single founder and acts in accordance with his/her wishes as outlined in the foundation’s charter. Due to the wide flexibility of foundations, they have been used effectively for various purposes, including asset protection, estate planning, and tax optimisation.
An offshore foundation is simply a foundation that is formed in a jurisdiction other than the founder’s residence. Offshore foundations may have additional advantages and tax exemptions provided they do not conduct any financial activities within the jurisdiction that they are formed. They are usually registered in favourable tax havens and international financial centres.
Top Uses of an Offshore Foundation
Offshore foundations can be used for the following purposes:
- Asset and wealth protection: Foundations are separate legal entities with similar asset protection mechanisms to asset protection trusts. Offshore foundations in jurisdictions like Cook Islands offer the utmost in asset protection.
- Estate planning: Foundations can be formed to bring benefit to a specific beneficiary / beneficiaries. They are therefore useful as vehicles to transfer estates, as they remove lengthy probate procedures, eliminate/reduce inheritance tax, and enable the founder to avoid forced heirship rules.
- Tax reduction: Foundations are tax exempt entities and therefore enjoy various tax breaks and deductions. They can be used as part of a wholistic wealth management plan to significantly reduce taxes.
- Charitable purposes: one of the traditional uses of a foundation is to fund charities and charitable causes by means of grants in accordance with the founder’s wishes. Such activities would be tax deductible.
- Preserving family legacies: Foundations can be used to preserve familial wealth and legacies for generations, as they continue in perpetuity even after the founder dies.
- As holding entities: Foundations are useful as holding entities for a variety of asset classes and secondary entities. They can be used to hold valuable collectibles such as art, watches, etc., as land holding entities, or even as a holding vehicle for a company or corporation. While foundations cannot engage in commercial business activities directly, they are allowed to own secondary corporate entities that engage in business.
- Supporting private causes: Foundations can be used to fund specific private causes and purposes, such as funding a society or club, a non-commercial project, sports team, etc.
Types of Offshore Foundations
There are numerous different types of foundations. Which of these distinct types may be formed in a particular country or state depends on the specific foundations law in that jurisdiction. We will not go into detail about each of the types of foundations available, but simply list them here for you to do further research if you so choose:
- Private interest foundations
- Public foundations
- Corporate foundations
- Charitable foundations
- Family foundations
- Community foundations
- Special purpose foundations
These categories are quite broad, and the way in which foundations function as well as their allowable activities, qualifying criteria and so forth depends greatly upon the jurisdiction in which they are set up.
For that reason, offshore foundations are known more distinctly by the country in which they are formed than by their so-called type. For example, we usually just refer to a “Cook Islands Foundation” or a “Panama Foundation”.
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.
Structure of an Offshore Foundation
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 counsel 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), which 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.
Where to Set Up an Offshore Foundation
There are several offshore jurisdictions where one can establish a foundation for optimal tax savings and asset protection. The most popular of these are:
Cook Islands foundations provide unparalleled asset protection and privacy, and do not recognise court orders made outside the Cook Islands’ legal system.
They also have a short statute of limitation of only two years.
Belize foundations offer excellent tax savings and asset protection.
They can be formed for either charitable or non-charitable purposes. They must have a registered agent in Belize.
Nevis offers various types and forms of foundations to suit any individual’s needs. These include an ordinary foundation, trust foundation, company foundation, or partnership foundation.
Nevis is yet another Caribbean jurisdiction known for its low taxes, financial privacy, and strong asset protection laws.
Panama foundations are popular holding vehicles for shares and interests in companies, to hold other assets, or to invest in various financial instruments. They offer good privacy in that there is no requirement to submit accounting or be subjected to audits.
A Panama foundation requires a minimum of three members on its council and a starting capital of at least US$10,000.
Offshore foundations are incredibly useful and versatile financial vehicles which are often overlooked and underutilised. They provide the same flexibility and control as offshore companies while enjoying stronger asset protection and favourable tax exemptions.
Understanding how, when, and where to use an offshore foundation for your financial needs can help you establish the optimal offshore financial plan. Consulting with an expert in offshore finance such as an asset protection attorney can help you set up the best type of foundation in the right jurisdiction to suit your specific circumstances.