If you own a company or some other types of assets and you would like nobody to know about it, you can take several steps to protect your personal information. First, you can own the company via nominee shareholders or possess bearer shares. Second, you can create an offshore trust or a foundation.
The first two methods of protecting the confidentiality of company ownership have become inefficient over the last few decades. This has happened due to a massive and well-coordinated global campaign against offshores, money laundering, anonymity, and tax base erosion. Most countries of the world now exchange fiscal and financial information with each other.
Inefficiency of old methods of confidentiality protection
No offshore jurisdiction allows issuing bearer shares anymore. As far as nominee services are concerned, they are legal in many offshore jurisdictions but now nominees have to know the identities of company UBOs. In some countries, UBOs’ identities are also known to the company Registrar.
Besides, no offshore company can be registered without a registration agent. National legislations oblige the agent to know who the ultimate beneficial company owners are. If the agent does not identify the UBO, he or she will be breaking the law. Naturally, registration agents do not want to go to jail and they will refuse to provide services to an unidentifiable client.
It is true that in many offshore jurisdictions, the information about the company UBOs is available only to the registration agent and it is not available to the public. On the other hand, the information can become available to third parties on a court decision in any case.
If you want to transfer money abroad in order to hide it, you cannot do it. You will have to disclose your identity to the foreign bank because they will not open an account for you otherwise. Similarly, you cannot secretly own an offshore company these days. Bearer shares are disallowed and your identity will have to be known to the nominees and the registration agent.
Foreign trusts and foundations
Creating an offshore trust or a foundation is a legal method of distancing yourself from your assets. At the same time, you can keep benefiting from your assets via a foreign trust or a foundation. Besides, the information about the assets kept in trust is going to be unavailable to your competitors.
If properly structured, a trust or a foundation will make your assets safe from creditors too. Assets that you keep in a trust do not legally belong to you, which means that they cannot be taken away from you. This holds not only for your creditors but for fiscal authorities as well. You cannot be taxed on the assets that you do not possess. You are responsible only for declaring the benefits that you obtain from a trust (if you are a trust beneficiary) and paying taxes on them.
Admittedly, setting up an offshore trust of a foundation is more expensive than hiring nominees. But this instrument of protecting the confidentiality of your company ownership information is much more efficient.
What is a trust and how can you use it?
A trust has at least three parties. The Settlor is the person who puts property in trust. The Trustee is the person (often a legal firm) that manages the property for the benefit of the trust Beneficiaries. Many trusts also have a fourth partly, namely, a Protector who oversees the actions of the Trustee. By creating a trust, the Settlor legally separates him/ herself from their property. If he or she makes personal debts, the property cannot be expropriated from him/ her. At the same time, the Settlor can continue benefiting from the property kept in trust.
Trusts come in a number of different subtypes. For asset protection purposes, you will be well advised to create an irrevocable trust. If you create a revocable trust, the property will remain in your possession from the legal point of view so this is not an efficient asset protection instrument.
You can also create a discretionary or a fixed trust thus giving more or less freedom to the Trustee to distribute the profits generated by the trust to the Beneficiaries.
You can also create a purpose trust formulating its purpose narrowly (possess shares of company XYZ) or widely (preserve cultural heritage). Since a purpose trust does not have any beneficiaries, nobody can be sued and nobody can be taxed. This is a highly efficient asset protection instrument.
You have to be careful when setting up a trust, however, because if yours is deemed a sham trust, you will lose all the advantages that a trust brings. A court of law (and no other institution) can decide that a certain trust is a sham trust in the following cases:
- The Settlor did not have full rights for the property put in trust at the moment when the trust was created;
- The purpose of creating the trust was to deceive Settlor’s creditors. For instance, you make debts, put your property in a trust, and then claim that you have nothing that you could sell to pay back the debts. Your is going to be a sham trust;
- The trust is revocable. This is not exactly a sham trust it simply does not make much sense to create a revocable trust if your goal is to protect your assets;
- The Settlor controls the activities of the Trustee;
- The Trust Deed does not reflect the true purposes of the trust Settlor.
There have been precedents in different jurisdictions when trusts have been deemed sham. You have to seek professional support if you would like to set up a trust especially in a foreign country.
A private foundation
A trust is not a legal entity but a fiduciary agreement instead. A foundation is a legal entity with all the positive and negative consequences that this status entails. This is the main difference between a trust and a foundation: they are similar in many other respects.
A foundation has a Founder, a Foundation Council, and Beneficiaries. The Foundation Charter is a publicly accessible document while the Regulations are a private document governing the activities of the Council. Similarly to a trust, a foundation can have a Protector. Both trusts and foundations are used for asset protection, tax planning, and inheritance purposes.
If you are thinking of setting up a foreign foundation, you can consider Liechtenstein and the Netherlands for this purpose. However, a foundation will come at a considerably lower price if you create it in Panama or Nevis. Nevis and the Cook Islands are also recommendable for creating trusts there.
