Foundations were first created in Liechtenstein and then adopted in other civil law jurisdictions once their effectiveness and value as asset protection mechanisms had been acknowledged. The increase use of the foundation led to its formation by individuals and corporations from far and wide who were unable to register foundations in their own countries due to the absence of legislation. As a result of this, the use of the foundation extended globally, transforming the foundation into offshore entity.
In common law jurisdictions the offshore trust resembles the offshore foundation in many ways leading many people to believe that offshore foundations and trusts are the same entities, with the exception that foundations are characteristic of civil law jurisdictions and trusts, common law countries. If you decide to use foundation or offshore trust we recommend to combine this asset protection and tax planning vehicle with citizenship through investment. However, the differences that exist between offshore foundations and offshore trusts have given rise to the conclusion by many that offshore foundations are much more effective for asset management and tax planning than the offshore trust. It is on this basis that many common law jurisdictions have legislated offshore foundation acts to enable individuals and corporations to protect their assets using the offshore foundation as an alternative to the offshore trust; Anguilla, St. Kitts and Nevis, the Bahamas and Panama are some of these territories. Though offshore foundations possess the same basic elements, jurisdictions have legislated varying features that help strengthen the ability of their offshore foundations to protect assets as well as their level of competiveness internationally.
The basic elements of an offshore foundation include the charter, protector, council, beneficiary and founder. The charter of an offshore foundation contains the rules and regulations governing the administration of the foundation. The charter is similar to the Deed of a trust and may at times be referred to as the Letter of Wishes depending on the jurisdiction. The offshore foundation is controlled by the protector which is most jurisdictions is legally capable of being a natural person or a body corporation. The offshore foundation’s council has the responsibility of administering the foundation’s assets, while the beneficiary is the person or corporation that inherits the assets. Offshore foundations are created by the founder.
In spite of having these components, offshore foundations do not have owners, which means that their assets cannot be claimed and can only be ceded, transferred or distributed to the beneficiaries pursuant to the provisions of the charter. Additionally, assets of an offshore foundation can be invested but must be replaced thereafter along with the returns earned from the investments, as any investment made on behalf using the assets of the offshore foundation must be in the interest of the foundation. These two components of the offshore foundation result in this entity being viewed as a more effective means of tax planning, safeguarding and accumulating wealth than the offshore trust. Offshore bank accounts can also be opened in name of the offshore foundation, where transfers, payments and financial transactions are done by the foundation. This feature is particularly beneficial for corporations or corporation personnel who may have interests in other corporations and may not want their real identity exposed when transacting.
In order to legally avoid transfer tax on property of an offshore foundation, a transfer can be made from the current beneficial owner to the new. This transfer does not constitute a sale, since the property is converted into an inheritance and remains owned by the offshore foundation still preventing claims from being made by any one. To couple this, offshore foundations are tax free entities and therefore enhance tax deferral possibilities. Hence, if cash was placed in the offshore foundation and investments were made and duly reinvested in the foundation, then the chances of accumulating wealth would grow whilst tax could be deferred until maybe retirement or after a specific period of time when taxes would become due if the inheritor were to obtain or pay himself a regular income from that cash. Because of these qualities many families and organisations have found the offshore foundation an ideal alternative to a will or a trust for success and estate planning.