Preservation and management of assets. DLL Top Consulting

[/eng/] About Subscription Home › Activities › Preservation and management of assets Preservation and management of assets Simple non-resident holding companies are not always an effective and reliable instrument for preservation of assets. It is especially true when it comes to corporate conflicts, non-amicable acquisitions, title challenging, and hereditary portion issues. In such cases it is worthwhile using structures for trusts and special finds that have been developed with due account to individual objectives against specific risks for preservation of assets and control. Trusts Trust is one of the most sophisticated and unique legal instruments of management. Some important corporate planning instruments and many financial services are based on trusts. Trust may take up the functions of a shareholder in holding structures. According to a trust agreement, one person – settlor — releases some property or right to another person – trustee — and entrusts the latter with responsibility to administer such property on his behalf as an independent owner for the benefit of third parties – or beneficiaries. Trustee may be presented by a private trust company incorporated specifically for the purposes of management of the trust in the country of trust establishment, or by a professional trust company accredited by the client. Along with that, supplementary conditions with regard to form and methods of control over trustee’s activities, mode of remuneration, terms of trust existence, etc. may be specified. Major advantages of trusts: At proper planning trust may protect conveyed property from enforcement of civil or correctional penalty upon it Trust allows for making out a legal scheme of control over assets under condition of confidentiality Assets of trust in many jurisdictions are exempt from local taxes Assets are released under professional administration, which may enhance efficiency of their use Trust provides for more flexibility and privacy than devise, and allows retaining control over assets and ensures their succession to the specified persons in the event of death or incapability. Based on the terms of transfer of assets, trustee’s authorities, and settlors’ residence, stipulated in the trust deed, trusts are divided into the following groups: discretionary and fixed, revocable and irrevocable, international and national. Discretionary trust is the most popular one; it implies by definition that the trustee is empowered to dispose of trust assets at his/her discretion, and to decide upon the time, beneficiary and proportion in which the trust funds shall be paid, or not paid. Extent of such discretion is determined by a Letter of wishes that the settlor presents to the trustee at establishment of trust. In such Letter of wishes the settlor expresses his wishes with regard to procedure of trust assets disposal and appoints beneficiaries. Key factors in selection of jurisdiction for establishment of trust: Existence of elaborated legal base for trust operation Requirements to registration of trust Cost of trust registration and maintenance Presence of accountable and professional trustee Geographical/transport/visa accessibility Risk of acknowledgement of foreign legal opinions and extent of cooperation with foreign regulatory authorities Tax advantages. Cyprus, Great Britain, British Virgin Islands, and New Zealand are the most popular jurisdictions in terms of trust establishment. Foundations Major advantages of foundations Structure: foreign foundations allow for placement of investments in Russia and Ukraine as foreign investments, foundation is a more effective structure for investment activities as compared to holdings, foundations allow to structure relations between a manager and investors (management fee, carried interest), foundation makes it possible to define limited liability for investors Taxes: foundations are exempt from capital gain tax (profit tax), dividends and interests paid by the foundation are either liable to reduced or fixed taxes or exempt from taxes entirely, foundations are exempt from legacy taxes Preservation of assets: foundation places property in the fund beyond the reach of creditors, and government and legal authorities, foundation provides for legal remoteness from property along with necessary level of control and supervision. Funds’ names may differ according to certain jurisdiction. So, there are collective investment funds on Jersey, mutual funds on British Virgin Islands and Cayman Islands, collective investment schemes on Bermuda Islands, and investment companies on Mauritius. Private foundations are of particular interest. They are established by an already known set of people to serve their financial and other interests. Minimum requirements are imposed on such foundations. For instance, a private foundation is not required to make out and present an issue prospectus. If third parties’ funds are expected to be employed, most offshore jurisdictions offer establishment of public foundations. In terms of licensing foundations may be divided into those that need to get licenses, and those for which it is not obligatory. In the latter case incorporation procedure boils down to registration of a company, but scope of activities and investor base is heavily restricted for such funds. Management schemes Private scheme – when an owner does not want third parties to be aware of who is the actual owner of fund’s assets, but wants them to honestly believe that assets belong to the fund itself, or, at least, be unable to prove otherwise, and find out legal interconnection between property and beneficiary. Public scheme – when beneficiary is nor afraid to own and dispose of the property openly. In such case, all rights, responsibilities and obligations are determined as required by the fund’s charter and effective legislation of country of incorporation. Investor may buy and pay off fund’s shares without restraint. Meanwhile, investor gains his income as a difference between selling and acquisition value of shares. Nevertheless, taking into account an objective to create a direct investments fund, it should be noted that a private scheme is generally used when making investments into liquid assets (e.g., securities). Legal forms In jurisdictions of common law these are usually represented by a company, or a unit trust, or a limited partnership. The prevailing type of an offshore investment fund is a company, i.e. a limited liability legal entity established in accordance with applicable legislation. Besides that, several years ago some countries developed and adopted a special law with regard to companies that are designed particularly for operation as investment funds. They are called segregated accounts companies, protected cell companies, and Segregated Portfolio Companies. Essence of this law is that a company is divided into several individual “cells”, each having limited liability. This allows for making investments into various kinds of assets within one company; besides, investors into one type of assets have protection against risks on other types. Sometimes, establishment of Umbrella Funds is worthwhile. Peculiarity of such fund consists in establishment by fund initiator of a number of subsidiaries that invest in different market sectors, or employ different types of investments. Advantage of such structure is that an umbrella fund being, in fact, a parent company, without any special financial or administrative difficulties involves subsidiaries where investors may (at a nominal tax rate) restructure their investment portfolios, persisting under protection of the umbrella fund, conduct a quick and economically beneficial redirection of funds into one or another industrial sector in order to increase their profits and minimize risks. Criteria that one shall bear in mind when selecting a country for fund incorporation: Requirements to licensing Whether there is an intent to obtain complete privacy of investments Whether there will be any funds raised from third parties unknown in advance Whether there is a double taxation treaty with the countries in whose companies you intend to invest Whether the issue of company’s goodwill and having image of an “offshore” company is of any relevance What documents from the country of incorporation may be needed in the investee’s country Whether it will be necessary to substantiate the fact that the fund pays taxes in, and is a tax resident of, the country of incorporation. 2004—2007 DLL Top Consulting Created at Dmytro Babych Studio