ABOUT THE AUTHOR: Phillip Dearden is a Director of
West Corporation Limited
A number of developments have taken place in the Isle of Man in
recent months. This article looks at three of these: Isle of Man
foundations, the EU Savings Directive notice, and recent
tax-information exchange agreements.
Foundations set to become a reality
The Foundations Bill 2010 has been passed by the Isle
of Man parliament and is due to become law shortly. This will
create a new legal entity, the Isle of Man foundation.
Among other things, this is designed to appeal to clients and
practitioners in civil-law jurisdictions.
The Foundations Bill will create a new vehicle that
will have some traits familiar to trust lawyers in common-law
jurisdictions, while also being, in some ways, similar to a
civil-law foundation or a company. One specific market that may
benefit from the use of Isle of Man foundations is the charitable
or philanthropic market.
The Isle of Man foundation will be a separate legal entity and
will have the ability to manage and own assets in its name and
arrange for its own funding.
Parties
The parties involved in an Isle of Man foundation include:
- a ‘founder’ – similar to a settlor of a trust
- an ‘object’ – the purpose of the foundation, which may be
charitable or non-charitable, and may simply be to benefit a person
or class of persons
- a ‘beneficiary’ – a person or class who may be permitted to
benefit under the objects
- a ‘foundation council’ – similar to a board of directors, or
trustees in a trust. Council members are bound to act within the
scope of the foundation rules and have explicit responsibilities
and exposure to liability if they engage in misconduct
- a ‘registered agent’ – who must be a licence holder in the Isle
of Man under the Financial Services Act 2008
- an ‘enforcer’ – the instruments may or may not require the
foundation to have an enforcer (which may be a company), to whom
the council is accountable
- ‘foundation rules’ – the rules governing the foundation,
including the procedures for appointing, removing and remunerating
council members and the registered agent. The rules are not public
documents;
- ‘foundation instrument’ – the document submitted by the
registered agent on behalf of the founder, which records the name
of the foundation, the object(s), who the registered agent is and
who the council members are. This is a public document.
Features
Foundations have characteristics that are similar to a
traditional trust arrangement, but also have some traits seen more
commonly in companies.
An Isle of Man foundation will be a separate legal person in its
own right, as opposed to a trust, which is a legal relationship
between trustees and settlor/beneficiaries. Assets held by a
foundation will be held in its own name; a foundation could trade
and arrange for finance in its own right.
A foundation is similar to a company in that it carries limited
liability. There are proposals to extend the perpetuity period of
Isle of Man trusts. Unlike a trust formed in the Isle of Man, a
foundation can run in perpetuity.
The creation of a foundation will be on public record and
details, such as the foundation’s name and the council members’
names and addresses, will be available for public scrutiny. This is
contrary to a trust arrangement, which is a private
relationship.
Nonetheless, not all of the foundation’s records are available
for public examination. The foundation rules, which govern how the
foundation is run (and thus fulfil a similar purpose to a trust
deed), are not a public document.
Foundation beneficiaries have no legal automatic right to
foundation income, whereas they can have rights and expectations
within trusts.
It is expected that a foundation beneficiary’s right to
information could be wider than the rights available to a trust
beneficiary. Clause 31 of the Foundation Bill 2010
suggests that upon written request by a ‘person with sufficient
interest’, a foundation must provide full and accurate information
about various functions, including the assets of the foundation,
the financial statements and the foundation’s administration.
Unlike trusts, an Isle of Man foundation will be required to
have a licensed Registered Agent on the Isle of Man and to be able
to prepare financial statements, should the request arise, along
the lines of an Isle of Man company.
Differences
The Isle of Man foundation will be similar to those created in
other jurisdictions, but will have a few distinctions.
Some jurisdictions, such as Jersey, require council members to
be recognised licence holders, whereas the council members
appointed within an Isle of Man foundation do not need to hold a
foundation licence, although a Manx foundation does require that an
Isle of Man licensed registered agent be appointed.
Unlike some jurisdictions in which there is foundation
legislation, there is no requirement for an Isle of Man foundation
to have an enforcer; it is an option.
The foundation instrument, which is a public record, must be
written in English. Although there is no requirement for the
foundation rules to be written in English, an English translation
should be available.
Taxation
The general company tax regulations will apply to foundations,
so they will incur no income tax on profits other than those
generated by the exploitation of Isle of Man land, which is taxed
at ten per cent.
Purpose
The purpose of the new vehicle is to offer a framework suitable
for civil-law jurisdictions. Foundations may be used for charitable
or non-charitable purposes and can offer an attractive asset
management structure when combined with the existing high levels of
corporate services available on the island.
EUSD
Although the Isle of Man is not part of the European Union, it
voluntarily agreed to introduce measures similar to the EU
Savings Directive (EUSD) with effect from 1 July 2005.
In June 2009, the Isle of Man government announced its intention
to move to automatic exchange of information for accounts held in
the Isle of Man where the beneficial owner is resident in the
EU.
This policy came into effect from 1 July 2011 and thereafter
there is no option for EU-resident account holders to opt for tax
retention rather than information exchange.
The responsibility for reporting the information rests with the
paying agent, who is a person, usually a bank, established in the
Isle of Man, who makes the payment of interest in the course of
their normal business.
TIEAs
The Isle of Man government has been at the forefront of
negotiating, concluding and implementing Tax Information Exchange
Agreements (TIEAs) in recent years.
A TIEA is not a document allowing two jurisdictions to freely
exchange tax information. Instead, TIEAs determine the procedure to
follow when requesting information from another jurisdiction. An
authority should ensure that the request is made for valid
purposes. The procedures dictated by a TIEA should ensure that the
tax authority receiving an information request makes sure the
requesting authority has done its best to obtain the information in
its own country, so that use of a TIEA is only ever a last
resort.
A TIEA should include some latitude for a recipient authority to
decline a request if it believes that the requesting authority has
not exhausted all information-gathering avenues in its own
jurisdiction, if the request does not adhere to the specific TIEA
procedures, or if the request is too general in nature.
TIEAs are usually based upon the model developed by the OECD. A
lack of tax information exchange was one of the criteria
highlighted by the OECD when determining harmful tax practices and
a factor for a jurisdiction becoming ‘blacklisted’.
The OECD and G20 suggested that there should be a requirement
for countries to enter into at least 12 effective TIEAs with OECD
members to be thought of as cooperating in matters of tax
transparency.
In recent months, the Isle of Man has signed TIEAs with Mexico,
Japan, Indonesia, Poland and Slovenia. This brings the total to
date to 24 signed TIEAs: 16 in full operation and eight signed but
awaiting ratification by their respective parliaments.