Asset protection through a private foundation in Curaçao

PUBLICATIONS / Articles / 2012 / Asset protection through a private foundation in Curaçao
Free Spirit Magazine, September 2012 – Even as a keen follower of world developments you would be forgiven for not noticing the break-up of a country called the Netherlands Antilles in 2010. Maybe it was because the break-up didn’t involve much fighting, except maybe in its former parliament.

The Netherlands Antilles consisted of five Caribbean Islands. Three of those islands became separate municipalities of the Netherlands, albeit with more autonomy than municipalities in the Netherlands proper. The other two islands became countries within the Kingdom of the Netherlands. Much like the arrangement between the UK and its British Overseas Territories the Netherlands is responsible for foreign affairs and defence and the highest court of appeal resides in the Netherlands. Aside from the governor which is appointed by the government of the Netherlands these countries have a locally elected government and enjoy autonomy in most areas. Interestingly, as part of a deal in which the Netherlands took over the government issued debt of the Netherlands Antilles the new countries now no longer have the authority to issue debt. They are not part of the European Union.

Curaçao is one of these two new countries. It used to be the seat of the government of the Netherlands Antilles and the main centre of its economic activities. The Netherlands Antilles is the first offshore financial centre. Its offshore industry was kick-started during the Second World War to fill a need for managing the non-Dutch assets of residents of the occupied Netherlands. In 1998 it introduced a Private Foundation regime as an alternative to the regimes offered by Liechtenstein and Panama. A Private Foundation is a legal person. Like a private limited company it has a board, but unlike a company it cannot carry on a business and doesn’t have shareholders. Instead the board can make distributions to individuals, other legal entities or charitable causes according to rules set by the Founder. Those rules can be extensive or kept to a minimum. A supervisory committee and or a protector can be appointed to restrict the powers of the board and to keep oversight.

A Private Foundation, or “Stichting Particulier Fonds” (SPF) in Dutch, is typically set up for the same reasons as a trust: to hold investments for the benefit of beneficiaries for asset protection and estate planning reasons. By transferring assets to a foundation these assets will be beyond the reach of the creditors of the person who transferred these assets (“the settlor”). This holds true as long as the transfers were not made in order to defraud creditors. Also the assets will be outside of his estate upon his death, avoiding forced heirship provisions and otherwise possibly lengthy probate in particular when the assets are located in different countries. A Private Foundation is often the preferred instrument over a trust for those residing in civil law countries or with assets in civil law countries. This might be for several reasons.

Whereas foundations are legal persons, trusts are legal instruments. Civil law jurisdictions often do not recognise assets transferred to a trust as being legally separate from those of the settlor of the trust and those that do (because they are signatories to the Hague Trust Convention) often require a substantial connection with a common law jurisdiction to be shown in order for it to be valid.

Whether a trust is valid, depends on many factors. A trust needs to be validly constituted, otherwise it could be considered a sham trust, and rendered void. This problem often happens when the settlor retains too much control. This problem doesn’t arise with a SPF. The fact that it was allowed to be incorporated means that it has been done so validly.

Those with civil law backgrounds will appreciate the security provided by the fact that the foundation is established by notarial deed.

It is the flexibility that the SPF offers compared to a trust that makes it attractive as well. The founder can retain rights, eg. to approve of distributions to beneficiaries, appointments to the board or to the supervisory committee. The supervisory committee itself is optional as is the appointment of a protector. The role of the protector is that of trusted person, normally he is given the right to veto certain important decisions of the board and to fill vacancies in the board or supervisory committee. The settlor can be the only beneficiary of the SPF, and there is no requirement for the SPF even to have beneficiaries. The settlor can in principle be the protector, a member of the supervisory committee, or even a member of the board. For settlors resident in countries with taxation this it is often not a good idea to retain too much control, at least not by being a member of one of the formal organs of the SPF, but for those residing the UAE there are no such considerations of course, so a settlor could retain total control by being the sole member of the board of the SPF while the assets of the SPF are not his any longer.

What makes Curaçao attractive as a location to form a foundation is that it is a reputable jurisdiction which benefits from efficient and clear administrative practices instituted by the Dutch. The SPF needs to prepare financial statements annually, although there is no requirement to file them with the Commercial Register. The information on public record can be kept to a minimum. The notarial deed is on public record but it need not mention the protector, beneficiaries or supervisory board. All these matters as well as the governance structure can be set out in the Regulation of the Foundation which are not on public record. Curaçao has impartial and effective courts, where board members of a SPF can be effectively held to account. Not an unimportant consideration when setting up a legal entity that could potentially serve its purpose for many generations.

The Netherlands Antilles and now Curaçao distinguishes itself from the typical Caribbean zero-tax haven in that is does impose taxes. The reason is that in certain tax planning contexts it is necessary to prevent anti-avoidance legislation of high tax countries kicking in. The trick is to either impose minimal taxation, as it does for e-commerce companies that set up in its e-zones at a profit tax rate of 2%, or to impose nominal taxation: i.e. to only impose tax in principle but not in practice in most cases relevant to offshore investors. An example of the latter is the corporation tax of 27.5% it levies on the profits of companies, while allowing for a 100% participation exemption, which means that capital gains or dividends received from subsidiaries are not taxable (with some exceptions), and not imposing any withholding taxes on outgoing payments.

The SPF is by default not taxed in Curaçao. Curaçao inherited the legislation of the Netherlands Antilles but used its increased autonomy to enhance its attractiveness as an offshore financial centre. In particular it amended its law governing SPF’s to allow a SPF to choose whether to be taxed at a rate of 10% on an annual basis. This is a very ingenious regime because for some calendar years the overall tax burden could be reduced by choosing to be taxed in Curaçao while in other years it might be preferable not to be taxed in Curaçao. Ten percent profit tax is often the magical level of minimum taxation required before anti-avoidance legislation kicks in. So a beneficiary of a SPF resident in a high tax country might be taxed on undistributed income of a SPF unless the SPF itself is taxed. However when this person moves to another country without such taxation it would be beneficial to choose the no-tax option instead.

This flexibility sets the SPF apart from regimes offered by other countries offering private foundations and makes it extremely flexible to adjust to the circumstances and to deal with future developments in international tax planning, seeing an increasing number of countries resorting to aggressive anti-avoidance legislation.

Keeping in mind that a private foundation in particular is an entity that could exist for many generations it is of prime importance that it can deal with future changes and that it is formed in the jurisdiction is reliable and stable. Forming a SPF meets both requirements.

Adriaan Struijk, MSc, TEP, Freemont Group, managing director

This article featured in Free Spirit Magazin, September 2012.

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