Foundations: the Next Step in Wealth Protection

Seychelles has grown substantially as an international financial centre since the enactment of the International Business Companies Act 1994. Located in the northern Indian Ocean (GMT+4), Seychelles is an independent country within the Commonwealth, having gained independence from Great Britain in 1976. The tax-exempt IBC (a company incorporated under the International Business Companies Act 1994) has been a star performer for Seychelles, as demonstrated by ever-growing registration numbers over the last decade, including 13,751 new IBC incorporations in 2008 alone. Seychelles now has approximately 60 licensed international corporate service providers.

The success of the IBC, along with Seychelles’ increased offshore financial services business volumes, know-how and global profile, have combined to enable Seychelles to steadily develop more value-added areas of offshore business. Unlike many ‘IBC jurisdictions’, Seychelles has developed a growing network of double taxation agreements (DTAs), which may be accessed by Seychelles tax resident companies. For example, Seychelles CSLs (companies incorporated under the Companies Act 1972 and issued with a special licence under the Companies (Special Licences) Act 2003), are regularly used to hold investments in China and Indonesia, in view of favourable Chinese and Indonesian tax relief afforded to Seychelles companies under its respective DTAs with these countries. Seychelles is also steadily building value-added business in the areas of trusts, limited partnerships and mutual fund structures.

The focus of this article, however, is on Seychelles’ newest financial services product – the foundation. The Seychelles Foundation Bill 2009 (the Act) has recently been published, and it is anticipated that the law will be enacted into force by November 2009.

Foundations have existed in parts of Europe since the Middle Ages, when they were originally only used for charitable or religious purposes. In modern times, foundations have increasingly been used for wealth management purposes, as pioneered in civil law jurisdictions such as Liechtenstein, Austria and Panama. Over the last five years, a number of common law jurisdictions have introduced foundation legislation, and the popularity of foundations continues to grow.

In contrast to a trust, which may only operate and own property through a trustee, a foundation is a separate legal entity (as is, for example, a company). Once the founder of a foundation transfers assets to the foundation, those assets become the sole property of the foundation. Unlike the beneficiaries of a trust who have an equitable interest in trust assets, the beneficiaries of a foundation have no equitable interest in foundation assets. As neither the founder nor beneficiaries of a foundation have any ownership interest in foundation assets and as management and control of a foundation is typically with the foundation’s council (which may be located in a low tax or nil tax jurisdiction), a foundation is a highly useful entity for tax planning, asset protection, wealth management and ‘outside estate’ succession planning.

A Seychelles foundation is established by a written charter signed by one or more founders and on the issuance of a certificate of registration by the Registrar (the Seychelles International Business Authority) upon registration of the foundation under the Act. The sole document to be filed when applying for registration of a new Seychelles foundation is the foundation’s charter. A registration fee of USD200 is payable to the Registrar. An annual renewal fee of USD200 is due on the day before the foundation’s registration anniversary date.

A Seychelles foundation’s charter must state, inter alia, the name of the foundation, the name and address of the founder or founders, the initial asset endowment of the foundation, the objects of the foundation and particulars of the foundation’s registered agent and registered office in Seychelles. The names of the beneficiaries of the foundation are not required to be stated in the charter. Unlike other foundation jurisdictions, it is not mandatory for the names of the councillors of the foundation to be stated in the Seychelles foundation charter. This ensures a measure of privacy that other jurisdictions can not offer given that the charter is publicly accessible by search of the Registry.

Under the Act, the founder is the individual or corporate entity who subscribes their name to the charter establishing a Seychelles foundation acting either for themselves or on behalf of another and who endows that foundation with its initial assets. The broad definition allows for nominee founders.

A founder may reserve, in the foundation charter or regulations, to themselves or for other persons, various rights, including the right to approve investment activities of a foundation and the right to appoint or remove councillors, protectors or beneficiaries. A founder may be a foundation beneficiary but not the sole beneficiary. The founder of a Seychelles foundation may assign or transfer all or any part of their rights, powers and obligations as founder to such person or persons as the founder may determine.

While a foundation must have a charter, it may or may not choose to adopt regulations. However, a foundation will normally adopt regulations to ensure that matters relating to foundation beneficiaries and distribution entitlements remain private. A foundation’s regulations, unlike the charter, are not filed with the Registry and, therefore, are not publicly accessible. Regulations may provide rules in respect of, inter alia, the regulation of the foundation council, the designation of beneficiaries and the distribution of assets to be made by the councillors of the foundation.

While a Seychelles’ foundation’s charter and regulations will usually be prepared in the English language, its charter and regulations may be written in any other language, in which case it shall be accompanied by a certified translation in the English or French language. The name of a foundation may also be expressed in any language, but where the name is not in the English or French language, a certified translation of the name in English or French shall be given to the Registrar. In such cases, the foreign name will be specified in the Registry-issued certificate of registration, together with the translated name in English or French, as the case may be.

A Seychelles foundation is required to have initial assets of a value of not less than USD1 or the equivalent thereof in any convertible currency. The initial assets may be endowed after registration of a foundation.

A Seychelles foundation may own assets worldwide. However, the assets of a foundation shall not include any real estate or other property in Seychelles, except that a foundation’s assets may include, inter alia, shares, debentures or other interests in Seychelles IBCs, any interest in a Seychelles limited partnership, any interest as a beneficiary under a Seychelles trust, any interest as a beneficiary under another Seychelles foundation, any interest in a Seychelles mutual fund or funds in a Seychelles bank account.

A Seychelles foundation is exempt from Seychelles taxation on its income and is exempt from Seychelles withholding tax and stamp duty (except in relation to any permitted dealings in Seychelles real estate).

The objects of a foundation may be charitable, non-charitable or both, and may be to benefit a beneficiary or beneficiaries, or to carry out a specified purpose, or to do both. The objects of a Seychelles foundation shall include the management of its assets and income and the distribution thereof, as the council may determine pursuant to the charter or regulations, to the foundation’s beneficiaries or, in the case of a foundation which has a specified purpose or purposes, in fulfillment of that specified purpose or purposes. The objects of a foundation shall not include the carrying on of any activity which is unlawful, immoral or contrary to any public policy in Seychelles.

A foundation must also have a council, which manages the foundation and is responsible for administration of the foundation’s assets and carrying out the objects of the foundation. A foundation council is required to consist of one or more persons, which may be a natural or legal person. Non-resident councillors are permitted. A founder may be a councillor, but a founder cannot be a sole councillor.

In contrast to some jurisdictions, there is no mandatory requirement for a Seychelles foundation to have a licensed resident councillor. Obviously, however, from an onshore tax-planning perspective, and consistent with management and control from Seychelles, it will often be desirable to appoint councilors who are resident in Seychelles. The duties of a councillor include acting honestly and in good faith with a view to the best interests of the foundation. A councillor’s duties are owed only to the foundation and not to the beneficiaries.

A Seychelles foundation must also at all times have a registered office and a licensed registered agent in Seychelles. Additionally, a foundation may, but is not required to, have a protector, who may be a natural or legal person. A founder, beneficiary or councillor of a foundation may be appointed as a protector, but a sole councillor or a sole beneficiary cannot act as protector. Typically, a protector may be given limited veto power in that the protector’s prior approval will be required in respect of certain foundation decisions, such as, for example, the addition or removal of a beneficiary or councillor or approval of foundation investment activities.

Robust Asset Protection

The assets transferred to or otherwise vested in a Seychelles foundation shall:

• be the assets of the foundation, with full legal and beneficial title;
• cease to be the assets of the founder, once transferred to or otherwise vested in the foundation by or on behalf of the founder; and
• in the case of a foundation with one or more beneficiaries, not become the assets of a beneficiary unless distributed to any beneficiary.

The Act contains strong foundation asset protection provisions. No transfer or other disposition of property to a foundation shall be void, voidable or otherwise be liable to be set aside by reference to a foreign rule of forced heirship or any other foreign law. Additionally and notwithstanding any foreign law to the contrary, a transfer of property to a foundation shall not be void, voidable or otherwise liable to be set aside by reason of the founder’s bankruptcy or the liquidation of the founder’s property or in any claim against the founder by any creditor of the founder, provided that the Seychelles Supreme Court may, where it is proved beyond all reasonable doubt that the founder was insolvent or intended to defraud any person who was a creditor of the founder at the time when the founder transferred property to the foundation, declare that such transfer of property was void or voidable to the extent necessary to satisfy a proven claim of a creditor of the founder. The onus of proof in bringing such a claim rests with the creditor. The Act further provides that such a claim with respect to any property of a foundation shall not be made against a foundation and shall be barred absolutely on the expiry of two years from the date of the transfer of such property to the foundation.

Under the Act and notwithstanding any Seychelles or foreign law to the contrary, it shall be lawful for an instrument of transfer or other disposition, or for the charter or regulations of a foundation, to provide that any estate or interest in any property distributed by a foundation to a beneficiary shall not be alienated by bankruptcy, insolvency or liquidation or be liable to be seized, sold, attached, or taken in execution by process of law (i.e. on the basis of retention of title by the foundation). Additionally, the charter or regulations of a foundation may provide that any beneficiary shall forfeit his benefits or rights or potential interest under the foundation in the event that he challenges the establishment of the foundation, the transfer of any assets to the foundation, the foundation’s charter or regulations or any provision thereof or any decision of the councillors, any protector or the founder. Pursuant to the terms of a foundation’s charter, the founder is also able to limit, in accord with his or her wishes, the extent of a beneficiary’s entitlement to financial or other information relating to a foundation and its assets.

The Act provides for the continuation of foreign foundations in Seychelles and for continuation of Seychelles foundations overseas. The Act also provides the consolidation of two or more existing foundations into a new foundation and for the merger of an existing foundation into another existing foundation.

The Seychelles foundation is a robust yet versatile entity, offering strong asset protection features, ease of formation and administration, value for money and privacy.