The publication of the Private Foundations Act 2017 established a long-awaited framework for the establishment of foundations in Gibraltar.
What is a foundation?
A foundation is an entity with a separate legal personality which is able to hold and deal with property in its own name as absolute legal and beneficial owner, for the specific purposes that are detailed in the Foundation Charter.
The purposes can be very wide, need not be charitable, and indeed can be “anything capable of fulfilment” as long as they are not illegal, immoral or contrary to public policy. As long as the Foundation Charter permits, the purposes of the foundation can be amended, providing flexibility in the event of future changes of circumstances.
Establishing a foundation
The Founder, being the person who provides the initial assets to the foundation, makes an irrevocable endowment. The foundation is then set up and governed by the Foundation Charter and Foundation Rules which detail the purposes, beneficiaries and guardian of the foundation, as well as the rules on how it should be administered.
Details of, inter alia, the endowment, councillors and guardians, and copies of the Foundation Charter are then filed at Companies House, which will be responsible for keeping a Register of foundations. Upon completion of the registration process, Companies House will issue a Certificate of Establishment, which serves as conclusive evidence of the registration of the foundation.
Parties in a Foundation
The Founder is the person who contributes the initial endowment, or assets, to the foundation. It is possible for the Founder to reserve certain powers to himself, such as the ability to appoint and remove the Guardian or councillors, or to amend the purposes or the constitutional documents of the foundation.
The Foundation Council, made up of the councillors, manages and administers the entity, makes distributions to the beneficiaries and works to achieve the purposes of the foundation. In Gibraltar, the Council must include a Gibraltar resident body corporate holding a Class VII licence (professional trustee).
A guardian can also be appointed to further safeguard the purposes, and indeed must be so appointed where there are no designated beneficiaries, or more than 50 beneficiaries, or a class which is insufficiently certain. This provides protection for the beneficiaries, whilst allowing the class of beneficiaries for a foundation to be broad and flexible.
Like a trust, the foundation will have beneficiaries. The Bill describes two types, disenfranchised and enfranchised beneficiaries, with the latter being entitled to copies of the constitutional documents, and disclosure of the records and accounts of the foundation.
Accounts and taxation
With requirements similar to those that apply to companies, proper books of account with respect to monies received and expended, and the assets and liabilities of the foundation must be kept for 5 years.
Financial statements, including a profit and loss account, a balance sheet, and a report made by the councillors, are to be filed annually at Companies House.
Taxation of foundations is also similar to the taxation of Gibraltar companies. The rate of tax is 12.5% which will be charged on profits or gains accrued or derived in Gibraltar from any trade, profession or vocation. The beneficiaries of a foundation who are ordinarily resident in Gibraltar will be taxed in Gibraltar on distributions received from the foundation, the use of assets owned, used or leased by the foundation, or any loan received from it.
A foundation can be used for the protection of family property, whether for succession planning reasons, or to safeguard assets from economic or political uncertainty and damage, or protection against creditors or liabilities. Unlike a trust, a foundation has legal personality and can hold assets as legal and beneficial owner. The concept of the trust is often met with confusion or difficulty in civil law based jurisdictions, which may not recognise it. Conversely, the use of foundations is common in civil law jurisdictions, and this understanding can often facilitate transactions and planning.
The Bill also provides a detailed mechanism for overseas foundations to be registered in Gibraltar, which may be useful for tax- planning, asset protection and other purposes. There is also a mechanism for the conversion of companies limited by guarantee, which have, previously, to some extent been considered as the Gibraltarian equivalent to foundations.
Foundations have the unique feature of holding property for specific purposes. They are a legal entity, with a structure similar to that of a corporate, with a management board, and unlike a trust, features the separation of ownership and administration of the assets.
The Private Foundations Act responds to the needs of private client and commercial practice. Given the importance of the development of this practice in civil law countries, and particularly in emerging markets outside the EU, the existence of an entity which is widely recognised and used and is a viable alternative to the more traditional trusts or company structures, is highly anticipated to assist in Gibraltar’s growth.
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