About Private Interest Foundations (PIFs)

About private interest foundations (PIF’s)

A private interest foundation/stiftung (in German) is a self-owning separate legal entity similar in most ways to a limited liability company save that it does not have traditional share or equity holders or an ultimate beneficial owner. The purpose of a private interest foundation (PIF) will normally be to look after the interests of its named or non-named beneficiaries who will normally be relatives (children and/or spouses) of the beneficial founder (the person who sets up a PIF) who it is generally accepted should not be a beneficiary in his/her own right. A PIF, will be controlled by a foundation council independent from the founder pursuant to its regulations/bylaws and the letter of wishes normally left by the beneficial founder. In most cases, a beneficial founder will reserve rights to change beneficiaries and/or even determine (end) the existence of the foundation itself.

In précis, a correctly set-up PIF can be viewed as an alternative to a traditional common law trust save that it generally more flexible and indeed robust from a tax planning perspective especially in common law country's such as the UK, due to very favourable case law dating back to the 1960's. It is important to note that a PIF is not generally involved in commercial activities itself but rather the ultimate beneficial owner of underlying companies, which own the liquid, IP or fixed assets that constitute its assets.

The Advantages of a Private Interest Foundation/Stiftung in Tax Planning?

A properly established PIF is a self-owing legal entity which will separate a founder from any donated assets for the benefit of his selected beneficiaries or class of beneficiaries. Of course, to be valid such donations must be made from both taxed sources and not contravene the rights of any third party but subject to these criteria a PIF will both act as an ideal asset protection vehicle and further have many potential tax advantages due to the fact that it has no ultimate beneficial owner . In fact, in the British House of Lords case of Carl Zeiss Stiftung v. Rayner & Keeler (1967) App. Cas. 853 PC 1967 it was clearly stated that: "... questions relating to the constitution of a foreign corporation should be decided according to the law of the place where it was incorporated (its lex situs)". In effect, which is very favourable, this means that an English court will use in this case Liechtenstein law to interpret the validity of a foundation and not English law. Even better, HMRC's Company Taxation Manual (part 14 sec. 8300 Controlled Foreign Companies) appears to accept that PIF's should be treated as analogous to companies and hence, by definition, not trusts. The result being that much of the anti-avoidance legislation will probably not be applicable (see also the case of Westland Helicopters limited v. The Arab Organization for Industrialization (1940) 2db.282)

Where should a PIF be registered?

Foundations, at least in their charitable format, are available in most civil law jurisdictions; however, for our purposes it is the private interest foundation (PIF) that affords both potential tax planning and asset protection benefits. Locations providing PIF registration include the Netherlands Antilles, Panama, the Seychelles and the Principality of Liechtenstein, the latter dominating the sector primarily due to the fact that local lawyers are licensed, there is compulsory indemnity insurance, key case law relates to Liechtenstein private interest foundations/stiftung's and there is virtually no corruption. Of course, there are downsides as Liechtenstein is relatively expensive and PIF's can be set-up in a robust manner in jurisdictions such as the Seychelles (per the Foundations Act 2009) but only if there are licensed professional members on the foundation council and the regulations have been amended to reflect what is needed to try and secure case law protection as such statutes tend to be too flexible at law.

lichtenstein private interest foundations

Synopsis

The Principality of Liechtenstein was established within the Holy Roman Empire in 1719. Occupied by both French and Russian troops during the Napoleonic wars, it became a sovereign state in 1806 and joined the Germanic Confederation in 1815. Liechtenstein became fully independent in 1866 when the Confederation dissolved. Until the end of World War I, it was closely tied to Austria, but the economic devastation caused by that conflict forced Liechtenstein to enter into a customs and monetary union with Switzerland. Since World War II (in which Liechtenstein remained neutral), the country's low taxes have spurred outstanding economic growth and it is one of the world's best regulated jurisdictions for private interest foundations (stiftungs in German) offering both registered and non-registered (deposited) PIFs with excellent albeit relatively expensive licensed lawyers acting directly or indirectly as Foundation Council members (Historical source CIA Factbook)

About Liechtenstein Private Interest Foundations

In general, it should be noted a PIF is a civil law construct equivalent in principle to a common law 'trust' in that they are a self-owning entities set-up by a 'founder' (settlor) or 'originating party' by way of an endowment/donation in favour of the stated objects of the foundation (trust): these objects normally being to provide for a class of beneficiaries known or related to the founder. The objectives of the PIF are recorded on its registered/deposited Foundation Charter but the 'key' to a successful PIF are the non-registered Foundation Regulations, which need to be properly drafted to ensure that the Foundation Council (see below) is/are independent of the founder during its lifetime. Most well drafted Regulations will have anti-duress clauses to prevent vexatious 3rd party legal actions. However, it is important to note that PIF endowments will only be valid if donated when there are, at the time of the endowment, not just no 3rd party creditors but no reasonable likelihood that such action will be commenced.

Lichtenstein private interest foundations (PIF's) or stiftungs must be set up for a non-commercial purpose but can invest and/or own commercial companies in or outside of Liechtenstein. PIFs can be registered or deposited with the relevant Liechtenstein authorities with the latter giving a higher degree of confidentiality. The governing body is called the foundation council and generally consists of either a licensed trust company and/or local lawyers with suitable indemnity insurance (a key difference when compared with other PIF jurisdictions). Management and administration fees tend to be charged at a professional rate equivalent to the rates charged in London or Switzerland however as PIFs are non-commercial in nature such fees are no more and mostly less expensive than a comparable trust. Liechtenstein PIFs are required to pay a small annual tax of but otherwise are tax free with a very high degree of confidentiality in respect to both the original founders and/or 'originating parties' depending on structure. Liechtenstein PIFs are specialist self-owning legal entities and highly recommended for those with relatively significant assets, wanting a safe and regulated environment for donated assets be they in liquid or fixed/real property.

How PIFs are likely to be considered by UK courts

Some of the potential benefits of using a PIF rather than a trust, at least for our UK based clients, are that anti-avoidance provisions in the UK and Ireland are based upon the use of trusts as self-owning entities and not PIFs. Further, the British House of Lords case of Carl Zeiss Stiftung (Stiftung is simply the German word for a PIF) v. Rayner & Keeler (1967) App. Cas. 853 has supported the contention that a PIF, unlike a common law trust, is to be treated as a self-owning separate legal entity i.e. in other words, akin to a limited company which provides potentially both the benefits of a trust (but with extra protection against local anti-avoidance provisions) and of a limited liability company! It should be noted that whilst all PIFs should be treated in the same way as highlighted in the above case, the case revolved around a Liechtenstein PIF, which is another reason why these are the 'Rolls Royce' of PIF structures.

The SCF Group and PIFs

There is no doubt that the SCF Group is the most experienced tax planning and company formation agent in the UK and can ensure that a Liechtenstein PIF has been drafted in a manner that is most likely to withstand creditor 'attack'. In particular, the SCF Group has successfully drafted PIF Regulations with its Liechtenstein colleagues for a significant number of clients over the years.

Basic Structure & Facts

  • Liechtenstein PIFs can be set-up directly or, which is more usual, by a local trustee company acting as the 'founder';
  • Endowments are separate from the personal estate of the founder ;
  • The Foundation Council normally consists of 2 or 3 local licensed lawyers together with an independent professional 'protector';
  • 'Protectors' and supervisory bodies can be appointed with it even being possible in certain cases for a 'protector' to also be the founder;
  • The Founder can reserve the right determine (end) the PIFs existence at any time;
  • Foundation Regulations are not kept on public record;
  • The independent protector can protect and play a major role in influencing the Foundation Council (The governing body) activities and ensure that they adhere to the PIF Charter and Regulations. Something not possible under a traditional trust;
  • There is a high degree of confidentiality with only limited information being available on the public registry
  • The minimum initial endowment is CHF 30,000.00 with no limitations on further endowments

Star Ratings

PIF & Corporate registration efficiency 4

Cost

4

Confidentiality

5

Local Banking facilities

5 (All local banks are AAA Rated or equivalent)

Legal system

5

Political stability

5

Reputation

5

Administration & Accountancy Services

It is a requirement that a PIF maintains full and proper accounts, an asset ledger and that periodical asset valuations are carried out. Where a PIF owns an underlying separate legal entity to carry out its investments then such legal entity must also have its accounts maintained by SCF accountants.

Bank Accounts

A PIF will require its own bank account to receive initial endowments or where an endowment constitutes shares or assets in another company or any other proprietary or intellectual rights then it is necessary that a suitable 'transfer of assets and liability' agreement is put in place clearly showing that ownership of the aforementioned has passed over to the PIF or its underlying investment vehicle. For more information please consult with your SCF consultant

Notes

The SCF Group does not provide tax planning advice save where there is a specific and agreed remit and issued 'letter of engagement'. All clients are therefore advised to ensure that their particular tax circumstances have been confirmed before proceeding with any corporate structure.

Seychelles Private Interest Foundations

Synopsis

A lengthy struggle between France and Great Britain for the islands ended in 1814, when they were ceded to the latter. Independence came in 1976. Socialist rule was brought to a close with a new constitution and free elections in 1993. President France-Albert RENE, who had served since 1977, was re-elected in 2001, but stepped down in 2004. Vice President James MICHEL took over the presidency and in July 2006 was elected to a new five-year term (Source CIA Factbook).

About Seychelles Private Interest Foundations

Seychelles private interest foundations (PIF's) were introduced under the Foundations Act 2009. In précis, a PIF is a civil law construct equivalent in principle to a common law 'trust' in that they are a self-owning entities set-up by a 'founder' (settlor) or 'originating party' by way of an endowment in favour of the stated objects of the foundation (trust): these objects normally being to provide for a class of beneficiaries known or related to the founder. The objectives of the PIF are recorded on its registered Foundation Charter but the 'key' to a successful PIF are the non-registered Foundation Regulations, which need to be properly drafted to ensure that the Foundation Council (see below) is/are independent of the founder during its lifetime. Most well drafted Regulations will have anti-duress clauses to prevent vexatious 3rd party legal actions. However, it is important to note that PIF endowments will only be valid if donated when there are, at the time of the endowment, not just no third party creditors but no reasonable likelihood that such action will be commenced.

How PIFs are likely to be considered by UK courts

Some of the potential benefits of using a PIF rather than a trust, at least for our UK based clients, are that anti-avoidance provisions in the UK and Ireland are based upon the use of trusts as self-owning entities and not PIFs. Further, the British House of Lords case of Carl Zeiss Stiftung (Stiftung is simply the German word for a PIF) v. Rayner & Keeler (1967) App. Cas. 853 has supported the contention that a PIF, unlike a common law trust, is to be treated as a self-owning separate legal entity i.e. in other words, akin to a limited company which provides potentially both the benefits of a trust (but with extra protection against local anti-avoidance provisions) and of a limited liability company! However, it should be noted that the drafting of a Seychelles PIF must be carefully executed by instructed lawyers to ensure it is structured in a manner very similar to that of the more traditional Liechtenstein stiftung.

The SCF Group and PIFs

There is no doubt that the SCF Group is the most experienced tax planning and company formation agent in the UK and can (if instructed) ensure that a Seychelles PIF has been drafted in a manner that is most likely to withstand creditor 'attack'. In particular, the SCF Group has successfully drafted PIF Regulations for a significant number of clients over the years.

Basic Structure & Facts

  • Seychelles PIFs can be set-up by natural or juridical bodies or through 3rd parties;
  • Endowments are separate from the personal estate of the founder;
  • The Foundation Council must consist of at least one natural person or juridical body however if the natural person 'councilor' is also the founder there must be a second councilor;
  • The Founder can protect and play a major role in controlling the Foundation Council (The governing body) activities and ensure that it/they adhere to the PIF Charter and Regulations. Something not possible under a traditional trust;
  • There is a high degree of confidentiality with only limited information being available on the public registry and then only in respect to the Foundation Charter where normally the founder is a nominee;
  • There is a 2 year statute of limitations in respect of third party claims against donated PIF assets further protected by a very high burden of proof laid upon claimants;
  • The minimum initial contribution only shall be US$1.00 (One US Dollar) or its equivalent in any recognized currency. There are no restrictions on further endowments;
  • 'Protectors' and supervisory bodies can be appointed with it even being possible for a 'protector' to also be the founder;
  • The Founder can reserve the right determine (end) the PIFs existence at any time;
  • Foundation Regulations are not kept on public record;
  • A founder may be a Foundation beneficiary provided he or she is not the sole beneficiary;
  • Seychelles PIF's are very cost efficient;

Star Ratings

PIF & Corporate registration efficiency 5

Cost

5

Confidentiality

5

Local Banking facilities

3

Legal system

5

Political stability

4

Reputation

4

 

Administration & Accountancy Services

It is a requirement that a PIF maintains full and proper accounts, an asset ledger and that periodical asset valuations are carried out. Where a PIF owns an underlying separate legal entity to carryout its investments then such legal entity must also have its accounts maintained by SCF accountants.

Bank Accounts

A PIF will require its own bank account to receive initial endowments or where an endowment constitutes shares or assets in another company or any other proprietary or intellectual rights then it is necessary that a suitable 'transfer of assets and liability' agreement is put in place clearly showing that ownership of the aforementioned has passed over to the PIF or its underlying investment vehicle. For more information please consult with your SCF consultant.

Notes

The SCF Group does not provide tax planning advice save where there is a specific and agreed remit and issued 'letter of engagement'. All clients are therefore advised to ensure that their particular tax circumstances have been confirmed before proceeding with any corporate structure.