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'Foundation company' vehicle established in Cayman Islands

The Cayman Islands Foundation Companies Law came into force on 19 October, introducing a new legal vehicle allowing a company with separate legal personality and limited liability to function like a civil-law foundation or common-law trust.

Foundation companies can be created by declaring them as such to the Registrar of Companies, and will be governed in the same way as an ordinary company, under the Companies Law 2016. However, it is forbidden to distribute profits or assets to its members

It must be formed for some lawful purpose, which may or may not be beneficial to other persons; it could, for example, be formed to act as a holding company or an investment company. If there are beneficiaries, they have no legal powers or rights in relation to the foundation company, or its management or its assets. This allows foundation companies to hold higher risk investments, such as shares in a family business, because beneficiaries will not have direct rights of action against ‘trustees’, for example. Moreover, rights to information, such as reports and accounts, are limited to ‘interested persons’, i.e. its members or supervisors. The entity will only have a duty to carry out its objects if the memorandum of association so declares and if it designates persons to enforce the duty.

Anyone can place assets in the foundation company and there are no restrictions as to what it can invest in. The memorandum must, however, state the rules for the disposal of surplus assets on winding up.

If the objects of a proposed foundation company are to be carried out mainly outside the Cayman Islands, application may be made to register it as an exempted company not subject to any tax on income, withholding or capital gains. Nor will its shareholders be liable to tax on their shares or dividends or on their estate.

Moreover, the Cayman Islands Trusts Law’s ‘firewall’ or ‘foreign elements’ provisions will apply to property contributed to foundation companies. This gives protection against claims in foreign courts to the transfer of assets to the foundation company.

Possible uses include holding vehicles for shares in a private trust company; protector or enforcer of a trust; special purpose vehicle in finance or commercial transactions; and succession planning as an alternative to trusts, particularly for clients in civil-law jurisdictions where there are concerns about the tax treatment of trusts.