Special Types of Companies
There are a number of offshore jurisdictions that are keen to encourage the establishment of insurance companies that, like banks, bring employment and investment to the country of incorporation, and generally enhance its reputation and its range of financial services.
In a number of OFCs it is possible to incorporate insurance companies that pay no tax on their premium or investment income. St Vincent and the Seychelles are currently two of the easier places in which to set up an insurance company.
Captive Insurance Companies
Multinational companies often form captive insurance companies to insure and re-insure the risks of subsidiaries and affiliates. Captive insurance companies are particularly suitable for the shipping and petroleum industries and for the insurance of risks that might only be insurable at prohibitive premiums.
Bermuda and Guernsey have long been favoured as domiciles for the incorporation of captive insurance companies, with countries such as the Isle of Man, Gibraltar and the Turks & Caicos Islands now competing for a share of this growing market.
The term "hybrid company" is used to describe a company that is limited both by shares and by guarantee and therefore has two classes of members: shareholders and guarantee members. The directors elect a Guarantee Member into membership of the company on condition that the member undertakes to contribute to the debts of the company up to a certain specified maximum amount, typically US$100 or less. As such a Guarantee Member holds a contingent liability. This contrasts with the position of the shareholder who holds an asset - the shares. The rights and obligations which attach to each class of membership can be laid down in the Articles of Association of the company or by the directors in board meetings, thereby keeping the terms and conditions of membership confidential. The arrangements that can be made are infinite and flexible. Skilful drafting can be used to attach different rights and obligations to each class of membership and create structures that are precisely tailored to the different needs of the client.
Hybrid companies are often used as quasi trusts, particularly by people resident in Civil Law countries where trusts are not recognised. Typically the company will be structured so that the shares are issued on terms that each carries one vote but no rights to dividends or to participate in the capital or income of the company. The Guarantee Memberships would be issued on terms that they carry no rights to vote but all the rights to participate in the income and capital of the company. Thus all control rests with the shareholders but all benefits flow to the Guarantee Members. The shares can be issued to professional managers but, unlike normal shareholders, they cannot receive financial benefit from holding the shares and therefore act as quasi trustees. All financial benefits flow to the Guarantee Members who are therefore in a position not unlike the beneficiaries of a trust.
A Guarantee Member's interest can be extinguished on death thereby avoiding any succession problems and the need to obtain probate. There will generally not be any inheritance tax or state duty implications.
The anti-avoidance legislation enacted by many onshore countries aims to tax the undistributed or untaxed profits of low tax paying companies as though those profits have been received by the shareholders. Although the legislation differs by country, it generally focuses on the percentage of shares held or the control of the company if control is achieved otherwise than through the ownership of shares. Under the arrangements outlined above, the Guarantee Members would not own shares or have control so it may be that this type of anti-avoidance legislation is ineffective in taxing profits rolled up within a hybrid structure. It will generally also be the case that a hybrid structure does not entail any reporting requirement for the Guarantee Members so that, on a practical level, unwanted attention from onshore revenue authorities can be avoided.
A hybrid company may also provide a means of bypassing Exchange Controls. A Guarantee Member would normally be issued with a membership certificate, but this does not constitute a share, stock or security. Most Exchange Control regulations refer to securities and therefore the holding of a Guarantee Membership may not require Exchange Control approval.
There are a number of offshore jurisdictions in which it is possible to form hybrid companies. The structures offered by the Isle of Man and Gibraltar have been the subject of much recent interest, but the TCI hybrid company is perhaps the most flexible.
A guarantee company is a company that is limited only by guarantee and therefore has only Guarantee Members and no shareholders. The same status applies to Guarantee Members as for a hybrid company, but the hybrid may have an advantage in that control rests with a third party e.g. the shareholders.
In a guarantee company the Guarantee Members, rather
than shareholders, would hold the voting rights and control so it may not be as easy to sidestep the anti-avoidance legislation and Exchange Control regulations certain of the major onshore countries. Guarantee companies can be formed in most offshore and onshore jurisdictions that follow the British legal system.
Anglo Saxon Foundations
Traditionally, the Liechtenstein foundation has been the preferred vehicle for residents of Civil Law jurisdictions who wish to protect family assets and pass them on to future generations. English Common Law does not specifically recognise the concept of the foundation, but a guarantee company may be structured to mirror a Liechtenstein entity. Such an entity may conveniently be described as an "Anglo Saxon Foundation", but in many ways this structure is more sophisticated and flexible than the more expensive Liechtenstein equivalent. Moreover, because such an entity is formed under an English Common Law system, it is also more intelligible to a wider audience and will be more generally accepted by the major onshore jurisdictions.
An Anglo Saxon Foundation is created by the founder, who may be elected as the founding member, transferring assets to the guarantee company as a subscription. The company elects members and appoints directors.
Membership is not transferable and ceases upon death or resignation, but the directors may then elect new members.
Frequently there are two classes of directors, founder directors and general directors. The founder directors can only be drawn from a designated class, which would normally be the founder member and his family. They are the only persons who have power to elect new members and the members are the only persons who may benefit from the company. In this way control of the financial benefits remains with the family acting in its capacity as founder directors. The general directors would typically be professional advisors who manage the day-to-day affairs of the company but are unable to benefit in any way other than by payment of the agreed fee for their services. They cannot have any control over who may be elected as members and how those members may benefit.
Limited Liability Companies (LLCs)
The limited liability company is another hybrid business entity, which combines the features of a partnership with those of a corporation. It is a relatively new structure that was first created by the US state of Wyoming under the Wyoming Limited Liability Act of 1977. Wyoming's example was followed by Florida in 1982 and all US states have since enacted LLC legislation.
The state of Delaware is usually considered as the preferred domicile for a US LLC because of a comparative lack of regulation and bureaucracy. An LLC has corporate form and personality but is categorised as a partnership under the Internal Revenue Code of the USA. As such, an LLC is not separately taxable but rather its income is taken to flow through to its members who are taxed according to US principles as though they had received the income directly. Non-US persons are only taxed on US-source income or income connected with the conduct of a US trade or business. If the LLC earns only income which falls outside this definition and the members of the LLC are non-US persons with no US presence, then no tax would be payable either by the LLC or by its members.
Having non-US individuals or companies as the members can therefore create a non-taxable structure. If an LLC had individual members, those members would most probably be taxed on profits received from the LLC in their country of residence, hence the recommended
structure is to have two offshore companies (we recommend TCI companies) as the members.
Following the US lead, many offshore jurisdictions have passed legislation enabling the incorporation of LLC structures. These are primarily used to structure joint ventures between US and non-US corporations or persons. A non-US corporation or person may gain a considerable tax advantage by structuring their affairs offshore, whereas a US corporation may lose tax credits in the country in which they are investing which would be available if they made a direct investment. The same criteria would not generally apply to a non-US person or corporation. The offshore LLC may therefore be structured so that the income attributable to the US corporation flows through complete with tax credits still attached, whereas the income attributed to the non-US person or corporation may be rolled up offshore.
Most of the offshore jurisdictions allow for the incorporation of an LLC, but the Bahamas, Cayman Islands, Isle of Man and TCI companies are particularly suitable. In all cases the relevant local legislation seeks to create a vehicle that has corporate form but which will be characterised as a partnership by the US Internal Revenue Service, thereby creating an offshore entity which is tax neutral for US persons but may have tax advantages for non-US persons.