Why the Cayman Islands as an optimal destination for Foundation Companies

Cayman Islands foundations are governed by the Foundation Act 2012 and are mostly used for estate planning and/or philanthropy. A foundation is a hybrid of a company and trust, operating like a company but having governance features similar to trusts. Whilst ordinarily found in civil law jurisdictions, a Cook Islands foundation offers an alternative wealth planning vehicle for clients not familiar with trusts and/or who may be looking for asset protection measures not ordinarily offered with foundations from other jurisdictions.

Why the Cayman Islands as an optimal destination for Foundation Companies

 The Cayman Islands stands out as the preferred choice for establishing foundation companies due to its favorable legal and regulatory landscape, tax advantages, and global recognition.

 A Supportive Legal and Regulatory Environment

 The Cayman Islands boasts a robust legal framework designed to facilitate the establishment and operation of foundation companies. Governed primarily by the Foundation Company Act of 2017, supplemented by guidelines from the Companies Act (Revised), this comprehensive legal infrastructure ensures that foundation companies in the Cayman Islands are meticulously regulated, offering a secure and compliant environment that aligns with international standards.

 Tax Benefits

 Setting up a foundation company in the Cayman Islands comes with substantial tax advantages. Foundation companies are exempt from income, withholding, and capital gains taxes, enabling efficient wealth management and preservation. Furthermore, members and beneficiaries of these companies are not subjected to estate or inheritance taxes within the Cayman Islands. Additionally, for foundation companies incorporated as exempted entities, they have the option to apply for a tax exemption undertaking, which shields them from any changes in Cayman Islands tax laws for a period of up to 30 years from approval.

 Global Recognition and Compatibility

 Cayman Islands foundation companies enjoy a prominent international reputation and are highly regarded in various jurisdictions. This recognition is especially advantageous for individuals and families with assets and interests spread across multiple countries. These foundation companies seamlessly interact with foreign legal systems and tax structures, facilitating cross-border transactions and enhancing wealth management options, making them a compelling choice for clients with global perspectives.

Cayman Islands Foundation Companies
Advantages

• It possesses its own legal identity.
• Offers financial protection with limited liability.
• Affords similar advantages as a trust.
• Can adopt a hybrid structure, incorporating philanthropic elements.
• By-laws hold more weight compared to a Letter of Wishes.
• Blends corporate attributes with succession planning opportunities.
• Particularly suitable for high-risk assets like family business shares, as it owes no fiduciary duty to potential beneficiaries but safeguards the
• Foundation Company itself.
• It is not accountable to the beneficiaries.
• Operates within established company and trust regulations.
• Particularly relevant and comprehensible for clients residing in civil law jurisdictions who may have concerns regarding trust tax treatment.
• Safeguards against claims in foreign courts through the “firewall” feature in the Trusts Law (Revised).

Cayman Islands Foundation Companies
Features

• Recognized as a company under Cayman Islands’ jurisdiction.
• Possesses its own distinct legal persona.
• Holds a certificate of incorporation, along with Memorandum and Articles of Association.
• Comprises a board of directors and a company secretary.
• May be limited by shares or guarantee, with limited liability for members.
• Exempt from any taxation in the Cayman Islands.
• Can continue to exist without members post-incorporation.
• May establish by-laws governing foundation governance and asset distribution to beneficiaries.
• Has the option to appoint a supervisor for overseeing the board of directors.
• Can grant additional rights and powers to interested parties (founders).
• Restricted from distributing dividends or assets to its members.

Typical Uses

Foundation companies can serve as an attractive alternative to trusts, particularly for clients in civil law jurisdictions where trusts may be unfamiliar or subject to uncertain tax treatment. They offer many of the features that make trusts ideal for succession planning and asset protection. In common law jurisdictions, foundation companies are frequently employed to hold high-risk assets, such as family business shares, within family office and private trust company (PTC) structures. Moreover, foundation companies can function as ownerless or orphan entities, making them suitable for use in PTCs, investment funds, and broader commercial transactions. For instance, foundation companies can be employed as:

 Holding vehicles for PTC shares.

• Protectors or enforcers of trusts.
• Special purpose vehicles in financing or commercial ventures.
• Entities for cryptocurrency-related projects, including initial coin offerings (ICOs) and trading operations.
• Traditional tools for succession planning and asset protection.
• Vehicles for philanthropic purposes.

Cayman Islands Foundation Company
Structure and Governance

A foundation company is overseen by a board of directors. It is not mandatory for directors to have residency in the Cayman Islands, nor are there any specific qualifications or limitations on who can serve as a director of a foundation company. Thus, any individual with full legal capacity and any company can assume the role of a director.

 Director

The board of directors of a foundation company operates under the same obligations and responsibilities as directors of any other type of company. They are held to the same standards of care, diligence, and skill as expected from directors in general. For a comprehensive understanding of directors’ duties, please refer to our Guide to Directors’ Duties and Obligations under Cayman Islands law. It is important to note that, depending on the company’s constitution, a member or supervisor may also serve as a director, and there is no requirement for supervisors to be separate from directors. Directors are obligated to furnish interested parties with reports, financial accounts, and any necessary information or clarifications concerning the foundation company’s business and operations.

 Founder

In contrast to foundations in other offshore common law jurisdictions, a foundation company does not necessitate the appointment of a formal founder. Instead, a foundation company is established based on the directives of the individuals promoting it, following the same procedures as any other Cayman Islands company. A founder does not inherently possess any rights regarding the foundation company but may reserve specific rights if desired. Such rights could include the ability to amend provisions in the company’s constitution, but this is only permissible if expressly stated in the constitution.

 Beneficiary

A beneficiary of a foundation company is an individual who stands to gain from the foundation company fulfilling its objectives. The company’s constitution can specify the types of beneficiaries and the nature of their benefits. It is feasible for a foundation company’s constitution, though not obligatory, to grant duties, powers, or rights to beneficiaries, enabling beneficiaries to assert enforceable rights against the directors, officers, and interested parties.

 Interested Person

An interested person within the context of a foundation company encompasses its members, supervisors, those with the right to become members or supervisors, and individuals declared as such by the company’s constitution. In parallel with members of non-foundation companies, an interested person can initiate legal actions in the name of or on behalf of the foundation company to enforce directors’ duties and liabilities in specific circumstances. Subject to the provisions of the company’s constitution, interested persons also have certain entitlements to access information, as outlined below.

 Secretary

A foundation company must have a licensed Secretary responsible for providing company management services in the Cayman Islands. The company’s registered office must align with the Secretary’s registered office. For a foundation company, a qualified person is an individual or entity licensed or authorized under the Companies Management Act (Revised) to offer company management services within the Cayman Islands. A foundation company is obligated to have a qualified person as its secretary at all times. The secretary is responsible for maintaining comprehensive and accurate records of the company’s activities and inquiries made for the purpose of issuing notifications.

Corporate Status

A foundation company is a legal entity distinct from its members, directors, and other affiliated individuals. Governed primarily by the Companies Act (Revised), supplemented by the Foundation Company Act of 2017 when applicable, foundation companies benefit from a substantial body of legal precedent and enjoy recognition in various jurisdictions.

 Incorporation

To become a foundation company, a new or existing company incorporated under the Companies Act (Revised) must meet specific conditions and apply to the Registrar of Companies. These conditions include being limited by shares or guarantees, having a memorandum that explicitly states its status as a foundation company, describing its objectives (which may include beneficiaries), outlining asset disposal procedures in the event of winding up, and prohibiting dividends or other distributions to members. Additionally, a foundation company must have adopted articles and a secretary licensed to provide company management services in the Cayman Islands.

 Constitution

A foundation company’s constitution may grant membership rights to any individual and can operate without members if permitted by its memorandum and as long as it retains a supervisor with voting rights at general meetings. The management of a foundation company is overseen by its directors, and its constitution can allocate rights, powers, and duties to various stakeholders, such as members, directors, supervisors, founders, or others, pertaining to matters such as admission and removal of members, bylaw creation, supervision of management, resolution voting, constitutional amendments, and asset disposition.

 Bylaws

In addition to its constitution, a foundation company can establish customized bylaws to modify or expand upon its management and operation. Bylaws provide privacy benefits as they are separate from the constitution, do not require registration, and can be amended more flexibly over time.

 Rights and Duties

Unless altered by the constitution, foundation company duties are owed exclusively to the company itself, and rights are enforceable only against the company. This feature makes foundation companies suitable for holding high-risk investments, as beneficiaries do not possess direct action rights against trustees, as in a trust context. Information rights, such as access to reports and accounts, are limited to interested persons defined by the Foundation Act. Interested persons can take legal actions on behalf of the foundation company for the enforcement of directors’ duties, similar to members of traditional companies. Beneficiaries, if any, have no powers or rights concerning the foundation company, its management, or its assets.

 Court Intervention and Dispute Resolution:

Foundation companies benefit from the Trusts Act’s firewall provisions, safeguarding them against claims in foreign courts. They also have access to the Grand Court, similar to Cayman Islands trusts, for assistance in contentious and non-contentious matters. A foundation company’s constitution may require dispute resolution through arbitration, and any resolution method prescribed by the constitution cannot be invalidated unless a party engages in fraud or bad faith.

 Tax Treatment

Foundation companies are not subject to income, withholding, or capital gains taxes in the Cayman Islands. Members or beneficiaries of a foundation company do not face income, withholding, or capital gains taxes related to their interests. They are also exempt from estate or inheritance taxes in the Cayman Islands. Moreover, a foundation company, when incorporated as an exempted company, may apply for a 30-year exemption from any future tax law changes in the Cayman Islands.

 Annual Registrar Fees

Every foundation company is required to pay an annual Companies registry fee to the Registrar in January of each year, amounting to CI$700 (US$854). Additionally, the foundation company secretary typically charges an annual fee. Legal fees associated with incorporation may vary, depending on whether the constitution needs customization and whether bespoke bylaws are required.