A foundation is a non-profit organisation whose main aims are charitable and/or research-related. The actual scope of permitted activities for foundations varies significantly between jurisdictions, but the general aim of any foundation is to serve the public benefit without seeking to make a profit. Foundations base their work around distributing donated assets in ways that further their purpose, and these assets can be collected both publicly and privately.
However, today foundations are often used as an asset protection tool. Therefore, here we will discuss offshore foundations used for asset management. In this sense, foundations are commonly used to accept transfers of foreign funds and property (including such assets as real estate, intellectual property, bank deposits, company shares, investment portfolios, etc.). Foundations are recognised as separate legal entities and combine the features of corporations and trusts.
There is a wide variety of legal implications for foundations, depending on the particular jurisdiction they are registered in. In some countries, foundations are prohibited from conducting any form of business; in some, e.g. Germany, economic activity is permitted if it serves the main purpose of the foundation. In the USA, the law distinguishes between private foundations (which distribute the donations of specific individuals) and community foundations (which distribute public donations). Private foundations have more control over their charity-related activities, but also receive fewer tax benefits.
Functions of a foundation
The main function of a foundation is to engage in charitable work and to distribute donations. An additional aim is to raise the assets needed for these donations and to choose recipients. Assets can be acquired either privately (from specific individuals) or publicly (from the general public). Public donations are usually collected with the aid of publicity campaigns and advertising. Some jurisdictions also allow foundations to obtain assets from business activity, if it can be proven that this economic activity is of a truly non-profit nature.
There are a number of functions that are prohibited to foundations, the main one being economic activity aimed solely at generating a profit. In some jurisdictions, e.g. Italy, foundations are also prohibited from dedicating their charitable activities to purposes other than those declared upon registration.
The differences between jurisdictions are more pronounced for foundations than for any other legal entity. If you require further information on the rules for foundations in the jurisdiction of your choice, please consult Confidus Solutions.
Types of foundations
The four main types of foundation are listed below. A foundation can be multifunctional or it can serve only one specific purpose; it all depends on your reasons for creating it.
These are usually set up in the interests of protecting the environment, building hospitals, opening schools, etc. and offer a way to invest your money while doing something good for society and/or the environment. You could call it a long-term investment in the future of humanity.
The main purpose of this kind of foundation is to receive donations. Donations may be targeted, meaning that they can only be spent in ways that support the main purpose of the foundation. This purpose can be changed only if the donor agrees. Any conditions allowing the fund to allocate target donations differently should be negotiated before the contract is signed.
These are usually established by a private individual or wealthy family as a wealth and succession management strategy. Most commonly, they are created in order to plan and control personal savings, funds and properties; to avoid forced heirship; to optimise taxes in terms of real estate property transfer, etc.
These allow companies to structure pension funds, to manage employee benefit schemes and to accumulate and control income from interest, dividends, royalties, etc.
Most popular jurisdictions for foundations
Taking into consideration factors like tax regime, substance requirements and confidentiality, we would strongly recommend the following jurisdictions as the top options for your foundation.
Panama is undoubtedly one of the most popular jurisdictions for setting up a private foundation, as it is the simplest and the least expensive structure for asset protection that we know of at the moment.
The Netherlands Antilles Private Foundation
The Netherlands Antilles Private Foundation (stichting particulier fonds — 'SPF') is popular with residents of civil-law countries, which generally do not recognise trusts.
The Bahamian Foundation
The Bahamian Foundation is a flexible tool which can be used for different types of foundation and for different purposes, e.g. inheritance planning, charitable or commercial. The Bahamian foundation has distinct legal personality status, which is a great advantage. The Bahamas may also accept a foundation re-domiciled from another jurisdiction.
You should be aware that when you incorporate an offshore foundation, your private and business assets will be governed by the laws of another jurisdiction. However, taking the foundation offshore can bring great tax benefits, legal freedom and new horizons for investments. Choosing the right jurisdiction for your foundation is the key, and you can count on your Confidus Manager to help you make the right decision — please don’t hesitate to contact us.
Management and structure of the foundation
The structure of a foundation is easy to grasp, as it closely resembles the structure of a corporation or company. That is why foundations are often preferred to trusts, with their more complex composition. In order to set up a foundation, you will generally require the following:
- Founder: a person on whose behalf the foundation will operate and who will supply assets to the foundation.
- Foundation Council: the fiduciary officers who will administer and manage the foundation. They sign all contracts, administer property and assets and make investments on behalf of the foundation.
- Foundation Charter: a document stating the purposes and the governing principals of the foundation.
- Beneficiaries: those who will benefit from the foundation’s assets.
As mentioned earlier, foundations are among the most varied company structures in terms of differences between jurisdictions. Accordingly, there are only a few parameters that can be described as general requirements for registering a foundation. One is that a foundation must state its purpose upon registration, including the areas/sectors/development spheres that it intends to support. Some jurisdictions, e.g. the UK, also place restrictions on the income of a foundation — those above and below certain thresholds must register with separate authorities. There are also cases when an entity can act as a foundation and receive the corresponding benefits without actually being registered as one.
One of the most important aspects of registering a foundation is that they are eligible for tax relief and other forms of government support. This, however, also varies greatly between jurisdictions. The only feature common to all is that, while almost any foundation can receive these benefits, their extent will depend on the type of foundation and other parameters.
To learn about the requirements and possibilities in the jurisdiction of your choice, please contact Confidus Solutions.
Top three famous foundations
As of 2016, the world’s top three foundations are:
- The Bill & Melinda Gates Foundation
- The Stichting INGKA Foundation
- The Wellcome Trust
The Bill & Melinda Gates Foundation is a private (both functionally and legally) foundation established by Bill and Melinda Gates in 2000 with three main goals in mind: to support healthcare, education and access to information, as well as to eliminate extreme poverty. The foundation’s main assets are Bill Gates' wealth as the co-founder of Microsoft, one of the world's most influential technology companies.
The Stichting INGKA Foundation is a Dutch foundation formed in 1982 by Ingvar Kamprad, who also founded the renowned furniture company, IKEA. The foundation aims to promote innovations in architecture and interior design, although recently it has also turned its attention to helping children in developing countries.
The Wellcome Trust is a British foundation established in 1936. Its primary goal is to support research and development in medicine and healthcare, as well as to promote general public understanding of the medical sciences. Initially, the foundation's assets were derived from its pharmaceutical business, but later it ceased its commercial activity and became fully focused on charity.