Rob Gray and Nicky Forshaw

Rob Gray and Nicky Forshaw

27 September 2012

Page 1

To:Rob Grayand Nicky Forshaw

Email:;

Our Ref: LXA/JB/1005545/0130/G4476104v1

27 September 2012

DearRob and Nicky

taxation of Guernsey foundations

I understand that we are now waiting for Royal Assent via the Privy Council in order for The Foundations (Guernsey) Law, 2012 to be brought into effect in Guernsey. In the meantime, I understand that the Guernsey Registry currently anticipates going live for registrations of foundations from 2 January 2013. I have received a number of enquiries regarding the proposed taxation of income arising to a foundation from property held by it and distributions of an income nature made by foundations in the furtherance of its purpose (whether or not these purposes involve beneficiaries). I recall that the Department of Commerce & Employment had said in its submissions of 27 October 2006 that they recommend that foundations are "as far as possible, treated in the same way as trusts with Guernsey trustees".

Subsequently, in its commentary on question 20 set out on page 11 of the Consultation Document on Foundations issued 11 April 2011, the Department explained that there were two broad options: taxation along the lines of a trust or of a company. The Department repeated its preference that foundations are to be treated as trusts for the purposes of Guernsey tax law but it would consider the issue further depending on feedback from the Consultation. The Department said that any decision on tax treatment of foundations would be a matter for the Department of Treasury & Resources.

I wonder whether you could shed any light on how T&R are proposing to tax Guernsey foundations and how this treatment will be embodied in our tax law? Do you have any indications on the timing of proposed changes to the tax law? If foundations are taxed along the lines of trusts, please confirm that the equivalent of Statement of Practice M12, adopted as appropriate for foundations, will be brought into effect at the same time?

If the intention is to treat foundations as trusts for tax purposes, I am concerned that a blanket expansion of the definition of the term "settlement" in Section 65(4) Income Tax (Guernsey) Law, 1975 as amended ("ITL") to include foundations may bring into play unintended consequences. For example, how would Section 53 ITL (trustee chargeable to tax on the income of a settlement) be applied in the context of foundations where it is the foundation itself, rather than say, the council or the councillors of the foundation, which would be entitled to receive the income of the foundation? Unlike trusts, foundations will have a separate legal personality that is distinct from its council or other participants.

Further, under Section 65(A) of ITL, a settlor is under a duty to notify the Director of the existence of a settlement at any time during a year of charge in which the settlor is or was resident in Guernsey. The procedure for notification is facilitated by Section G of the personal tax return, which requires the tax payer to provide supplemental information in a separate Settlement/Trust Form, including the name of the settlement, date of the settlement and name and address of the trustees. Income received by the tax payer or spouse is to be entered in Section H of the tax return. Whilst the foundation was introduced to cater for clients who are based outside Guernsey, it is conceivable that a Guernsey resident may be involved in a foundation in some capacity. If Section 65(A) ITL is intended to extend to foundations, it would be important to ensure that the correct terminology is used and the duty to report arises only where there is a likelihood that Guernsey tax is due, taking into account any applicable statement of practice equivalent to M12 which may be introduced.

Do you anticipate that T&R will introduce a requirement to notify the Director of Income Tax of the establishment of a Guernsey foundation? It may be of assistance to know that on registration of a foundation with the Guernsey Registry, certain particulars of the foundation are to be entered in Part A of the Register, which will be a matter of public record. Again, this is unlike trusts, where there is no public register of the establishment of trusts. Under the Foundations Law there are "participants" and "foundation officials" which are defined terms. The "participants" of a foundation are -

(a)the founder;

(b)enfranchised beneficiaries (if any);

(c)in relation to any purpose or dis-enfranchised beneficiary, the guardian; and

(d)any other person so identified by the foundation's constitution.

The term "foundation official" includes the councillors and guardian of a foundation.

My concern is that, since the draughtsman of the Foundations Law has taken great pains to ensure that a Guernsey foundation is distinct from a trust and a company, it would be helpful if this distinction is reflected as far as possible in the Guernsey tax treatment of Guernsey foundations, which should use terminology drawn from the Foundations Law, rather than relying on terminology used for trusts.

I look forward to hearing from you at your earliest convenience, as we are in the process of putting together training modules for those who will be involved in establishing and administering foundations from Guernsey.

Kind regards.

Laila Arstall

Senior Associate

For and on behalf of Carey Olsen

Telephone:+44 (0) 1481 741544 (Direct Dial)

Facsimile:+44 (0) 1481 739044 (Direct Fax)

Email:

1005545/0130/G4476104v1