CURAÇAO, 11 JANUARY 2018
The Curaçao Private Foundation (also known as “SPF” or “Stichting Particulier Fonds” in Dutch) is a private foundation that was introduced to offer an alternative to the Anglo Saxon Trust. In this post, we explain why its minimum of formalities, its flexibility and its privacy make the SPF an essential freedom tool, and why it offers an attractive alternative to the Swiss Foundation to use in an ICO or TGE.
A “civil law trust”
Curaçao is an island in the Caribbean and is an autonomous territory of the Kingdom of the Netherlands, which apart from the Netherlands still has sovereignty over other Caribbean islands such as Aruba, Sint Maarten, Bonaire, Sint Eustatius en Saba.
That means the Head of State of Curaçao is the Queen of The Netherlands, who is represented in Curaçao by a Governor. Importantly, whilst its highest court of justice is the Supreme Court of Justice in The Hague, the Netherlands, Curaçao has its own corporate laws and tax laws and is not part of the European Union.
Dutch is the primary official language. However, because the majority of tourists come from English speaking countries, English is its second official language.
The legal concept of the Private Foundation dates back to 1998 and is built on the model of the Curaçao Foundation and the Liechtenstein and Swiss Stiftung.
Comparison with a traditional Swiss or Liechtenstein “Stiftung”
Like any other foundation, the Curaçao Private Foundation must state a specific purpose for its existence. However, the SPF differs from the traditional foundation in that its purpose does not have to be limited to charity, social or generally non-profit purposes. For instance, the SPF can and is typically is set up with the purpose of:
- investing, managing, and administering assets;
- acting as a custodian of the assets for the SPF’s beneficiaries (of which the Founder of the SPF can be one);
- holding assets incl. IP;
- generally, whilst the SPF may not be seen as conducting an “enterprise”, portfolio investments and holding activities are not considered an enterprise for these purposes, making the Foundation ideal for portfolio management purposes including crypto holdings.
This non-charitable purpose is important because it allows the Private Foundation to make distributions out of its assets to any third party, including natural persons, companies, trusts, partnerships in any jurisdiction (expect Curaçao itself).
Comparison with the common law trust
Whilst the operations of a Private Foundation are very similar to a trust, its main differences with the Anglo-Saxon Trust are:
- A Private Foundation is based on civil law; a Trust is based on common law;
- A Private Foundation is a legal entity, whereas a Trust is not;
- A Private Foundation is the legal and economic owner of its assets, whereas the Trustee is the legal owner of the assets and the beneficiary is usually the economic owner;
- A Private Foundation does not need to designate beneficiaries immediately, whereas a Trust must always designate at least one beneficiary.
- A Curaçao Private Foundation provides more protections for its Founder (the equivalent of the Trust’s Settlor):
- The Private Foundation is multi-generational: there is no limit on its duration;
- The Private Foundation is more flexible the Founder retains full control whilst in a trust the assets are pledged to the Trust and managed by the Trustee;
- A Founder of a Private Foundation may add or remove assets and beneficiaries at any time;
- There are no taxes on Private Foundations in Curaçao (see below on taxation)
Key Difference between a Private Foundation and a Corporation
- The main difference between a foundation and a corporation is that a foundation does not have capital divided into shares or quotas, nor shareholders or members, but only beneficiaries, which are appointed when the Foundation is established or later, and can be varied through the Founder’s “Letter of Wishes” (see below).
- A Foundation’s managing board differs from a corporate board of directors in that members or shareholders do not control its board or managers.
Compared for instance with a BVI Company, still one of the most popular holding structures especially for Asian clients, the Foundation has a number of key advantages:
- The Foundation separates different business interests and these interests are not mixed together, which enhances creditor protection;
- If a Founder does say 20-30 projects over a lifetime (from investing in other companies to real estate to IP), one Private Foundation can accommodate them all, whilst under a BVI Company structure, each project would have to be organized under a different BVI entity.
- BVI has attracted a lot of scrutiny recently being one of the most popular incorporation centres for Asian clients, in addition to its use by OECD clients. As a result, BVI is under pressure from the US and OECD to share corporate records, which would lead to a loss of confidentiality. Curaçao by contrast enjoys a much lower profile than BVI and enjoys a very high degree of confidentiality.
A Private Foundation can also live in perfect co-existence with a Hong Kong Company. Whilst the Hong Kong Limited has tax treaty benefits with mainland China and is therefore ideal for Mainland-related business, there is an inherent risk of the Chinese Government examining Hong Kong corporate records. The solution is to ring-fence the China-related business by having the Private Foundation own the Hong Kong operational company for China purposes, whilst holding other (non-Hong Kong) companies for non-China related business.
In what follows we will highlight the key advantages of the Curaçao Foundation over other Foundations, such as the Swiss or Liechtenstein ones, and the trust as its common law equivalent.
These advantages are the following:
One of the main attractions of the Curaçao Foundations is that it can achieve all of the above goals whilst maintaining a very high degree of confidentiality about the Founder and the Foundation’s beneficiaries.
- The Founder’s identity is kept private: A Foundation is established and registered in the name of a Curaçao attorney, NOT in the Founder’s name. By instructing Otonomos as your corporate service provider, the local attorney is not aware of the Founder’s identity and personal details.
- Even as one of the Beneficiaries (or the sole beneficiary) of the Foundation, as the list of beneficiaries is not public, the Founder will not be on public record.
- In addition, the Founder’s name is separated from the ownership of the assets, as the assets are owned by the Foundation, not the Founder.
When structured properly, confidentiality can be layered as follows:
- Attorney-Client privilege Nr 1 between Founder and Otonomos’ attorneys;
- Attorney-Client privilege Nr 2 between Otonomos’ attorneys and Curaçao attorney who registers the Foundation;
- Otonomos’ local agents as corporate service provider in Curaçao listed as the Foundation’s Director;
- Local service provider address as Foundation’s address.
Public disclosure in Curaçao is kept at a minimum with the Curaçao Register only showing the following publicly accessible information:
- The name of the SPF;
- Th date on which it was established and registered;
- The address of the Foundation, which will be the management company’s address in Curaçao;
- The Director, typically a company rather than an individual acting on behalf of the local management company.
The second main benefit of using the private Foundation structure is the degree of control in the hands of the Founder, and how control can be structured.
The articles of association of a Private Foundation can be tailor-made to fit the Founder’s preferences and Curaçao corporate law provides substantial freedom in this respect:
- For instance, the articles can stipulate that the Founder is entitled to dismiss or appoint a board member.
- The articles may also contain far-reaching provisions for determining how assets are invested and for appointing parties entitled to the assets.
- Absolute discretionary authorization may also be given to the board members or the Supervisory Board for granting control of the assets. In such cases, the Founder can make known, by means of a letter, his/her wishes with regard to the assets and payments to the board members or members of the Supervisory Board. This letter is usually referred to as a ‘letter of wishes’, in accordance with common trust law.
In practice, the establishment of an SPF is typically sequenced as follows to secure control in the hands of the Founder whilst maintaining confidentiality:
- First, the Foundation will be registered with the Founder’s rights held by Otonomos as Nominee Founder via a Nominee Agreement.
- Once established, the Founder’s rights will be transferred to the actual Founder;
- Once in possession of full powers, the Founder can appoint the Foundation’s Board. Optionally, an Advisory Board, a Protector (typically a local corporate service provider) and/or a Supervisory Board can be appointed with powers to control the Board;
- Finally, the “Letter of Wishes” allows a Founder to express his/her views and wishes with regard to:
- the Beneficiaries of the Private Foundation;
- the distributions to be made to the Beneficiaries;
- the management and administration of the assets of the Private Foundation
This Letter of Wishes is private and confidential; the identity of the Beneficiaries is not mentioned in any public deed or public registry (unless the Founder prefers to include the Beneficiaries in the Deed of Establishment/Articles).
A Foundation’s board is appointed by the Foundation’s charter. Board member vacancies are filled either by the board itself with full autonomy or by another body or person specifically named in the charter for that purpose.
In practice, a Private Foundation’s board will invariably act upon the Founder’s direct or indirect instructions.
The beneficiary, or beneficiaries, are those that benefit from the Private Foundation. As the beneficiaries do not need to be named in the Foundation’s Articles, the confidentiality or anonymity of the beneficiaries can be achieved.
Interestingly, there can be different beneficiaries for different projects.
Provided the private Foundation itself does not engage in active businesses, all contributions to and distributions by the SPF are tax- exempt. This means that as a top holding entity for corporate structures, the Foundation maintains full tax benefits and confidentiality.
At the individual level, U.S. taxpayers and others paying taxes on global income must declare all income derived from a Foundation to their governments, as they have to on all other income.
From the above, it is clear that the Curaçao Foundation offers a very large degree of flexibility in its activities.
It is mainly used as for capital preservation, as a holding, for estate planning or for portfolio management purposes.
Further examples of their versatility include:
- Debt markets: Acting as trustee for a group of holders of shares, bonds or notes, whose assets are secured by mortgage, pledge or other security right;
- Legal ownership of IP rights, which can be licensed against the payment of royalties;
- The Private Foundation can also, in its capacity of trustee or nominee, act as shareholder of a company and exercise all rights and powers attached to such shares on behalf of the Principals.
Finally, the SPF is relatively low cost to set-up and maintain, taking into account that it can be used for multiple purposes, which each project or investment compartmentalised, so it should only ever be necessary to set up one Foundation.
It is probably worth spending that little bit extra to carefully draft the Foundation documents, especially the Letter for Wishes, which as described above is all-determining for how the assets of the Foundation are distributed and to whom.
Otonomos offers a pre-pack set-up of a Curaçao Foundation for a one-time setup fee of only USD 2,449 and annual maintenance starting at USD 1,800 per year. You can add extras such as a bank account and also benefit from our negotiated rates with our preferred legal and tax partners who for a capped fee of USD 2,000 will help draft your constitutional documents and customise your letter of wishes. You can find more information and order online here.
A recent use case: ICOs and TGEs
Our analysis is that a Foundation can be a more flexible and cost effective vehicle for Initial Coin Offerings and Token Generation Events (TGEs) compared to some of the “established” jurisdictions.
What the Curaçao Foundation has in common with its peer Foundation in other jurisdictions, most prominent Switzerland, is that its nature as a foundation achieves complete independence of any ownership as there are no shareholders.
However, the “locked-box” shortcomings of the single purpose Foundation such as the Swiss, which prevents ICO leads from ever getting the funds out of their foundation except for the promotion of the foundation’s purpose) is not an issue with a Curaçao Private Foundation, which as we have seen can also serve much broader purposes.
In addition, the rigidity of the Swiss Foundation and its lack of tax benefits (except in case of a charitable foundation, a status seldom granted) contrasts with the operational and governance flexibility and tax exempt nature of the Curaçao Foundation.
Perhaps counter-intuitively, a Curaçao Foundation could also purposefully be made more transparent as to the identity of its Founders, whilst in the Swiss case whomever controls the Board of the Foundation controls the Foundation itself.
In Switzerland, at least some Board members will have to resident, whilst no such requirements apply to the Curaçao Foundation.
Then there is the cost aspect: at some point accountability will creep into the ICO/TGE process, and even the most basic Swiss setup is a multiple of the cost of its offshore cousin, with ongoing maintenance easily adding thousands of dollars a year.
Finally, a Curaçao Foundation will also give you much more operational flexibility in how you tax-optimally fund the operational entity using the proceeds of your ICO/TGE and where all the work is done, and which is typically based in an “opco”-type jurisdiction such as the UK, mainland Europe, or even the US.
In conclusion, whichever “cachet” a Swiss foundation may be perceive to have, it is arguably not deserved on the basis of its user-friendliness, tax benefits or cost.
DISCLAIMER: This guidance note is not legal or tax advice. Please seek independent tax and legal advice.