Panama foundations and UK tax

If you look at offshore companies or trusts on the internet you'll see these mentioned quite a lot. You'll see Foundations offered in lots of jurisdictions, but Panama and Liechtenstein tend to be popular. Foundations are similar to trusts in many ways although there are some crucial differences. Just like setting up a trust, when an individual sets up a foundation they transfer control over their assets to another person. In other words, the foundation is a separate entity to the settlor. When a settlor transfers assets to a trust, the trustees hold the assets on behalf of the trust beneficiaries. The trustees are also bound by the trust agreement. The trust therefore holds the trust property in a fiduciary capacity. However, with a foundation, the foundation itself has a separate legal personality. As a result the foundation can enter into agreements as it is the owner of the assets which are managed by the foundation council. By contrast a trust is not a separate legal entity different from the trustee (although it is separate from the settlor). The Foundation is therefore an unusual entity as it looks like a trust but shares characteristics with a Company. How is a Foundation treated for UK tax purposes? This is a good question and much will depend on the Foundation in question and the various rights and responsibilities of the parties involved. When looking at overseas entities the UK authorities will usually ask two questions:

Firstly - Does any income that the Foundation receives accrue to the Foundation or to the beneficiaries/owners?

Secondly - Does the person to whom the income accrues hold it for them self or in a fiduciary capacity on behalf of another person? These questions will point to how the entity is to be treated for UK tax purposes. The UK authorities will not only play close attention to how the overseas jurisdiction treats the entity but also will look at its characteristics and then assess these in accordance with UK law. Body of Persons It's worthwhile noting that the UK provisions state that a 'person' includes a body of persons, corporate or unincorporated. This will clearly include a company which will therefore have a separate entity. It could also include partnerships but these are specifically excluded from being a separate entity from the partners in other provisions. So where there is a 'body of persons' as is the case with an overseas foundation, unless it's classed as a partnership it will be treated as a separate entity to the beneficiaries or owners. In the case of a Panama Foundation it's pretty clear that it should be regarded as a separate 'body of persons' for tax purposes and would therefore be separate from the owners. The next issue to determine is whether the Foundation receives income for itself or whether it holds it in a fiduciary capacity for another person (eg the ultimate owners). This is what separates trusts from companies. Although the trust is separate from the beneficiaries the trustees hold the income in a fiduciary capacity on behalf of beneficiaries. As stated above this will frequently depend on the precise facts but the ultimate issue is whether the Foundation is the beneficial owner of the income or not. The argument from most of the offshore incorporators is that it is the beneficial owner of the assets. In this case, the treatment of the Foundation is akin to an offshore company. A separate legal personality and lack of a fiduciary relationship would indicate such a status. What impact would this have on the foundation? The main impact would be in terms of the anti avoidance rules. These would all apply to the Panama foundation to attribute income and capital gains of the foundation to any UK resident 'beneficiaries'. Therefore income that arises to the Panama Foundation could, based on this, be apportioned to the UK resident beneficiaries or members of the Foundation.