Foundations in the Isle of Man

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Foundations in the Isle of Man

Since January 2012, international clients and advisors have been able to incorporate and use the new flexible yet sophisticated Isle of Man foundation following the introduction of the Foundations Act 2011.

A foundation is an incorporated, self-owning, legal entity which, although having much in common with limited companies and trusts, possesses its own unique features. Foundations have separate legal personality and are therefore capable of holding assets, suing and being sued. The main difference between limited companies and foundations is that the latter cannot directly engage in commercial trading that is not incidental to its objects. It can, however, easily get around this issue by holding a trading subsidiary.

As an incorporated entity, a foundation can transact in its own name but it has no 'owner' as such, so the person who establishes the foundation (known as the 'founder') cannot be liable for its debts.

The founder of a foundation can retain greater control over the objects and administration of the foundation compared with the settlor of a trust. Furthermore, foundations can exist in perpetuity, unlike trusts.


Potential uses of a foundation

  • as a useful succession planning or wealth management vehicle (e.g. to hold the shares in a family business to protect it from competing wishes concerning its future);
  • to hold the shares in a private trust company (PTC);
  • charitable foundations;
  • 'orphan' or off-balance sheet structures, for example securitisations or distressed ship refinancing which is becoming increasingly common through Isle of Man vehicles;
  • holding wasting assets (e.g. superyachts and business jets);
  • generally as an alternative to trusts for clients in noncommon law jurisdictions (who may not be comfortable with using a common law trust structure).

Establishment


In order for a foundation to be established under the Act, an application, made in the form and manner required and must be submitted to the Registrar of Foundations (“the Registrar”).

The application must be made by a registered agent (the holder of a class 4 license issued under the Financial Services Act 2008 and permitted to be a registered agent of foundations). The application must be accompanied by the foundation instrument and the appropriate fee. The licenceholder must make a declaration confirming that:

  • they will be the registered agent of the foundation on its establishment;
  • their address will be the business address of the foundation in the Isle of Man; and
  • the licenceholder is in possession of a copy of the foundation rules for the proposed foundation.

If the application meets the requirements of the Act, the Registrar must establish a foundation. Should the Registrar decline to register a foundation, application may be made to the High Court to appeal the decision of the Registrar. On approving the application, the Registrar must make the following entries in the Register of Foundations (“the Register”):

  • name and address of the foundation;
  • its objects;
  • names and residential addresses of the council members;
  • name and address of the registered agent;
  • registration number.

The Registrar must then issue a Certificate of Establishment.

The Certificate of Establishment is evidence that the foundation has been established. On establishment, the foundation is a legal person and capable of suing and being sued in its own name, and may hold its assets for its objects.

The Registrar is appointed by the Department of Economic Development and must keep a Register that includes the foundation instrument of each foundation. The Register is available for public inspection.

The Registrar must, on payment of the prescribed fee, issue a certificate stating whether or not a named body is a foundation and include details of its address, registration number, members of the council and details of the registered agent. A copy of the foundation instrument may be obtained for a fee. The certificate and a certified copy of the foundation instrument are admissible in legal proceedings.


Foundation Instrument


The foundation instrument is the major constitutional document of a foundation (sometimes called, in other jurisdictions, the charter). It must comply with the terms of the Act and must be completed in English. The foundation instrument is a public document.

The name of the foundation must comply with the “Guidance Notes – Choosing Your Company or Business Name” issued by the Registrar in respect of bodies corporate and unincorporate that are registered in the Isle of Man. The name of a foundation must end with the word “foundation”.

The objects for which the foundation is established must be set out in the foundation instrument. These must be certain, reasonable and possible, not unlawful or contrary to public policy or immoral. The foundation’s objects may include “mixed” objects that benefit a person or class of persons, carry out a specific purpose or do both.

The names of the persons that are beneficiaries under a foundation need not be named in the foundation instrument – they must however be determined in accordance with the foundation rules. Where a foundation has been established for a specified purpose, the foundation instrument need only provide that the foundation is to hold assets in accordance with the foundation rules for that purpose.

The foundation instrument must also specify the names and residential addresses of the members of the council of the foundation. Any subsequent changes to the council members or their details must be notified to the Registrar within one month of the change occurring.

The details of the registered agent must also be included in the foundation instrument.


Foundation Rules


The foundation rules (“the rules) may be written in a language other than English. Where this is the case, a translation of the rules must be provided to the registered agent. The rules are not publically available.

Where the foundation is for the benefit of a person, or class of persons, the rules may provide how the persons, or class of persons, may be changed.

The rules must establish a council to administer the foundation’s assets and carry out its objects. The details of administrative matters relating to the foundation council must be contained in the rules. Matters that must be considered include the appointment, retirement, etc. of council members, the manner in which decisions are to be made, including decisions those decisions (if any) that require the approval of any other person. The rules must identify any person empowered to approve a decision.

The functions of the council and the extent to which they may or must be delegated or exercised in conjunction with another person must be set out in the rules.

The registered agent is an essential element. No foundation may exist without a registered agent. The rules must make provision for the appointment, retirement, removal and remuneration of the registered agent. The High Court has the power to appoint a registered agent should this prove necessary.


The Enforcer


The appointment of an enforcer is optional, unless the foundation has been established to carry out a specified non-charitable purpose. This is similar to the requirement for a purpose trust to have an enforcer. In cases where the object is to benefit a person, or class of persons, the appointment of an enforcer, while optional, as in the case of the protector of a discretionary trust, may be a prudent consideration. An enforcer must be appointed in accordance with the Act and must exercise the functions of the role in accordance with the terms of the Act and the rules. The duties of the enforcer require that reasonable steps are taken to ensure that the council of the foundation carries out its functions and acts in the best interests of the foundation.

Where an enforcer is appointed, the foundation rules must specify the enforcer’s name and address. The rules must also make provision for the appointment, retirement, removal, replacement and remuneration of the enforcer. Apart from the founder of the foundation and the registered agent no person may be both a member of the council and its enforcer.

The enforcer is empowered to hold the council to account for the way that it has administered the foundation assets and has acted to further the foundation objects. The foundation rules may make provision for the enforcer to approve or disapprove specified actions of the council. Provision can also be made in the rules for the enforcer to sanction or authorise any action to be taken by the council that would not otherwise be permitted by the foundation rules. Before consent is given, the enforcer must be satisfied that it is in the best interests of the foundation to do so and that the council, in taking the action, has acted, or will be acting, in good faith.

The enforcer cannot sanction or authorise any action which is inconsistent with the Act or any other enactment.


The Assets


A foundation need not have an initial dedication of assets however, if it does, details of the dedication must be included in the rules. After establishment, further assets may be dedicated to the foundation unless the rules prohibit this. Details of any further dedications permitted under the rules, must be specified in the foundation rules which must be amended to include the details of additional dedications.


The Council of a Foundation


The council must have at least one member.

A council member must be at least 18 years old. A person cannot be a council member if:

  • suffering from a mental disorder under the Mental Health Act 1998;
  • disqualified from being a member of the council of a foundation; or
  • disqualified from being a director of a company.

The registered agent or another class 4 licenceholder may be a member of the council but only one class 4 licenceholder may be the registered agent at any one time.


Acts of Members of the Foundation Council


Council members have a fiduciary duty to act honestly and in good faith in the best interests of the foundation. They must exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances.

More generally the foundation council must act in accordance with the foundation instrument, the foundation rules and the Act.


Rights of Persons under a Foundation


The rights of founders are as provided for in the foundation rules. Rights of the founder may be assigned to another person if the rules allow for this. A copy of the document detailing the assignment of any rights must be provided to the registered agent.


Beneficiaries


A beneficiary has no automatic interest in foundation assets unless that beneficiary becomes entitled to a benefit under a foundation. If the benefit is not provided, the beneficiary, or person acting on his behalf, may obtain an order of the High Court ordering the foundation to provide the benefit.


Rights of Information


A written request for information may be made to the foundation by a person “with sufficient interest in the foundation”. The foundation must provide that person with information relating to the financial condition of the foundation and assets, the manner in which assets are being administered, the way in which it is carrying out its objects and the administration of the foundation. No information must be provided if this is prohibited by the rules. A person may however apply to the High Court for an order requiring the provision of the information. The person making application to the High Court must be able to satisfy the High Court that the information requested is required in order to determine whether the foundation is carrying out its objects and that the council is managing the assets and generally administering the foundation as is required.


“Persons with sufficient interest”


The term “person with sufficient interest” includes a foundation, the founder, a dedicator, a person to whom any rights are assigned, a member of the council, an enforcer, the registered agent, a person appointed under the foundation rules, a beneficiary and any charitable object, a person who, in the view of the High Court, can reasonably claim to speak on behalf of an object or purpose of the foundation or a person who the High Court determines to be a person with sufficient interest.


Capacity of a Foundation


A foundation may not engage in commercial trading which is not incidental to the attainment of its objects. It does however have the capacity to exercise all the rights, powers and privileges of an individual. The capacity of the foundation is not limited by anything in the rules or the act of any person appointed under the rules.


Application of Laws to a Foundation


Isle of Man Law governs any question about Isle of Man foundations. This also covers the dedication of assets to a foundation. This includes matters relating to the capacity of the foundation, its validity, the interpretation or effect of the foundation instrument, the rules relating to the administration or the existence and extent of powers in respect of a foundation such as powers of amendment, revocation etc.

The Act does not however validate the dedication of assets to a foundation where the assets are not owned by the founder or dedicator or that are subject to a power of disposition vested in the founder or dedicator. This means that any person who validly transfers assets to a foundation must have clear, undeniable title and right to transfer the assets to the foundation. This provision does not affect the recognition of the law of a jurisdiction outside the Island in determining whether the founder or dedicator is, or was, the owner of property.

Formalities of disposition must be observed when the rules relating to this are rules of another country and, if any such disposal to a foundation is invalid under the law of that jurisdiction, section 37 does not validate that provision.

However, the transfer of assets to a foundation is not void, voidable or liable to be set aside simply because the law of a jurisdiction outside the Island:

  • does not recognise foundations;
  • prohibits the dedication of assets to a foundation;
  • prohibits the establishment of a foundation and the transfer of assets to it avoids or defeats claims and rights imposed by law of another jurisdiction;
  • the establishment of a foundation or the dedication of assets to it contravenes, or potentially contravenes, a rule of law or a judgment or order intended to recognise, protect or enforce any law outside of the Island.

No enactment or judgment will be recognised, enforced or give rise to any rights in respect of the valid establishment a foundation or the dedication of assets to a foundation established under the Act.


Administration of Foundations


Part 3 of the Act relates to the administration of foundations. This makes provision for the service of documents on a foundation.

The documents to be kept at the business address are listed. There is a requirement for reliable accounting records to be kept at the business address.

Every foundation must make an annual return to the Registrar.


If you are interested in foundations in the Isle of Man and require further information please contact:


Dennis McGurgan