Among the boosters of the structures are Chinese wealth management professionals, who say that they are often preferable for Chinese citizens who, due to China's incomplete legal system, prefer having direct access to their wealth, while keeping a level of separation between them and the actual "owner" of the wealth.
Subtle advantage.
The basic difference between a trust and foundation is that a foundation is actually a legal entity, without shareholders or members, and thus can hold assets, enter into contracts and take people to court. Control over the assets held by the foundation is designated to the foundations board, which can be run by the person establishing the foundation - meaning a person can be in direct control of their assets. This is different from a trust, which requires the establishing party to hand over the assets to a trustee, who manages these assets with only slight guidance from the original owner. In some cases attempts to influence a trustee leads to the trust becoming legally invalid.
Foundations, with the notable exception of Liechtenstein "deposited" foundations, are listed in the local registries, making them more public than some would prefer, but most venues provide an option for keeping the founder out of the spotlight. In some cases the country allows the foundation to list without naming the managing directors, in other cases a foundation is required to name the managing directors but local agents can be used to keep the founder of the foundation in the background.
With countries the world over trying to hunt down tax dodgers in order to fill in their budget deficits, a foundation provides an extra level of security. The validity of a foundation is established with its entry into the local registries, trusts require verification in a court of law. Furthermore the establishment of a clear and separate estate protects the assets held by that estate unless it can be proved that they were obtained through criminal conduct.
"These differences can be particularly attractive to Chinese clients," notes Austin Zhang of the China Wealth Academy. "The most important issue for Chinese investors is how they can best control their assets when a trust is set up in a jurisdiction. The private foundation has become an acceptable vehicle to Chinese lawyers and wealthy individuals because a foundation father may also be a council member and a beneficiary, and even an inspector," he says in a note to clients.
The structure is particularly ideal for exporters. Who often would prefer keeping their Chinese business and their foreign business legally separate. For instance a Chinese shoe manufacturer could establish a Seychelles foundation as a holding company for a British Virgin Islands company that exports the products to America (law firms are already offering such structures). In this case the Seychelles foundation would hold final liability, a further boon as Seychelles foundation law place a high burden of proof on creditors trying to access the foundation's assets (beyond a reasonable doubt), and a short 2-year statute of limitations, a benefit common to foundations.
Legal comfort.
Setting up a trust in China is also constrained by an unclear legal code and strict government controls over the market.
The Chinese government attempted to bring trusts into the legal system in 2001 with the passage of its Trust Law. This law is specific and detailed about how to legally establish a trust, and how to verify the validity of the trust, but makes no specification as to taxation. "My impression is that they will tax any business done in China as though the trust were an enterprise, but it's not precisely clear," notes Gianpaolo Camaggio of Chiomenti Studio Legale.
Tracy Zhang of KPMG is even more ambivalent, "There are no clear regulations in this regard, currently holders of trusts are depending on regulatory ambiguity in order to avoid taxes [as opposed to actual legal protection."
The problem gets even more sticky in relation to offshore trusts. According to Chinese law trusts can only be formed by a certified local Chinese trust company. "These companies rarely have the interest or the experience to create offshore structures," notes Jason Bedford of KPMG. A Chinese person who wishes to create a trust for his assets offshore would usually either have to get a trust company to contract the work out - which still leaves open the question of tax liability - or extract his assets from China first and then hand them over to the offshore trust fund, which, with certain assets (shares, real estate, so on), might not be possible.
Things are much less uncertain with a foundation, as it is essentially a business to business deal. Jason Blatt of the Pamir Law Group argues that the best tax solution for Chinese businessmen is to do business in China through a Hong Kong company, thus receiving Hong Kong's preferential tax, while handing ownership of the Hong Kong company over to a private foundation to avoid capital gains taxes. Any related foreign businesses could be kept completely separate under a private foundation.
A new day.
With the seeming advantages of Foundation structures, at least for Chinese clients, there can be little wonder that the offshore centers which are competing for Chinese business are quickly lining up to provide the services. Seychelles and Jersey put new foundation laws into place only last year, while Caribbean islands have been getting their pitch books ready for their Chinese visits, and the Chinese government takes its time putting in place the legal structure to deal with this new model.
