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Balancing influence and substance for Middle Eastern clients

Balancing influence and substance for Middle Eastern clients

Given the continuing political instability in the Middle East, wealth preservation remains a top priority for many Middle Eastern families and individuals; both in terms of immediate asset protection and long-term succession planning.

In such uncertain and volatile times, offshore trusts can offer a useful safety net. For example, in the unfortunate event that a family is forced to flee their home country, having assets held in trust can provide certainty for the beneficiaries that these assets will remain available in their new home without having to go through a time-consuming and complex expatriation process. Equally, it is deemed desirable to have assets consolidated in a robust structure located within a reputable, well-regulated and tax neutral jurisdiction, such as Jersey, Guernsey or the Isle of Man.

I have discussed previously the common desire among wealthy Middle Eastern merchant families to retain influence over the assets in a structure. This is particularly prevalent among entrepreneurial individuals who are used to being ‘hands on’ with their business and financial affairs. Of course, in order for a structure to be effective it is important that the settlor does not hold too much control. After all, one of the fundamental principles of establishing a trust is that there must be a movement of assets away from the settlor to a third party.

An increasingly popular way to retain an appropriate but desirable level of influence over trust-held assets is through a private trust company (PTC); a corporate vehicle set up to act as trustee of a trust. A PTC is usually considered in the planning and establishment of trust structures for ultra-high-net-worth families with complex underlying assets who wish to maintain ongoing active involvement in the management of the structure – as is often the case with our Middle Eastern clients.

Indeed, our Group is currently working on one such PTC-based structure for a GCC family. They wished to establish a flexible structure for several family members that would facilitate investments across multiple jurisdictions, house business and personal investments alongside one another, allow a level of influence to be retained over the investment assets, while ensuring privacy and segregation between the assets of different family members.

Importantly, the composition of the board of a PTC can be defined by the settlor, helping ensure the structure is run in accordance with the family’s wishes. PTCs can be used to introduce family members into management over time (by appointing them to the board), and if the family becomes unhappy with the administration provided by the service provider, it is more efficient to change the directors of the PTC (and thus effect a change in provider) than change the trustees of a trust.

That all being said, there has been much discussion and activity in recent months around the EU’s new substance requirements for offshore companies from 2019. Following the EU Code of Conduct Group (Business Taxation)’s review of over 90 jurisdictions last year, it was flagged that, while the Crown Dependencies are compliant with most of the EU principles of tax good governance, they are among the territories lacking a legal substance requirement to ensure businesses are only granted tax residence in the jurisdiction once they demonstrate that they have adequate economic substance there.

Jersey, Guernsey and the Isle of Man voluntarily committed to address the Code of Conduct Group’s concerns and comply with the code. They have since been working together to develop proposals to meet their commitments. The Governments of both Jersey and Guernsey ran public consultations on their proposals throughout August, and Jersey became the first to publish draft economic substance legislation in October.

These changes must be kept in mind when planning the make-up of an offshore PTC’s board of directors as well as the boards of the underlying trust-owned SPVs. Under the new substance requirements, which will come into effect at the end of 2018, companies will need to be able to clearly evidence that they are directed and managed in the jurisdiction of tax residency, that they carry on Core Income Generating Activities (CIGA) there, and that they can also demonstrate adequate levels of qualified employees, annual expenditure and physical assets in the jurisdiction.

For Middle Eastern clients, this means striking a careful balance between satisfying desires for influence with ensuring that mind and management does not take place in the Gulf. Key to this will be the selection of high quality, reputable service providers that can partner effectively with clients to interpret and satisfy the substance and associated record-keeping requirements.

As trusted service providers, it is vital that we keep looking ahead to prepare for impending requirements and deliver future-proof solutions that maintain the highest level of corporate governance while satisfying our clients’ individual needs.