Cayman Islands Foundation Companies
Nature of a Cayman Foundation Company
The Foundation Companies Act permits the establishment of a foundation company for any lawful purpose, be it commercial, charitable/ philanthropic, private, or a combination thereof. A foundation company shares numerous characteristics with other Cayman Islands businesses and seamlessly integrates into the legal framework of the Cayman Islands. The Companies Act is also applicable to foundation companies, except where it conflicts with the Foundation Companies Act, and subject to specific consequential modifications. As a result, the foundation company can benefit, when relevant, from a substantial body of legal precedent concerning corporate entities.
A foundation company is regarded as a legal entity with limited liability, possessing a distinct legal identity separate from its members, directors, and other officers. It has the capacity to initiate legal actions, be a party in lawsuits, and hold property under its own name. Notable features of foundation companies, distinguishing them from other corporate entities available in the Cayman Islands, include their lack of mandatory members post-incorporation, the requirement for express consent for any changes to their memorandum and articles of association, and their prohibition from distributing dividends to members.
Uses of Foundation Companies
Foundation companies are expected to have diverse applications, including serving as special-purpose vehicles in financial transactions, functioning as charitable entities, acting as protectors or enforcers within the context of other trusts or fiduciary arrangements, operating as components within private trust company frameworks, and facilitating succession planning. They can be employed for various purposes equivalent to those for which trusts are currently utilized.
For clients seeking an alternative to trusts, particularly in civil law jurisdictions, the foundation company offers the advantage of being more readily recognized in the client’s home jurisdiction. It can be effectively utilized to manage family wealth and businesses. Should it be desired, individuals overseeing a foundation company can replicate the governance structure of existing family enterprises. The ability to grant different entitlements to beneficiaries also proves highly beneficial for asset protection purposes. Furthermore, the foundation company is well-suited for holding higher-risk, less diversified assets, as the fiduciary duty is owed to the foundation company itself, rather than potential beneficiaries.
The adaptability of foundation companies makes them an excellent choice for charitable and philanthropic endeavors. Foundation companies can have hybrid purposes that allow for non-charitable elements, eliminating the need for separate structures. Additionally, foundation companies share similarities with the Islamic waqf structure, which can be advantageous for Middle Eastern clients.
Special Purpose Vehicle (SPV) / Corporate
The unique characteristic of a foundation company, characterized by its “orphan” nature without ownership or beneficial interest constraints, positions it as a valuable tool for use as a special purpose vehicle in corporate transactions, including securitisations. Foundation companies also serve as an ideal entity for holding shares in a private trust company or as part of Cayman STAR trust structures.
General incorporation requirements
Application and declaration
Directors and members of an existing company or a company in the process of formation have the option to request the Registrar for the company’s designation as a foundation company. The prescribed fee for establishing a foundation company or converting an existing one into a foundation company is CI$500 (equivalent to US$609). In cases where the company is to be established as an exempted foundation company, such as when seeking eligibility for a tax undertaking certificate (see Taxation below), an additional fee for incorporating an exempted company is also applicable, contingent upon the authorized share capital of the entity.
The Registrar will grant incorporation as a foundation company once certain conditions are met, including:
- The company is structured as limited by shares or by guarantee, with or without share capital.
- The company’s secretary holds the requisite qualifications (possesses a Company Management License).
The company possesses a memorandum of association that:
- Explicitly states the company’s status as a foundation company.
- Either generally or specifically outlines its objectives (which can be beneficial to other parties but are not obligatory).
- Specifies, either directly or by reference to its articles of association, the procedure for disposing of any surplus assets in the event of liquidation.
- Prohibits the distribution of dividends or other profit or asset allocations to its members or potential members in their capacity as such.
- The company has adopted articles of association.
If an existing or newly formed company fulfills these criteria and the requisite fee is remitted, the Registrar will issue a new certificate of incorporation that explicitly designates the company as a foundation company.
Foundation Company Constitution
Rights, powers, and duties
In addition to delineating its management by directors or their delegates, the constitution of a foundation company, encompassing its memorandum and articles of association, may confer various rights, powers, and responsibilities upon different parties related to the foundation company. These rights, powers, or duties specified in a foundation company’s constitution may encompass or pertain to any or all of the following aspects:
- The admission, appointment, or removal of its members, supervisors, directors, or officers.
- The establishment and modification of by-laws, which, while not constituting part of the company’s core constitution, provide the foundation company with additional flexibility in its organizational and managerial structure.
- The oversight of the foundation company’s management and operational activities.
- The enforcement, on behalf of the foundation company, of obligations and liabilities outlined in its constitution.
- The convening of general meetings, as well as participation in these meetings.
- Voting on ordinary or special resolutions of the foundation company.
- The alteration or amendment of the foundation company’s core constitution.
- The liquidation of the foundation company and the disposition of any excess assets.
- Powers granted within the constitution are conferred for the benefit of the foundation company and may be subject to specific conditions.
Unless the foundation company’s constitution explicitly provides otherwise, any responsibilities established within the constitution are solely owed to the foundation company, and any rights established within the constitution can only be enforced against the foundation company itself. The Foundation Companies Act includes a standardized constitution template for use if preferred.
Members and supervisors
The constitution of a foundation company possesses the authority to confer upon any individual, regardless of whether they are currently identified or in existence, the privilege of becoming a member or supervisor of the foundation company. This entitlement can be legally enforced through legal action against the foundation company, irrespective of its enforceability as a contractual matter.
Following its incorporation, a foundation company may cease to have members if its memorandum of association explicitly permits or mandates such a scenario, while still maintaining a supervisor. The cessation of members does not impact the company’s legal existence, its capacity, or its powers. However, it’s important to note that even if a foundation company no longer has members, it cannot subsequently admit members or issue shares unless expressly authorized to do so by its constitution.
The constitution of a foundation company also holds the authority to designate a member or supervisor as a director of the company. It’s worth noting that while there’s no requirement for supervisors of a foundation company to also serve as directors, this arrangement is permissible.
Assets and Investments
Given that there’s no mandatory minimum capital requirement for a foundation company, a founder or any other party may contribute assets to the foundation company, subject to the company’s acceptance. These assets can be employed in furthering the company’s objectives. Foundation companies are not bound by specific regulations regarding their investments, and there are no restrictions on the types of investments they may undertake, unless explicitly stipulated otherwise in the constitution.
Roles, management, and operation of
Cayman Islands Foundation Companies
Board of Directors
A foundation company’s administration is overseen by a board of directors. There is no stipulation mandating directors to be residents of the Cayman Islands, and there are no other restrictions regarding who may serve as a director for a foundation company. This means that any individual of legal capacity and any company are eligible to act as directors. Directors of a foundation company bear identical responsibilities to the company as directors of any other entity, encompassing a duty of care, diligence, and skill. For a comprehensive understanding of directors’ obligations under Cayman Islands law, please refer to our detailed guide on this subject.
Subject to the constitution, a member or supervisor also has the option to serve as a director, and there’s no requirement for a foundation company to appoint supervisors who are distinct from directors. Directors are mandated to furnish interested parties with reports, financial accounts, and any necessary information or explanations pertaining to the foundation company’s operations and business affairs.
In contrast to foundations in other offshore common law jurisdictions, a foundation company does not necessitate the presence of a formal founder. The incorporation of a foundation company occurs upon the instructions of the individuals promoting it, following the same process as any other Cayman Islands company. A founder does not inherently possess rights concerning the foundation company but can choose to reserve specific rights if they desire. The founder may be granted the authority to amend any provisions within the company’s constitution, but this can only occur if expressly provided for in the constitution itself.
A beneficiary of a foundation company refers to an individual who stands to benefit from the foundation company’s pursuit of its objectives. The constitution can accommodate various types of beneficiaries and beneficial provisions. Furthermore, a foundation company’s constitution, although not obligatory, has the option to delineate specific duties, powers, or rights vested in beneficiaries. This arrangement allows beneficiaries to hold direct, enforceable rights against the directors, officers, and interested parties if specified in the constitution.
An “interested person” within the context of a foundation company refers to any of the company’s members or supervisors, an individual entitled to become a member or supervisor of the company, and/or someone officially designated as an interested person under the company’s constitution. An interested person holds the authority to initiate legal action in the name of or on behalf of the foundation company to enforce the duties or obligations of directors, under circumstances and procedures akin to those applicable to a member of a company that does not possess foundation status. Subject to the provisions outlined in the company’s constitution, an interested person also possesses specific rights to access information, as elaborated below.
A “qualified person” concerning a foundation company signifies an individual who holds the requisite licensing or permissions in accordance with the Companies Management Act (Revised) to offer company management services within the Cayman Islands. A foundation company must continually retain a qualified person as its secretary, and this secretary is obligated to maintain comprehensive and accurate records of the company’s activities and inquiries made for the purpose of disseminating notifications.
Ongoing requirements for a foundation company
Registered Office Location
A foundation company is mandated to establish its registered office solely at the premises of its qualified person, who also serves as its secretary.
Requirements for Record-Keeping
A foundation company is under the obligation to maintain various registers and documents at its registered office, which encompass:
- Register of directors and officers.
- Register of mortgages and charges.
- Beneficial ownership register (unless qualified for exemptions; for detailed information regarding available exemptions, please refer to our “Guide to the Cayman Islands Beneficial Ownership Regime”).
- The data contained in the beneficial ownership register is also subject to monthly submission by the company’s registered office provider to the Cayman Islands competent authority, conducted with utmost confidentiality.
- Furthermore, a foundation company is mandated to uphold a register of supervisors at its registered office, detailing the particulars of the company’s supervisors and the dates of their appointments. This register must be updated within 60 days of any changes in the company’s supervisors. While the company must also maintain a register of members, it is permissible to store this register at a location other than the registered office. Additionally, the company should maintain a minute book, and the registered office provider is required to retain copies of specific records for the purposes of compliance with anti-money laundering regulations.
Compliance with Regulatory Laws
A foundation company must ensure that it, along with its directors, officers, and interested parties, provides information (including accounts, documents, and records) to its secretary, as may reasonably be required to comply with specific anti-money laundering and counter-terrorist financing laws. The company is also prohibited from accepting an asset contribution that is gratuitous or received in consideration of a share issuance unless the secretary has issued notice that there are no objections to such acceptance under the relevant laws. In the event of a breach of these obligations, the foundation company, its directors, any company manager, and any individual purportedly acting as a director or manager during the commission of the offense will be subject to penalties upon conviction. These penalties may include a fine of CI$15,000 (equivalent to US$18,293) and/or imprisonment for up to five years.
The Companies Act mandates every company to maintain accurate and proper accounting records, detailing all income, expenditures, purchases, sales, and the company’s assets and liabilities. These records should provide an accurate and fair representation of the company’s financial status and explain its financial transactions. In the Cayman Islands, a company can select its preferred date as the financial year-end. Unless specified differently in the foundation company’s constitution, the directors are obligated to furnish interested parties with reports, financial accounts, information, and explanations pertaining to the foundation company’s business, operations, and the fulfillment of directorial duties and exercise of powers. These obligations can be initiated either through an ordinary resolution or a written request from an interested party.
There is no statutory requirement under the Foundation Companies Act or the Companies Act necessitating the filing or auditing of a foundation company’s financial accounts. However, exceptions may apply if a foundation company falls under Cayman Islands regulations governed by other regulatory laws. For further information, please feel free to reach out to us.
Each foundation company must remit an annual Companies registry fee to the Registrar in January of each year, amounting to CI$700 (equivalent to US$854). This fee will be managed by the company’s registered office provider.
A foundation company is restricted from disposing of its assets if, immediately following the disposition, it becomes incapable of settling its debts in the normal course of business. Knowingly and willfully authorizing or permitting such a prohibited distribution by a director or manager of a foundation company is considered an offense. Conviction carries a maximum fine of CI$15,000 (US$18,300) and/or a prison sentence of up to 5 years. Additionally, the memorandum of association of a foundation company must contain provisions that prohibit the payment of dividends or other distributions of profits or assets to the company’s members.
At present, a foundation company cannot transfer in or out of the Cayman Islands through continuation, nor can it merge or consolidate under the Companies Act. Future regulations may be introduced to modify the Companies Act procedures to accommodate foundation companies. The Companies Act provisions related to voluntary or compulsory winding up, either initiated by the company or ordered by the court, also apply to foundation companies, with certain modifications. For further details, please contact us.
The Cayman Islands do not impose any exchange control laws, which means there are no restrictions on the movement of funds in or out of the Cayman Islands, whether by residents or non-residents. Bank accounts can be maintained in the Cayman Islands or any other jurisdiction worldwide, in any currency. Additionally, a foundation company’s capital can be expressed in any applicable currency.
Dispute Resolution and Jurisdiction
The constitution has the flexibility to outline methods for resolving disputes, disagreements, or challenges among the directors, officers, interested parties, or beneficiaries of the foundation company. These disputes can pertain to the foundation company’s operations, its affairs, or the duties, powers, and rights of individuals under the constitution. Such resolution mechanisms may include compromise, mediation, arbitration, or any other legally recognized method.
Jurisdiction of the
The Grand Court of the Cayman Islands may, if specified in the foundation company’s objectives or constitution, possess authority in matters concerning the disposal of surplus assets during winding-up and issues related to the number or conduct of the company’s directors. Notably, Section 48 of the Trusts Act (Revised), which enables trustees of Cayman Islands trusts to seek directions from the Grand Court, is applicable to foundation companies. Additionally, the “firewall” legislation found in sections 92 and 93 of the Trusts Act is also pertinent to assets contributed to foundation companies. This aspect can be especially valuable for clients hailing from countries with “forced heirship” laws.
The Cayman Islands do not levy corporation tax, income tax, capital gains tax, inheritance tax, gift tax, wealth tax, or any other form of taxation on foundation companies. Stamp duty is only applicable to specific documents, typically at a nominal rate. Foundation companies engaged primarily in activities outside the Cayman Islands can apply for registration as exempted companies. Upon approval, they can obtain a tax undertaking certificate from the Cayman Islands government, ensuring the stability of their tax status for a period of up to 30 years from the date of the undertaking.
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