Higher costs fail to deter company formation and use of trusts

Higher costs fail to deter company formation and use of trusts

Updating company and trust laws this year has given a new lease of life and potential new business lines for Gibraltar’s trust and company service providers against the background of rising costs, greater transparency and increasing regulation, discovers Ray Spencer

It has been 20 years since the jurisdiction’s reputation in this area of financial services was based around the setting up of hundreds of brass plate companies and secretive trusts to hide ownership of assets offshore. For the past 15 years, however, Gibraltar has been at the forefront of implementation of international initiatives to ensure transparency, compliance and security.

“The industry may to some extent have been tarnished by certain bad practices, whereby some operators aggressively promoted the establishment of structures whose benefit was predicated on a failure by the client to report the structure in his home jurisdiction. Taken at its worst, this could amount to facilitating the sheltering of assets” said Adrian Pilcher, who is part of the private client tax team within the commercial department at law firm ISOLAS, where he is a partner.

Pilcher was candid. “Service providers could in the past hide behind the fact that ultimately the reporting obligation was on the client.  Today the rules have changed, and it is now up to the service provider, as well as the client, to report.”

Today, providers generally have fewer clients; fees have risen significantly.  At the height in early 2000’s, there were 30,000 companies in Gibraltar; today there is less than half that number.

The Gibraltar Financial Services Commission confirmed: “There are just over 60 licensees authorised to provide Fiduciary services and there continues to be rationalisation and consolidation in fiduciary groups. The trend within the industry continues to be focused on a move towards a higher quality offering and product, which is reducing client numbers, although not profits.”

Pilcher maintained: “Reporting effectively cleans up the playing field, so at the end of the process the good, legitimate operators are in a great position to do business. The other side of the coin, however, is that for some operators the cost of doing business may have gone up by as much as 50%. Although some cost can be passed on to the client, some smaller operators are finding that their business model is no longer viable.”

Mark Bridge, director and legal counsel at Europa Trust, was formed 33 years ago and licensed both as a company manager and as professional trustee, has seen the firm’s client base decline numerically in recent years, but the amount of work increase.

He suggested: “The nature of our business has changed and there’s been a general shift from establishing holding companies for single assets, to setting up trading and operational companies.

“This has been because Gibraltar’s much-improved image from being an off-shore jurisdiction to a successful, stable and compliant finance centre in the forefront of EU locations where people of substance are comfortable in setting up their businesses.”

Joey Immosi, Fiduciary Wealth’s business development director, noted: “Some 20 years ago, there were lots of brass plate companies, but that has changed with the emphasis on due diligence and KYC (Know Your Customer) processes, and Gibraltar government was an early adopter of OECD tax information exchange agreements, which has been good for the jurisdiction’s reputation.

“We need to know from our clients today exactly what is going on and technology has helped drive this.”  That had also meant investment in “a team to meet
regulatory requirements, to check that clients are who they say they are and living where they say.  Our compliance section began 12 years ago rising from one part-time person to three now”.

Compliance costs up

Higher compliance costs have also reduced the volume of companies being incorporated, but has resulted in better quality and more services being provided. “Overall business remaining strong”, said Gibraltar’s Association of Trust and Company Managers (ATCOM), which has 56 member firms [representing 90% of the sector] four more than five years ago and, it claims, the number of people employed has remained steady at around 1,000.

Marc X Ellul, managing partner of law firm Ellul & Co, and managing director of its associated company management business, became ATCOM chairman in June, and insisted: “The cost of compliance, as with any other reputable jurisdiction, has pushed up fees, but clients understand and accept those costs”.

“There is a lot of company business for sure; less volume, but a lot more work”, Ellul emphasised. Structures were more complicated, with tax advice and a clear understanding of an individual’s tax position being required, “so higher fees are being paid for that.  It is not an industry like it was 20 years ago – it’s not the volume sector.”

In addition to the near 160 various Gibraltar tax exchange agreements with other nations, the 4th EU Anti Money Laundering Directive (AMLD) and Exchange of Notes between the UK, Crown Dependencies and Overseas Territories (such as Gibraltar) required the private register of beneficial ownership, identifying anyone having more than a 25% beneficial interest in a company, by end-June. 

The UK’s Companies House information is public, but in other jurisdictions only tax, security and law enforcement agencies can look at Registers’ portals.  Trusts have traditionally maintained anonymity and these are included only if they have a tax consequence within Gibraltar.  Imossi reasoned: “Nobody really wants everything about them out there, no matter if it’s a very wealthy client, or someone less so; it’s a private matter.”

The Ultimate Beneficial Ownership Register at Gibraltar Finance was created in June and firms are encouraged to add details when creating new structures, with historic information being required by end-January.

Fiduciary’s website states: “It is usual for an underlying company to be utilised as a vehicle to hold assets of the Gibraltar trust. The company acquires assets such as real estate, marketable securities, pleasure yachts or any other investments or businesses, and it is the shares in the company that are entirely owned by the Gibraltar trust.  Normal practice is to have a number of companies owned by a trust, each of which holds one asset type.”

Non-residents do not pay tax locally, even when trustees may be Gibraltar residents and it is fully managed from The Rock.  Gibraltar has no capital gains tax, gift tax, wealth tax, estate duty, inheritance or death tax, “so it is possible to accumulate income and realise capital gains without a tax liability arising”, Fiduciary states.

Imossi revealed the threshold investment for establishing a structure had risen. “For example, unless the value of the assets to be held in a trust are worth at least £750,000, it doesn’t generally make financial sense, whereas in the old days the value could have been just £200,000,” he held.  In a smaller market, “the fee structuring has increased so that, perhaps, for every three clients lost, we onboard a new client with much larger business.”

Significant wealth

Paul Astengo, senior executive at Gibraltar Finance, responsible for growing the private client proposition, including trust and company management, concurred: “It’s costing more to stand still.  There are still very good reasons to place wealth in a structure, but it has to be significant wealth rather than
a one-off property, for example.” Special purpose trusts might be used for an educational donation to guarantee payment of a child’s university education, for example and for a set period of time.

ATCOM’s Ellul is looking to create a two-year Gibraltar company law and administration course in 2019, in conjunction with Gibraltar University, rather than having to teach the differences with English Law as now.  He estimated that conservatively more than 50 people will be attracted initially, and declared: “You have the alternative of
studying English law academic courses, but then you have a huge learning curve on the many Gibraltar law differences.

“At present, people in trust and company management learn through experience – [Gibraltar lawyers have a separate compulsory law course] – so I expect there to be three modules covering Gibraltar company law, company administration and regulation/compliance focusing on our particular laws, procedures and practices,” Ellul said.

Gibraltar company law has recently been overhauled with significant input from the Gibraltar Society of Trust and Estate Practitioners (STEP), whose chairman, Peter Isola, the senior partner at ISOLAS, set up a committee to look at bolstering Gibraltar’s private client / family office legislative offering.

Fire-walls added

“We identified a number of areas,” Pilcher noted, including “foundations legislation (that is particularly attractive to clients from civil law jurisdictions, who are not as familiar or comfortable with trusts), purpose trust legislation, legislation increasing the perpetuity period for private trusts, and ‘fire-wall’ legislation applying Gibraltar law to Gibraltar trusts to the exclusion of any other law.”

Fintech (financial technology) start-ups are showing interest in Foundations, although none are thought to have been registered since being permitted from April.  The UK has no foundation legislation; Guernsey and Jersey have, as well as traditional civil law jurisdictions such as Lichtenstein.

“A foundation offers some of the advantages of both a company and a trust. Assets held under a trust are held in the personal name of the trustees subject to the principles of equity and the common law which operate to ring fence the assets from the trustee’s own estate.  A foundation, on the other hand, is a separate legal entity in the same way as a company, and therefore holds assets in its own name. Like a trust, however, a foundation can be extremely flexible, and can also legitimately help maintain privacy,” Pilcher explained.

Conceptually, US FATCA was a smart, revolutionary piece of legislation”, Pilcher felt, but questioned how it was possible to implement “something so ground-breaking” and be able to anticipate all of its potential effects and consequences.  “When applied to certain scenarios, the legislation seems unclear, which of course, is the last thing you want. With trusts in particular it has not always been clear exactly who has to report, what is to be reported, or on whom.”

Pilcher pointed to government and industry guidance, but that was “not always in alignment, and often varies significantly from jurisdiction to jurisdiction.” The consequences of failing to report something reportable are such that service providers quite understandably err on the side of caution and opt for over reporting in cases of doubt, (although legislation discouraged it), “which creates a tremendous amount of unnecessary duplication, often at significant cost.”

This lead Pilcher to reflect: “Eventually, they will need to rein some of it back in.”  It’s a situation made worse by a proliferation of other reporting regulations with a great deal of overlap, yet with no consolidated reporting framework.”