Sovereign IOM — Foundations

Isle of Man Foundations are set up under the Foundations Act 2011. A Foundation is established by a founder, who provides the initial assets and sets out the Foundation’s purpose and governance arrangements in its constitution.

A Foundation may be established for:

• The benefit of specified individuals or groups.
• A particular purpose, including charitable or philanthropic purposes.
• A combination of purposes and beneficiaries.

Foundations are established as not for profit institutions and may pursue either public benefit or private benefit objectives. Any surplus generated must be applied solely towards the achievement of the Foundation’s purposes and may not be distributed to founders, council members or officials.

Because a Foundation has its own separate legal personality, it can hold assets directly, including real estate in the Isle of Man, and can contract with third parties. This makes it an attractive vehicle for holding investments, developing business interests or managing assets within a structured and regulated framework.

A Foundation may not engage in trading and commercial activities that are 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 foundation rules must establish a Council to administer the Foundation’s assets and carry out its objects. They should include:

• Administrative matters, such as the appointment or retirement of council members or the way in which decisions are to be made. Any person empowered to approve a decision must be identified.
• The functions of the council and the extent to which they may be delegated or exercised in conjunction with another person.
• Where the Foundation is for the benefit of a person, or class of persons, the rules should provide how the persons, or class of persons, may be changed.
• Provision for the appointment, retirement, removal and remuneration of the registered agent.

The rules may be written in a language other than English but, where this is the case, a translation of the rules must be provided to the registered agent.

An Isle of Man Foundation is generally governed by a Foundation Council, which is responsible for administering the Foundation and managing its assets in accordance with its constitution. They key roles typically include:

Founder

The Founder establishes the Foundation and provides its initial assets. The founder also determines the Foundation’s purposes and establishes its constitutional framework.

Depending on the structure, the founder may retain certain powers, although these should be carefully considered when establishing the Foundation.

Foundation Council

The Foundation Council must have at least one member, who must be at least 18 years old. The council is responsible for the administration and management of the Foundation, and must act in accordance with the foundation instrument, the foundation rules and the Act.

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.

The council’s responsibilities may include managing investments, making distributions and ensuring that the Foundation operates in accordance with its stated purposes.

Enforcer

The enforcer provides an additional layer of oversight and can be an important part of the Foundation’s governance arrangements. 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.

The appointment of an enforcer is optional, unless the Foundation has been established to carry out a specified non-charitable purpose. Where an enforcer is appointed, the enforcer’s powers and how they are exercised should be set out in the foundation rules.

Apart from the founder of the Foundation and the registered agent no person may be both a member of the council and its enforcer.

Beneficiaries

A Foundation may have one or more beneficiaries who are entitled to benefit from the Foundation in accordance with its constitution. A beneficiary has no automatic interest in Foundation assets unless that beneficiary becomes entitled to a benefit under a Foundation. A Foundation can also be established for purposes rather than, or in addition to, having individual beneficiaries.

Under the Income Tax Act 1970, a Foundation is defined as a corporate taxpayer. This means that for income tax purposes a Foundation will be treated in the same way as a corporate taxpayer: subject to a general rate of 0%, and 10% where the Foundation receives income from Manx land and property.

A Foundation is required to submit a tax return and accounts 12 months after the end of its accounting period; and will be subject to penalties should returns not be filed on time.

Foundations can offer a number of potential benefits as part of an appropriately structured wealth or succession plan.

• Separate Legal Personality – because a Foundation is a separate legal entity, it owns its assets in its own name. This can provide a clear distinction between the Foundation’s assets and those of its founder, councillors and beneficiaries.

• Succession Planning – Foundations can provide a structured way of holding family wealth across generations. The Foundation’s constitution can establish how assets are to be managed and how benefits are to be provided over time. This can help provide continuity where circumstances within a family or beneficiary group change.

• Flexible Governance – the constitution can be tailored to the founder’s objectives, subject to the requirements of Isle of Man law. This allows the Foundation’s governance and decision-making arrangements to be designed around its particular circumstances.

• Philanthropic and Charitable Purposes – Foundations can be used to support charitable, philanthropic or other long-term objectives. They can provide a framework for holding assets and applying them towards defined purposes over an extended period.
• Asset Holding – a Foundation can hold a wide range of assets, subject to applicable legal, regulatory requirements, and tax considerations. This may include investment portfolios, shares in companies and other forms of property.

Foundations can be useful where there is a need for long-term asset management, succession planning, family wealth planning or the pursuit of defined charitable or philanthropic objectives.

The choice between a Foundation or a Trust will depend on factors such as the founder’s objectives, the nature of assets, the intended beneficiaries, governance requirements and the jurisdictions involved.

Sovereign is also able to provide full administrative services to FFoundations, including the preparation of financial statements, accounts, the completion and filing of tax returns and the opening and maintaining of bank accounts.

Professional legal and tax advice should always be obtained before establishing a Foundation. Please contact Sovereign Isle of Man to can discuss your requirements.