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The Split Share International Business Company (IBC)

A Bahamian International Business Company or IBC can be used as a split share company that is both effective and affordable to administer.

The process for creating a split share company involves amending the Articles and Memorandums of the IBC so that the Ordinary shares of the company represents the future income and/ or any type of future gain of the structure and the Preferred shares represent the existing assets and liabilities that are treated as capital.

The IBC can also be split into the same class of shares as indicated above but instead of income and capital, the shares are used to delineate between a charitable purpose (ordinary shares) and a directed purpose (preferred shares).

In both examples, the setup of the IBC represents a form of planning that can shelter clients against tax exposure as well as provide succession planning. A revocable, fully directed trust owns the redeemable, preferred shares corresponding to the capital of the company, and a second irrevocable, discretionary trust is used to hold the ordinary shares corresponding to the income.

The “Split” between the income and capital of the company via issuance of different classes of shares, theoretically allows the client to segregate himself from the income generated by the holding company.

Provided that the client has fully relinquished control and benefit of such income (due to the irrevocable trust), neither the settlor or beneficiaries are subject to tax reporting obligations in their home country. I.e. No income tax reporting obligation until receipt of an income distribution.

In summary, as long as the Trustee retains full discretion on the income trust, there are no tax or reporting obligations in most jurisdictions.

Automatic Disclosure Vs Liability

Whilst most fiduciaries are willing to provide information such as trust instruments and bank account information to the donor and beneficiaries, there is a general reluctance to disclose any other information or documents to anyone else unless required by law.

The general practice is to request written approval from the donor prior to dissemination of information regardless of who the recipient might be. In yesterday’s world, the words “bank secrecy” were used as an attribute when describing reasons for establishing an offshore trust. After time, the word “confidentiality” was perceived to be more politically correct. In today’s world, anything to do with secrecy and confidentiality is discouraged.

The industry has moved toward transparency with emphasis on clients who are reporting and are compliant in their home jurisdictions. However, as tax laws change, many clients find themselves on the wrong side of the tax code almost overnight. When this happens, fiduciaries run the precarious gauntlet of disclosing clients to regulators or risk a legal battle by which the client sues for breach of confidentiality. This is why an important feature of any trust is a disclosure clause that allows the trustee to forward information to regulators with out fear of reprisal.

When disclosure without consent is imminent, trustees often seek a Beddoe Order. The order protects the trustees against claims by beneficiaries who suggest that an action should not have been brought and enables the trustees to recover the costs from the trust property.

Moral of the story, check your trust deed and review the clause on the duty to disclose…

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On International Business Companies or IBCs as Split Share Companies

On the Topic of Automatic Trust Disclosure by Fiduciaries.