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Structuring asset ownership in the global economy: financial executives may be able to boost returns on investments and pare risk by moving assets out of one jurisdiction and into another. But it's a complex area that needs to be fully explored, both in terms of legal entities and locations.

As we all know, there have been major changes in the global investment landscape over the last decade, driven in no small measure by the rise of emerging economies, increased security concerns worldwide, tax issues and the general growth and creation of private wealth. Despite such changes, individuals and corporations are shifting more assets to other countries than ever before.

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Assets are moving both into and out of the U.S. While much of this movement involves capital seeking better returns, in many instances investors are also seeking greater security for their assets. For example, while foreign investors buying businesses and properties in the U.S. are taking advantage of the current, and persistent, weakness of the dollar against the euro and other currencies, they are also looking for a safe, stable investment environment.

For financial executives involved in finding opportunities to increase their company's return on investment, as well as to lower risk and protect assets, choosing the right jurisdiction and ownership structure is critical. Yet understanding and navigating through the complexity of how to best hold foreign or offshore investments may often seem perplexing and daunting.

There are numerous types of legal entities in which asset ownership can be structured, including trusts, corporations, limited-liability companies, partnerships, limited partnerships, limited-liability partnerships and other more esoteric vehicles. And in addition to the myriad choices of entities, the choice of jurisdiction is equally challenging.

There are dozens of industrialized countries with growing or emerging economies, and there are also about 60 islands, duchies and pocket-sized republics offering special advantages to investors. Each of these jurisdictions has different laws and regulations and offers different ownership or entity advantages, and sometimes disadvantages. Add to this the fact that foreign companies and individuals looking for opportunities to form an investment entity in the U.S. are faced with a choice of 50 states plus Puerto Rico and various territories.

Some of these U.S. jurisdictions are more hospitable to investors than others, and a few even have laws that provide exceptional asset protection. Making the right choice can be rewarding; but equally, making the wrong choice can be disastrous. How to choose?

Entity-Management Companies

One of the consequences of the shifting investment landscape has been the rapid growth of a new kind of business--professional entity-management firms that help companies and individuals identify the most suitable jurisdictions and ownership structures for their investments and then handle the paperwork, fees and other details of forming and maintaining such entity structures. Typically, such firms are small companies with very large networks of relationships. They may not have an office in Hong Kong or Singapore, but they will have prominent contacts there.

For the financial executive vetting such firms, the two key points to investigate are experience and network. Many of these companies are relatively new; however, as a client, you want to be drawing on their experience, not creating it. Generally, the more experience a firm has, the more likely it can offer the economies of one-stop shopping.

There are firms that can do everything from helping companies establish manufacturing operations in industrial economies such as China and Russia to creating asset-protection entities in such obscure places as the British Channel Islands, Anguilla, Nevis, Dominica and Belize. There are also firms that simply specialize in a specific jurisdiction or type of investment entity

Much of the value of such professional entity-management firms lies in the quality and breadth of their worldwide network of relationships. If a U.S. company, for example, plans to set up an entity in the Bahamas (or any other jurisdiction), it should expect the chosen entity-management firm to be able to deal with all of the local regulations, file the appropriate paperwork, pay the required fees, provide nominal officers and directors, establish banking relationships, handle annual compliance and prepare and remit all necessary taxes on behalf of the entity.

Typically, the professional entity-management firm working with the U.S. company will have a key contact in the local jurisdiction, who, in turn, will have access to qualified local legal, accounting and banking resources. Relationships like this enable such professional firms to leverage their resources on a global basis.

Likewise, professional entity-management firms that provide services for overseas companies and individuals that want to invest in the U.S. often have affiliations with organizations like National Registered Agents Inc. (NRAI), which can: 1) establish new entities in full compliance with government regulations; 2) provide ongoing annual entity-management services; 3) offer nominal officers, members and directors; and 4) provide the registered agent and registered office for such entities.

Some of these firms maintain forms libraries that provide current tax forms and reports for every U.S. jurisdiction in which the company has operations; a few even offer Web-hosted compliance management services that expedite the handling of all compliance requirements.

In selecting the right entity-management firm to help establish a business entity in the U.S., it makes sense to see if the firm is affiliated with the proper organizations that can speed and simplify the process. Here, it is important to match the services offered with the investor's needs.

A company buying hotels located in various states may be most interested in creating the proper ownership structure and mitigating credit risk, as well as having access to compliance tools and services, maintenance services and the ongoing expertise of the professional firm. However, the main concerns of an individual overseas investor in buying a few rental properties in various U.S. states may simply be avoiding double taxation and ensuring that litigation against one property will not endanger other holdings.

Asset Protection and Privacy

For many U.S. investors, particularly high-net-worth individuals, the goal of moving asset ownership to a foreign country is to increase asset protection and gain greater privacy. For example, for certain individuals in high-risk professions, such as surgeons and obstetricians, and for many small companies, business owners, doctors, lawyers and other professionals, transferring assets out of their personal name and into a domestic or foreign entity can make it more difficult for creditors or litigants to attach these assets.

If a litigant takes a judgment to an offshore jurisdiction, the court in that jurisdiction may refuse to honor the judgment. The litigant will then be forced to start the litigation all over again in the foreign country. This approach can foil frivolous lawsuits and make legitimate litigators more amenable to settlement.

Of course, property and other assets physically located in the U.S. are more vulnerable to litigation than assets that can actually be moved offshore. If the assets are physically offshore, a creditor trying to attach those assets will typically have to do so under the law of the jurisdiction in which the entity was created.

Some jurisdictions refuse to enforce foreign judgments and require that such cases be tried again under their laws; others will not permit lawyers to take cases on a contingency basis; and a few even require claimants to pay a percentage of the amount they are claiming as a bond before they can file a lawsuit.

To be on safe ground, there are rules that must be followed. Investors should establish their trusts or other entities at a time when there are no known or foreseeable creditors pursuing their assets. If they move assets offshore to escape an existing or reasonably foreseeable creditor, the courts are likely to declare the transfer "fraudulent." The courts also tend to look unfavorably on debtors who transfer virtually all their assets overseas or who transfer assets just before or right after incurring a substantial debt.

The choice of how, and when, to structure this type of ownership can make all the difference.

Cost Considerations

The costs of establishing and maintaining entities in foreign countries can vary greatly, depending upon the local regulatory structure, the level of local service required, annual compliance requirements and how much service the entity-management firm provides.

For individuals, depending upon the complexity of the structure and the jurisdiction of choice, annual costs can run from a few hundred to several thousand dollars. For high-net-worth individuals, simple asset protection entities, because they require little ongoing oversight, can be created and maintained at much less cost than more active ongoing operations.

The benefits for corporations in choosing the right entity structure and the right jurisdiction can greatly outweigh the costs. For example, if a company owns high-risk properties like airplanes or oil tankers, establishing a separate entity as legal owner of the high-risk property is just common sense. An airplane crash or oil spill could have devastating financial consequences.

As a general rule, investors should be aware that the initial and annual costs of creating and maintaining an entity offshore or in most foreign jurisdictions will typically be higher than one would find in the U.S. In most cases, however, such costs are still modest in comparison to the benefits received. The professional service firm can help determine how to best balance costs, benefits and ownership goals.

Tax Considerations

Today, for U.S. companies and individuals, tax advantages generally play a much lesser role in structuring entities overseas than they did just a few years ago. That's because the U.S. has been very aggressive in pressuring traditional tax havens to tone down their offerings or eliminate them entirely. That, however, does not mean that investors cannot find legitimate ways to minimize their taxes by transferring assets, or the ownership of those assets, to other countries.

Foreign investors have more flexibility. A British investor, for example, can buy property in the U.S. and, with the proper ownership structure combining both onshore and offshore entities, can legally and legitimately avoid paying U.K. taxes and instead benefit from both the low U.S. capital gains tax rates and the relative value of the U.S. dollar versus the British pound. Achieving this kind of result takes careful tax planning, and there have been cases of British investors who did it wrong and wound up paying both the U.S. and U.K. taxes.

Notwithstanding adverse changes in U.S. tax law, more and more assets are being moved globally to take advantage of currency differentials, more favorable regulatory climates and privacy advantages, as well as to deal with liability concerns and general business risk considerations. Now is a good time for financial executives to consider offshore investments for their companies and, in the case of small companies and partnerships, for the owners and partners.

The major reasons for establishing offshore entities to hold investments are listed in the table on the previous page. Choosing to hold foreign investments in a structured entity is particularly advisable for investments in real estate and for high-risk assets.

The seeming complexity of establishing the right investment entities, whether offshore or domestically, can be intimidating, but there are professional entity-management firms that can quickly answer the key questions and get the company or individual moving in the right direction.

Karen L. Redman (kredman@gecgrp.com) is a U.K.-trained attorney with extensive expertise in trust and offshore entity structures. She is CEO of GEC Group, LLC (www.gecgrp.com), a professional entity-management services organization specializing in global entity formation and management.

RELATED ARTICLE: Why Set Up Offshore Entities?

The major reasons for establishing offshore entities to hold investments are to:

* Limit liability by separating the ownership of offshore businesses or properties from the company's other holdings.

* Protect and simplify the ownership and transfer of hotels, apartment houses, condominiums and other real estate investment property.

* Protect assets from creditors, litigants and other claimants.

* Gain tax advantages.

* Ensure privacy. The less people know about a company's or an individual's finances, the less likely they are to bring a frivolous lawsuit against them.

RELATED ARTICLE: takeaways

* Assets are moving both into and out of the U.S. While much of this movement involves capital seeking better returns, desire for greater security is also a reason.

* For financial executives seeking to increase ROI, as well as to lower risk and protect assets, the right jurisdiction and ownership structure for investments is critical.

* Professional entity-management firms may assist companies and individuals in identifying the most suitable jurisdictions and ownership structures.

* Choosing to hold foreign investments in a structured entity is particularly advisable for investments in real estate, and for high-risk assets.
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Article Details
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Title Annotation:global investments
Author:Redman, Karen L.
Publication:Financial Executive
Geographic Code:1USA
Date:May 1, 2006
Words:2057
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