Now that Vanuatu has been removed from the OECD "blacklist" we would like to introduce to you this fascinating concept for use by residents of countries that are not allowed to control foreign corporations. These countries include Australia, New Zealand and some other British Commonwealth countries. With a Hybrid the user does not have an offshore asset, only a liability! That is the key point.
The term "Hybrid Company" describes a company that is limited both by shares and by guarantee. Thus a Hybrid Company has two classes of members - Shareholders and Guarantee Members. The term "Shareholder" is familiar and well understood. The term "Guarantee Member" is less common, although sporting clubs or societies may be structured as companies limited by guarantee and thus having Guarantee Members.
A Guarantee Member is elected into membership of the company by the directors on condition that the member undertakes to contribute to the debts of the company up to a certain specified maximum amount - typically US$500 or less. Thus a Guarantee Member holds a contingent liability - an obligation, in contrast with a shareholder who holds an asset - the shares.
The rights and obligations of each class of membership may be laid down in the Articles of Association of the company. Alternatively they may be set out by the directors in board meetings if there is a desire to keep the terms and conditions of membership confidential. The rights and obligations that attach to each class of membership can be drafted to suit virtually any requirement.
Particularly persons resident in civil law countries that do not recognize trusts, or where even professionals are not familiar with the British Trust concept, often use hybrid companies as quasi trusts. As with trusts, hybrid structures may be useful for asset protection, tax planning (including estate tax planning), confidentiality and avoiding forced heir ship rules.
When used as a quasi trust, the hybrid company is typically structured with the Shares each carrying one vote but having no rights to dividends and no participation in the capital or income of the company in any way. The Guarantee Members have no voting rights but participate fully in the income and capital of the company. Thus control of the Company legally rests with the Shareholders, but all benefits flow to the Guarantee Members. The shares are then issued to professional managers, who act rather like ‘quasi trustees’ – having legal ownership of the Company and its assets but unable to receive financial benefit from holding the shares. All of the financial benefits flow to the Guarantee Members, placing them in a position rather like the beneficiaries of a typical trust. A Guarantee Member’s interest may be extinguished on death to eliminate succession problems, remove any probate requirements and therefore may eliminate any inheritance tax/estate duty implications.
The income tax statutes of many onshore countries, and in particular any related anti-avoidance provisions, often seek to tax undistributed or untaxed profits of low tax paying companies as if they had been received by the shareholders. The different legislations approach this goal in different ways but there is often a focus on the percentage of shares held. Alternatively, the legislation may focus on the control of the company, even if control is achieved otherwise than through the ownership of shares. However, in the organization of a typical Hybrid Company as set out above the Guarantee Members do not own shares nor have control. Professional managers act as shareholders and have legal control of the Company. This may mean that the typical anti-avoidance legislation is ineffective in taxing profits rolled up within a hybrid structure. Additionally, such a structure may not bring about any reporting requirement for the Guarantee Members so, on a practical level, unwanted attention from onshore revenue authorities is avoided.
A Hybrid Company may also provide a means of overcoming difficulties caused by Exchange Controls. Although a Guarantee Member would normally be issued with a membership certificate, this is not a share, a stock or a security. Since most Exchange Control regulations refer to securities, the holding of a Guarantee Membership may not require Exchange Control approval.
A guarantee company is a company which is limited only by guarantee and therefore has no shareholders only Guarantee Members. The comments made above about the Guarantee Members of a hybrid company apply equally to this type of structure so the guarantee company can be used for similar purposes. However, the Hybrid Company may have an advantage in that it may be beneficial to be able to point to the fact that control rests with a third party (i.e. the shareholders).
In a guarantee company the Guarantee Members, rather than shareholders, would hold the voting rights and therefore the control. Thus the members may not so easily be able to sidestep the anti-avoidance legislation and Exchange Control regulations of some of the onshore countries.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.