With the increasing mobility of labour, providing a tax efficient pension scheme for employees can prove difficult. Often regulations in the home country of the parent company limit the period overseas employees can remain in the parent's own scheme and, therefore, such employees often become members of local schemes or are left to make their own arrangements. In circumstances where an employee belongs to a number of schemes due to the fact that he has undertaken various assignments in different countries, pensions may become fragmented and subject to withholding taxes in a country where the employee no longer resides.
A solution being adopted by a number of multi-national companies is the establishment of an international pension trust in a jurisdiction such as Guernsey which has modern pension provisions within its tax and trust laws but does not impose any withholding taxes on the payment of pensions from approved schemes.
Employee Benefit Schemes
For similar reasons, offshore trusts are being established by companies with an international work force to hold benefits such as share option or bonus plans. In recent years we have seen Guernsey Trusts utilised to hold shares given by a company to employees as part of an international performance scheme. An example is where shareholder value is measured by adding movement in share price over a financial year to dividends paid to shareholders and then comparing this with the company's main competitors. Dependent on the performance of the company, a percentage of payroll is settled onto discretionary trusts for the benefit of employees and invested in shares of the company. A notional allocation of the shares is made to each employee by the trustee so that when an employee retires or leaves the company the trustee can exercise its discretion in favour of that employee and transfer the accumulated shares to him/her.
Offshore Trusts as part of an Onshore Scheme
Interestingly we have seen Guernsey Trusts used in conjunction with onshore plans as a means of reducing or deferring taxation. For example, in some jurisdictions when shares are issued to employees at a discount an immediate liability to tax may arise. This will often make the scheme unattractive to employees if, under the terms of the plan, shares cannot be sold to meet this liability until a certain period has expired.
In these circumstances a Guernsey Trust has been utilised to hold the discounted element of the employee's allocation of shares and thus the immediate liability to tax has been avoided. When the fixed period for retaining the shares has expired, the trustees will transfer the shares to the employee, which will most likely give rise to a tax liability but the employee will now have the ability to meet this by selling a part of the shareholding.
It can be seen that the flexibility of offshore trusts make them ideal vehicles to structure employee benefits. However, the real attraction must be that at the same time as resolving the problems of employers they provide significant benefits to employees.
This article provides a general outline on the subject at the time of writing. It is not intended to be exhaustive nor to provide legal advice in relation to any particular situation and should not be acted on or relied upon without taking specific advice.
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