Concept And Purpose
The concept of the purpose trust was introduced into the Isle of Man by the Purpose Trustees Act 1996. A purpose trust is a trust established to fulfil a particular purpose, rather than for the benefit of beneficiaries. There are no beneficiaries who can be taxed as the ultimate owners or receivers of the assets or income of the trust.
The purpose of the trust must be certain, reasonable and lawful, and it must not be contrary to public policy nor immoral. The purpose trust has an enforcer, who is completely independent of trustees, with strong statutory powers to ensure the purposes of the trust are properly carried out. There is no protector. The trust cannot exceed 80 years, and at the end of the trust period, the assets revert to the recipient.
A purpose trust cannot hold land or any interest in land in the Isle of Man and cannot be used for charitable purposes. It can be created by deed, during one's lifetime, or by will, on death. There must be two or more trustees, one of whom must be professionally qualified.
Taxation of Purpose Trusts
Taxation of purpose trusts follows general Manx trust law in that there is no liability to Manx Income Tax provided no person resident in the Isle of Man can benefit under the trust.
Practical examples of purpose trusts:
Purpose Trusts For Structured Financing Transactions
The most important use for purpose trusts is the protection of lenders in corporate financing transactions. The purpose trust allows a company's assets to be held by an independent offshore entity which carries out its duties in accordance with the special purpose defined in the trust deed. This concept is attractive in structured financing transactions as an additional way of protecting financiers from the insolvency of trading companies utilising big ticket assets. Financiers who take security over such assets which are owned by such a trust will be insulated from the potential problems of the company operating the asset.
These flexible structures are used in big ticket transactions such as aircraft or ship acquisitions; for instance, an airline wishing to acquire a new aircraft can finance it conventionally through a loan arrangement. However, if the airline gets into financial difficulties the lender could fear becoming embroiled in a complicated and lengthy liquidation. As an alternative to normal bank loan finance an airline or other company purchasing a big ticket item could set up the following purpose trust arrangement:
- Airline sets up Isle of Man purpose trust which owns the shares of an asset company (Asset Co) which are pledged as security by the trustees for all loans to the purpose trust;
- Shares are held in trust (pledged as security to the financier) until the loan has been repaid;
- Lease income from the asset flows from Airline Co to Asset Co to trustees to lender. Lender is protected because Asset Co has no legal relationship with airline and any creditor claiming against airline will not be able to set aside the trust which owns Asset Co. Such a special purpose trust arrangement may have a higher credit rating than the airline with consequent improved access to funding with associated lower costs.
Purpose Trusts To Own Assets "Off Balance Sheet"
Purpose trusts may provide a valuable opportunity for companies to place assets "off balance sheet" for confidentiality or other reasons. As an example, a private company, which undertakes shipping activities, but wishes to keep this activity confidential from its business customers, may consider the use of a purpose trust.
Purpose Trusts For Purely Commercial Purposes
A further use for purpose trusts will be in situations where trusts are established for purely commercial purposes where there is no charitable purpose at all, for example, a purpose trust may have its purpose the acquiring and holding of shares in a particular company. The purpose trusts may also include the objective of ensuring the efficient management of the company through the election of its directors and maximisation of the profits of the company. It may be advantageous for two parties in the joint venture to relinquish actual ownership of the relevant venture company to a purpose trust as the parties for legitimate tax planning reasons do not wish to be in actual control of the voting power of the company in certain jurisdictions.
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.