An established feature of the English Legal system is that Trusts can only be one of two types namely a Private Trust or a Trust for Charitable purposes. Many offshore financial jurisdictions, Barbados included, have added another arm to their Trust law by making provision for the Non-Charitable Purpose Trusts in recently enacted International Trust Legislation.

With this enactment it is no longer necessary for draftsmen to undergo the legal and mental gymnastics that their predecessors faced daily as they tried to ensure that these Purpose Trusts were upheld as a valid charitable trust. Indeed the line between what was upheld as a valid Purpose Trust and what was not, became so blurred that legal luminaries were forced to resort to statements of explanation such as "occasions when Homer has nodded," in trying to explain why one Trust had been upheld and another failed.

The provisions in the International Trusts Act that create Non Charitable Purpose Trusts no longer make such worries a concern. Section 9 and 10 of the Act are the relevant sections. It is interesting to note that except for the "beneficiary principle" i.e. that the trust need not be for an ascertainable beneficiary, and the rule against Perpetuities which is abolished by Section 7(3) of the Act, the main reasons given for the invalidity of these trusts in the leading case of Morice V Bishop of Durcham (1805 10 ves 522) remain. These are:

(i)The purpose is specific, reasonable and capable of fulfillment.

(ii)The purpose is not immoral, unlawful or contrary to public policy.

(iii)The terms of the trust specify the event upon the happening of which the trust terminates and provides for the disposition of surplus assets of the trust upon its termination.

Already practical use is being made of the ability to form Purpose Trusts and use such trusts in conjunction with other vehicles in the offshore sector. A wide variety of financial and commercial purposes are being utilised such as the use of the Purpose Trust to hold shares in a Barbados IBC or an FSC. IBCs are taxed at a declining rate of 2.5% - 1% of profits while FSCs are not taxed. The reasoning behind the Purpose Trust holding the shares may be several fold, from a tax advantage point of view, to avoiding an individual or group of individuals owning shares, to giving an additional layer of security between the investor and the venture that he is involved in the case of subsequent insolvency.

Another practical use of the Purpose Trust could be in the area of Cross Border Debt Securitisation whereby the purpose trust would hold the shares in a special purpose company which would be established to purchase the receivables from a trading company. With Barbados' growing network of Double Tax Treaties this type of structure could present an opportunity for significant tax planning once the correct structure is established.

On January 2nd this year Barbados enacted the Societies with Restricted Liability Act which Act provides for the organisation of an entity with a life span of not more 50 years in Barbados, which entity has full corporate personality. The Society as it is known, is considered by the Inland

Revenue Service in the United States as a Partnership and as such the Quota Holders in the Society are individually taxed rather than the entities. Like an International Business Company, the Society is taxed in Barbados on a reducing rate of 21/2% - 1%. It will only appear to be a matter of time before we see Tax Structures involving both of these Acts being utilised by investors.

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.