Management and ownership
The ILS Group compares managed and non-managed services from corporate service providers
Many corporate service providers (CSPs) offer two distinct types of ongoing service to clients – a fully managed service, or a non-managed service, where the CSP provides the company and the client provides the ancillary services themselves. When providing a fully managed structure, the CSP generally provides a complete package which includes directors and shareholders for the company. In a non-managed structure, clients usually prefer to provide directors and shareholders themselves. Here we explore the differences between the two types of structure, which we will refer to as managed and non-managed, to provide clear direction into which will be more suitable for the circumstances.
The basis on which a structure is established is critical to its success, so a clear understanding at an early stage is essential.
First, the client needs to decide whether he or she wishes the CSP to provide directors for the company or whether he is happy to act in this capacity himself. Taxation is the principal consideration. In some jurisdictions, controlled foreign company (CFC) legislation can often influence the type of structure suitable for the circumstances. Clients should take expert tax advice on this point.
In some circumstances, from a very simple tax perspective, any company, no matter where it is originally registered, can be considered to be tax resident in the jurisdiction from which it is effectively controlled. Thus a BVI company, with its directors resident in the UK and decisions regarding its activities consequently being taken in the UK, would according to UK tax law, be considered to be tax resident in the UK. There seems to be little point in establishing such an entity in an offshore location if you then expose it to onshore taxation.
Traditionally, one of the prime reasons for using professional director services is in order to maintain confidentiality. Given that many offshore registries do not maintain a public register of this information, this reason may be considered as non-applicable, but it is not always as straightforward as that. Firstly, many jurisdictions do maintain public registers, even in some traditional offshore locations. It is likely that in future years this trend may proliferate.
Secondly, even if a chosen jurisdiction does not have such a public register, just how confidential will client details remain if they actively control and manage the company? If clients are regularly signing on bank accounts, contracts and letters, it is clear that that confidentiality can be compromised.
Third party director services
If the client decides to appoint professional third parties to provide director services, what does this mean in practical terms? In order to understand this properly, we need to establish some frames of reference: one of the most important aspects to understand is the legal and technical position of those persons acting as a director of a company.
The term nominee director is frequently used to describe somebody acting as a director in a paid capacity on behalf of the beneficial owners of the company. The simple truth of the matter is that in law, there is simply no such thing as a nominee director. Anybody accepting such an appointment has full rights and responsibilities and cannot hide behind the word nominee. This is especially true when that director is a professional person or company and should be fully aware of all those duties and responsibilities.
CSPs provide a professional director service for many clients throughout the world; but the terms upon which the service is provided are rigorous. In order to satisfy the regulatory and common law requirements as outlined above, as well as to ensure real establishment of management and control in the desired jurisdiction, the CSP must be able to exercise real and proper control over the day to day affairs of any company for which it provide director services.
The first level of control is exercised with regard to fixed assets. Whether real estate, intellectual property or any other form of asset, the directors have a duty of control over acquisitions, disposals and valuations. Equally, directors will be watchful over liabilities. For example, mortgage proposals will be carefully examined for affordability. It is also one of the directors’ duties to effectively control liquid assets, such as the company’s bank account. In certain cases, such as active trading companies, it will be necessary to put in place measures that enable clients to run their business effectively. Joint control of the bank account can often provide a workable solution. In addition, CSPs are normally able to provide clients with online access to bank statements for tracking purposes. At all times, though, the CSP must maintain its legal and professional responsibilities. Shareholders Confidentiality is the key factor in determining shareholding. The choice clients need to make when establishing a simple offshore company, (subject to any local regulatory requirements) is whether they wish to be registered as shareholders directly in the company or whether to use nominees. In a managed structure the CSP provides the nominee shareholders and you are issued with a declaration of trust which sets out the terms upon which the CSP are the shareholders and that it is only holding the shares on your behalf. A client is identified explicitly as the ultimate beneficial owner of the shares and as such, will always have ultimate control of the company. In a non-managed structure, the client provides the shareholders: the ownership is therefore transparent. The provision of full management services to a company (directors and shareholders) is an essential part of making it as effective and efficient as possible. The principal reasons for structuring in this way are to protect the confidentiality of the beneficial owner of the business and to achieve maximum tax efficiency.