Nominees And Corporate Management Arrangements: How To Reap The Asset Protection Benefits

Categories:

The concept of the nominee manager (or director depending on the company type – we will use the term ‘manager’ throughout this article for consistency) is not a new one, and is one that has been used for decades. Historically, nominee arrangements have allowed a person who does not wish to broadcast their position as a company manager to the wider world (a ‘principal’) to appoint a third party to act as manager in their place, with the third party acting on the principal’s instructions.

Nominee arrangements have previously been used to minimise tax as well as to provide anonymity. The days of being able to use nominees to minimise tax are largely over as jurisdictions have developed their tax laws to identify beneficial owners and controlling persons sitting behind corporate structures. Moves towards beneficial owner identification and reporting have also made complete anonymity through the use of nominees difficult to achieve in recent times. That said, while it may no longer be possible or desirable to be able to shield the identities of beneficial owners from international authorities, nominee arrangements can still provide privacy from the world at large. But this is far from the only reason to use such an arrangement.

Asset Protection Advantages

Nominee arrangements, used properly, can add additional layers of asset protection to what would otherwise be a simple corporate structure. To achieve this however, it is vital that the role of the nominee is expanded beyond that seen in a classic bare nominee arrangement, where the nominee acts exclusively (and blindly) on the wishes of the principal, and takes no action other than as directed by the principal.

The problems of the bare nominee approach from an asset protection perspective are clear: if the principal becomes forced to make a decision adverse to the interests of the company and its shareholders, then the nominee is duty bound to follow it. Similarly, if a principal is prevented from sending any instructions to their nominee the nominee can take no action. To unlock the asset protection benefits of nominee arrangements a more nuanced approach is required.

Enter the corporate management arrangement. This is a more sophisticated instrument which affords the corporate manager a greater degree of flexibility and the autonomy to make its own decisions when necessary. A corporate management arrangement is underpinned by an agreement setting out the circumstances in which the corporate manager is permitted to act either of its own motion, or contrary to the wishes of the principal. The following examples demonstrate the benefits of this approach.

Example 1: Alex has entered into a corporate management arrangement with A1 Corporate Management Services Ltd (‘A1’) under which A1 acts as the corporate director of Alphaco Ltd, an offshore international business company. Following a lawsuit against Alphaco in his home jurisdiction, Alex is ordered by a domestic court to direct A1 to transfer all of Alphaco’s assets to the judgment creditor, and he duly does so. However, this would be a clear breach of the fiduciary duty A1, as Alphaco’s director, owes to Alphaco and its shareholders. The corporate management agreement between Alex, A1 and Alphaco allows A1 not to act on the principal’s wishes where it believes that doing so would be contrary to the fiduciary interests of the company and its shareholders. It also permits A1 to decline to action any request of the principal which it believes has been issued under duress. As a result, A1 takes no action, therefore preserving the assets of the company for the benefit of its shareholders.

Example 2: Brian has established Betamax LLC in an offshore jurisdiction and appointed Best Corporate Management LLC (‘BCM’) to act as corporate manager of the LLC under a corporate management agreement. Betamax is involved in frequent and regular commercial transactions which are instigated by BCM in accordance with Brian’s wishes. BCM is familiar with these transactions, which are essential for the continued operations and solvency of Betamax. Brian suffers a stroke and is incapacitated for several weeks. Fortunately, the corporate management agreement contains provisions which allow BCM to act independently, in the best interests of the company, during such time as the principal is incapacitated. This enables Betamax to function effectively while Brian recovers and until he is well enough to resume making decisions as principal.

As an aside, the flexibility allowed by corporate management arrangements as opposed to bare nominee arrangements benefits both sides: it also provides peace of mind for the nominee/corporate manager from a compliance perspective, as agreements can be drafted to allow the corporate manager to decline to act where they believe that doing so would be unlawful or would expose them to liability for breach of fiduciary duty. After all, corporate and nominee managers alike are managers just like any other. They are not immune from manager liability laws merely because they act under the instructions of others.

Application to Nominee Member and Shareholder Agreements

A similar approach can be applied to nominee member or shareholder agreements. These traditionally require the nominee to undertake any and all member/shareholder actions as directed by the principal. However, nominee ownership agreements can instead be set up to afford the nominee the option of proactively acting in what it believes to be the best interests of the member or shareholder and there to disregard the wishes of the principal where this confers a protective benefit.

Tax Position for Nevis and Cook Islands Companies

Nevis LLCs and IBCs are deemed tax resident in Nevis if they have a permanent establishment (physical premises) there or if effective management and control of the company takes place in Nevis. Where a corporate management agreement exists, the place of effective management and control will be the jurisdiction where the principal, rather than the corporate manager, is situated. That jurisdiction will be deemed by the Nevis tax authorities to be the jurisdiction of tax residence of the company.

In the Cook Islands, the situation is different for LLCs and IBCs. LLCs are not subject to Cook Islands tax and the existence or otherwise of a corporate manager does not change anything from a Cook Islands tax perspective (although it may do so in the principal’s jurisdiction of tax residence). Cook Islands IBCs are deemed to be tax resident in the Cook Islands if any director decisions are made from within the Cook Islands. This means that decisions made by a Cook Islands corporate director (whether independently, under a corporate management agreement, or as a nominee) could render the company liable to Cook Islands tax. For this reason Southpac no longer provides corporate directors for Cook Islands international companies.

What We Offer

Southpac can provide Cook Islands corporate managers for Cook Islands LLCs, and Nevis-based corporate managers and directors for Nevis LLCs and IBCs respectively. We can also provide nominee shareholders for Nevis entities.

If you are interested in using a corporate management arrangement to maximise your asset protection and privacy please contact us for information or reach out to your regular point of contact.