The Curacao Foundations and the Quebec Trust: A comparative overview of the civil and fiscal aspects
1. Origin of the Common Foundation in the Dutch Kingdom
1.1 Introduction of the Common Foundation the Netherlands
The Foundation dates as far back as the Roman period. Although it might be argued that the term and/or concept legal entity as such may not have existed, as we know it today. In the literature references can be found about the Foundation and has been referred to as Anstaltstiftung, Hauptgeldstiftung, fundatio or legaat.[1] Although the legislative structure for the foundation was not present at the time, the foundation as such has been recognized since the 19th century, partly due to influences by the German jurists.[2] The Civil Code for the Netherlands was taken over from the Napoleon Code in 1838. Interestingly enough both the Civil Code and the Code of Civil Procedure and some other pieces of legislation made reference to the foundation, although as I mentioned earlier the foundation did not have a legal structure. Based on the above-mentioned references it must be concluded that the legislators in 1838 implicitly recognized the existence of the foundation. Due to the lack of legislation there was no clear answer to the question if a foundation was formed, incorporated properly or uperhaupt existed. On June 30th, 1882 the Supreme Court of the Netherlands answered this question by stating that a foundation could be incorporated in iure without any need for governmental intervention or approval. The lack of legislation on the subject matter was considered as an omission.[3]
Between 1882 and 1937 many attempts were undertaken to repair the omission, but it was not until the 1950’s that the foundation received the proper legislation by means of the (Dutch) National Ordinance on Foundations of 1956. The National Ordinance on Foundations of 1956 described the foundation as an incorporated legal entity, which does not have any members and aims to realize its goals with the assets it owns. When Book 2 was introduced in 1976 it incorporated the National Ordinance on Foundations of 1956. Since then it was explicitly prohibited for a foundation to distribute assets to its incorporators, unless distribution is destined towards charitable, religious, social purposes.[4]
1.2 Introduction of the Common Foundations in the Curacao and Aruba
By National Ordinance of November 7th, 1967 the Common Foundation was introduced as a legal instrument in Curacao. The legislation for foundation was based on the Netherlands Ordinance on Foundations of 1956 (“NAFOUNDATIONS”). Hence, its primary purpose was also geared towards charitable, religious, academic or cultural purposes. Based upon the aforementioned National Ordinance the foundation is not allowed to be involved in business for profit or engage in any activity that would presume distribution of assets to its incorporators or other beneficiaries not being a charitable institution.
When the NAFOUNDATION was introduced Aruba was – at that time – still part of Curacao . As such the introduction in the Curacao was also the introduction in Aruba. In 1986 Aruba chose to separate from Curacao , but to remain part of the Dutch Kingdom (“status aparte”) and has since been an equal partner with the Curacaoand the Netherlands in the Dutch Kingdom. After the status aparte the foundation was introduced formally (again) in Aruba by a grandfathering and transition legislation of 1987.[5]
1.3 Introduction of the Curacao Private Foundation (“CPF”)
The CPF was introduced in the last quarter of 1998 as a result of amendment of a number of existing national ordinances. These amendments of existing laws were necessary to create the Private Foundation as a separate entity from the Common Foundation, which already existed. The amendment of existing ordinances is a common practice in our jurisdictions. This is unlike other jurisdictions were perhaps a separate act would have been introduced to realize the changes and also providing one act containing one text detailing the specifics. By National Ordinance of October 19th, 1998 the following ordinances were amended:
- the National Ordinance on Foundations;
- the National Ordinance on Succession Duty; and
- the National Ordinance on (Corporate) Profit Tax.
The civil aspects of the common and private foundation is since 2003 codified in section 2 of the Civil Code of the Curacaoi.e. sections 50 through 57, while the fiscal aspects are incorporated in the various fiscal ordinances.
Neither Aruba nor the Netherlands have introduced the private foundation in their respective legislation nor have taken any serious efforts to introduce same. Many legal practitioners in Aruba have argued for the introduction of a 9 similar or improved – private foundation in Aruba in order to remain competitive vis-à-vis Curacao .[6] It can also be argued that an introduction in the Netherlands could also contribute to the financial services sector of the Netherlands.
- Formation of a Common Foundation in Curacao
2.1 Formation a Common Foundation
A foundation, either common or private, can be formed by either a natural person or a legal entity.[7] There is no requirement against the nationality of the formers. The foundation is a legal entity with neither shareholders nor members. The foundation is a legal entity.[8]
A foundation can either be constituted by: (a) a deed of formation; (b) a last will; or (c) a testamentary disposition.
- Deed of formation
A foundation is formed by means of execution of a notarial deed of formation. This deed needs to be executed before a notary established in Curacao.[9] This deed can be executed in Dutch or any other language that the notary understands.[10] Once the deed is executed, it is the duty of the board of directors (“bestuurders”) for all the necessary information of the incorporator(s) to be recorded in the Register of Foundations held by the Chamber of Commerce on the island where it was incorporated.[11] As long as the deed of formation is not registered with the Chamber of Commerce the notary in charge of the formation is held personally liable for damages suffered by third parties.[12] The function of the Register of Foundations is further regulated by the National Decree Register of Foundations.[13] The registry will contain certain information of the Foundation i.e. date and place of formation, name of the foundation, purpose and the names of the board of directors.
- Last will
A foundation can also be formed by means of a last will. In this case the last will has to comply with the requirements for a valid testament as outlined in the Civil Code of Curacao. In this event, the last will is qualified as the incorporation document, rather than a notarial deed. Those appointed to the board are responsible for fulfilling the other (registration) requirements.[14]
- Testamentary disposition
In the event a testamentary disposition said is considered as a power-of-attorney to the heirs of the estate to form the foundation as per wishes/instructions of the deceased. The attorney-general’s office is the authority responsible for enforcing the execution of the power-of-attorney. Those appointed to the board are responsible for fulfilling the other (registration) requirements.[15]
Other than the above mentioned requirements there are no other formalities and/or registrations required.
2.5 Purpose of the Common Foundation
The Common Foundation can not be involved in the distribution of assets to its former(s). Article 1, paragraph 3, of the National Ordinance on Foundations, stipulates that:
“.. the object of a foundation may not be the distribution of assets to it’s founders, it’s board members or third parties, unless for charitable purposes…”
In the Curacao the foundation is used as: (a) a Common Foundation dedicating its assets to charitable, religious, academic or cultural purposes; (b) for employee welfare purposes. These foundations are established in order to provide for the event of death, disability or retirement of the employee; or (c) for administration fund purposes. It the latter the Common Foundation is used in (corporate) structures in which the Foundation is the legal owner of certain assets (i.e. shares in corporations) of which the beneficial ownership is held by others. In that aspect distributions made thus are neither out of its funds nor out of its income and thus permissible under the National Ordinance of November 7th, 1967 and as amended when this ordinance was incorporated in book 2 CCC.[16] Similarly, the distribution of assets upon liquidation of the foundation is not subject to legal restrictions.
- Profit tax
Based on the National Ordinance on Profit-tax, foundations are exempted from profit-tax providing a foundation is not engaged in business activities with the objective to make a profit.[17] In the event that a foundation is engaged in business for profit it is subject to profit-tax. The foundation will be required to maintain proper bookkeeping accordingly to standard accounting principles.[18]
- Gift tax
Distribution of assets or gifts made by the foundation is subject to gift taxes. Contribution of assets to the foundation is subject to gift tax in the Curacaoand Aruba regardless of the residency of the donor. Gift tax may be – depending on the jurisdiction – due in the donor’s country of residence
- Succession Duty
The foundation is subject to succession duty in accordance with the National Ordinance on Succession Duty.
- The structure of a private foundation
- Formation of a Private Foundation
A private foundation is formed and registered in the same manner as the Common Foundation. With the introduction of the new Civil Code of the Curacao(“CCC”) the National Ordinance on Foundations as amended, was incorporated in book 2 of the CCC along with all other legal entities. Book 2 came into effect on March 1st, 2004 By means of a national ordinance dated February 19th, 2004 PB 2004, 19.[19]
A private foundation may not engage in business for profit. Article 50 paragraph 5 of the Civil Code of the Curacao (“CCC”) states that the purpose of a private foundation may not include the earning of profit through the operation of a business enterprise. A private foundation can stipulate as its purpose the management of its assets. The management can include making investments, looking for growth and maximum returns on investments and (re-) selling assets to invest. There is no specific limitation on the type of investments. It is explicitly stated in the new legislation that for tax-purposes such management would not be considered to be operating a business for profit. Unlike the Common Foundation the purpose of a private foundation as stated in its deed of formation may explicitly include the making of distributions to former(s) and other parties. To whom distribution can or will be made can be described in the articles of formation either in very general or in very specific terms. Article 50 paragraph 3, unlike in the common foundations, allows for distribution of assets to its former, board of directors or third parties.[20]
- Name of the foundation
The incorporator is in principle free to choose the name of the foundation. The main legal requirement is for the word “stichting” or a translation thereof be included in the name. Unlike a business name the name of the foundation is not likely to cause conflicts.
- Legal personality & legal representation
Both a common and a private foundation have legal personality. This legal personality is granted by virtue of law.[21] The law further states that the foundation is neither comprised neither of members nor of shareholders.[22] This explicit mention by the legislator was to make sure that the legal personality of the foundation would not be confused with the legal personality of other legal entities such as the association (“vereniging”) or a corporation (“naamloze vennootschap”).[23] An association is comprised of members. A private foundation is de facto and de iure legally represented by the board of directors.[24]
- Deed of formation
A notarial deed of formation is a legal requirement for a formation of a private foundation and needs to be executed before a notary established in Curacao.[25] In practice the deed of incorporation also includes language explicitly mentioning that the foundation is a private foundation, so as to (further) make the distinction to third parties that it is not a common foundation. [26]
The deed of formation of a private foundation is required to include the following information: (a) the name of the foundation; (b) the object of the foundation; (c) the capital and/or assets brought into the foundation; (d) the regulation regarding the appointment and the dismissal of members of the board; (e) the arrangements for legal representation of the foundation and the resident agent[27]; (e) the period of the duration of the foundation (unlimited or limited); and (f) state whether amendment of the articles of formation is possible. The founder is in principle to determine the content and extent of the articles of formation providing said articles are not against the law and or deemed to be immoral.[28] It should be noted that at the appointment of one or more beneficiaries is not a requirement for the valid formation of a private foundation.
The former of a foundation can, if so desired, have the purpose clause of the foundation drafted as such as to include certain beneficiaries. However, the “purpose-clause” in the articles of formation only authorizes the (board of directors of a) private foundation to distribute assets or to make gifts whenever the board of the private foundation considers it appropriate and does not create a(ny) obligation between the beneficiaries/formers and the foundation, as such the beneficiaries and/or incorporators of a private foundation do not have any legal claims on the patrimony (assets) being held by the private foundation.
- Purpose & patrimony of a Private Foundation
The first reference to the patrimony of the foundation is in section 1 of the National ordinance on Foundations:
“..en beoogt met behulp van een daartoe bestemd vermogen een bepaald doel te verwezenlijken.”
This section cites that a foundation engages to realize a certain purpose by using a certain patrimony which has been assigned to pursue said purpose. In the event that a foundation is formed by a deed of formation, the patrimony of the foundation by means of a transfer of the assets(s) to the foundation. For a valid transfer to take place under the laws of the Curacao the transfer should be in compliance with the statutory requirements as outlined in section 3 of the Civil Code of Curacao. For example a transfer of real estate is only valid if the real estate is transferred by means of a notarial deed and registered in the public registry. Transfers of property that take place under foreign law must be in compliance of said foreign law.
At the time of formation no minimum amount of assets is required for the foundation to be validly formed.[29] The law however does require that the foundation in any event to have a minimum amount of assets in order to realize its goals and/or be in a position for the assets to be accumulated within a reasonable period of time.[30] Failure to comply with said minimum standards could result in dissolution of the foundation by the Court of First Instance.
- Amendment of articles of formation
Amendment of articles of formation is only possible if the original deed of formation empowers the board of directors to do so.[31] It is conceivable that the (original) former would limit the board of director’s authority to amend said articles in order to protect the foundation from possible misuse by the board. Amendments can only be made to the articles of formation by virtue of a notarial deed. Upon revision of the articles the board is responsible for recording in the Register of Foundations.
Amendment of articles of formation is possible in accordance with the National Ordinance on Foundations, however the legislation explicitly does not allow for existing common foundations to be converted into a private foundation by merely changing the objectives of the first. Article 1b, paragraph 3 stated that a private foundation must be constituted as such. It cannot come into existence through the amendment of the articles of formation of a foundation that has not been constituted as a private foundation.[32]
Although it is not specifically mentioned in the parliamentary documents it could be argued that one of the reasons why the legislator has chosen for this limitation is to prevent common foundations serving charitable and/or pension fund purposes to be converted into private foundations. Hence frustrating the original purpose of the foundation and creating room for the original incorporators to use the funds of the foundation for other (perhaps personal) purposes.
- By-laws/rules
The former(s) of a foundation may also reserve the right in the deed of formation to further determine the (corporate) course of action through the issuance of by-laws/rules. The by-laws are primarily for “internal-use only” and it is not necessary for these by-laws/rules to be made public. These by-laws or rules can be used to: (a) further define certain provisions in the articles; (b) further define certain procedures; (c) determine certain beneficiaries; (d) determine the liquidation process; and (e) serve as instructions to the board of directors so that the foundation is operated in accordance with the wishes of the former(s).
- Dissolution and liquidation
Dissolution and liquidation of the foundation is regulated in accordance with the law and/or the articles of formation. Grounds for dissolution by virtue of a court order are: in the events as determined by the articles of formation; insolvency/bankruptcy of the foundation; or a judicial order in accordance to Book2: section 57 CCC. A judicial order as mentioned above can be obtained if: (a) the purpose of the foundation is to distribute assets to its former(s); (b) the foundation consists of member; (c) the foundation fails to comply with the minimum standards required to achieve its goals and/or is deemed not to be able to obtain the required assets/funding within a reasonable time; (d) the purpose of the foundation has been completely realized; (e) or the purpose of the foundation can no longer be realized. Said court order can be granted upon request of any interested party or the attorney general’s office.[33] In said event the court will also appoint the liquidators of the foundation.
- Board of director, board of supervision and protector
The former of a private foundation can draft the deed of incorporation in such a manner allowing the creation of a board of supervision (“raad van toezicht”) and of supervision typically is empowered to supervise the board of directors. Also the board of directors may be required to obtain consent from the supervisory board in order to validly perform certain actions i.e. distribution of proceeds, encumbering of assets, sale or purchase of real estate or amendment of the deed of formation.[34]
A protector can be appointed by the former of the foundation.[35] A protector is entitled to make written wishes known to the board of directors.[36] However these wishes expressed do not create any legal obligation on the board of directors.[37] The rights of the protector are personal rights. These rights need to be exercised by the Protector and can not be exercised by any third parties or any heirs of the protector. In case of bankruptcy of the Protector the rights are deemed to be transferred to the board of directors, unless the Protector – prior to bankruptcy – transfers his rights to a third party and serves notice of this transfer to the private foundation.[38]
- Letter of wishes
In practice it is also common for a so-called “letter of wishes” to be given to the board of directors by the former of a private foundation. This “letter of wishes” may be amended from time-to-time and can some time even be found in draft only format. The board of directors can exercise its own judgment in the following or not. As such the wishes expressed in such letters do not create any legal obligation on the board of directors.
- Fiscal aspects of the private foundation
5.1 Profit tax
The private foundation is exempted from income and from profit tax. This tax-exemption was made possible due to the amendments of the National Ordinance on Corporate Profit Tax, which eliminates the need to file tax returns.
5.2 Gift tax
Distribution of assets or gifts made by the CPF is not subject to gift taxes either. Contribution of assets to the foundation is subject to gift tax only if the donor is a resident of Curacao. Hence any contributions made by non-residents are tax-exempt in Curacao, however gift tax may be – depending on the jurisdiction – due in the donor’s country of residence
5.3 Capital gains tax
No capital gains tax is due on establishment of the foundation.
5.4 Succession Duty
Amendment of the Ordinance on Succession Duty adds a new paragraph 8 article 5b to the Ordinance, effectively stating that all benefits obtained from a private foundation are exempt from succession duty. Amendment of article 61 of the Ordinance on Succession Duty further stipulates that acquisitions received by the private foundation will be subject to taxation at 25% of the (declared) value, if received from a resident of Curacao. Accordingly any acquisitions received by the CPF from a non-resident will not be subject to succession duty in Curacao .
5.5 Withholding tax
The distributions of assets or funds to non-residents of the Curacao beneficiaries are not subject to withholding tax.
- The Quebec Law of Trust
- Introduction of the Quebec Trust
While the CPF was introduced in 1998, the law of trust in Canada was restated on January 1st, 1994. The restatement took place when the articles of the Civil Code of Lower Canada (“CCLC”) were replaced with provisions of the Civil Code of Quebec (“CCQ”).[39] The CCQ to a great extend replaced the CCLC (Code civil du Bas-Canada), which had been in force since July 1st, 1866.
- Place of the Trust in the Civil Code of Quebec
The Quebec Trust (“Trust”) is integrated in the CCQ in sections 1260 and following. For purposes of the comparisons made in this paper it is interesting to point out that the Quebec’s legislator incorporated the (Quebec) Trust in Book 4, which regulates the concept of property. The sections regarding the “Trust” are preceded by the sections on “Foundation”. This may explain the similarities that I see, between the Trust and the Foundation, which I will address below.
- Civil aspects of the Trust compared to the Private Foundation
In the paragraph to follow I will discuss some civil aspects of the Trust. I will not discuss the fiscal aspects of the Trust in this paper.
- Legal personality
The Trust is incorporated in Book 4 of the CCQ in the section on Property, while the NAPG is regulated in the CCC in Book 2 in the section on Legal Entities.[40] The section of the Trust does not make an explicit mention that the Trust has legal personality. The legal personality of the CPF is granted by law.[41] The patrimony of the Trust is:
“…a patrimony by appropriation, autonomous and distinct from that of the settler, trustee or beneficiary and in which none of them has any real right..”.[42]
This coincides with the patrimony of the CPF .[43]
- Formation of a Trust
The Trust is established by contract, by will or in certain cases, by operation of law.[44] A foundation can either be constituted by: (a) a deed of formation; (b) a last will; or (c) a testamentary disposition.[45] A notarial deed is not required for the formation of a Trust.
- Types & purpose of Trust
The CCQ recognizes various kinds of trusts. Trust can be constituted for personal purposes or private or social utility.[46] This provision of the CCQ seems to be in terms of purpose a mixture of kids or purpose of the Common Foundation and the CPF .[47] The Trust may not have the making of profit or the operation of an enterprise as its main object.[48] This is similar to the object of the Common Foundation and the CPF .
- Administration of a Trust
A Trust is administered by a Trustee.[49] The Common Foundation or the CPF are administered by a board of directors, which may be under the auspices of a board of supervisory directors or a protector.[50]
Section 1278 states that the trustee (or trustees) has the control and the exclusive administration of the trust patrimony and that the titles relating to the property of which the trust patrimony is composed are drawn up in his name.[51] This, a prima facie, seems to deviate from a Dutch-Curacao perspective, from the principle of having a separate patrimony. In the case of a Common Foundation or CPF the titles relating to the property of the Foundation are held by the Foundation and not by any other party.
- Rights of beneficiaries
The beneficiary of a Trust is entitled to receive fruits and revenue and where such is the case capital of a Trust and may enforce these rights against the Trust.[52] In the case of an CPF the beneficiaries do not have a direct claim on fruits, revenue or capital from the CPF .[53]
- Closing comments
I have provided a general overview of the main civil and fiscal aspects of the common foundation and of the private foundation under the laws of the Curacao and I have made a (non-exhaustive) comparison with the Quebec Trust.
Review of the Trust show some sticking resembles between the Foundations and the Trust. The extents of the similarities that I have encountered are such that Quebec’s legislator could have chosen to name the Quebec Trust as Quebec Foundation. This perhaps may have fitted better into the civil law origin of Quebec. Especially if I accept as a given, that Quebec law had never accepted the common law theory that the trustee is the owner of the trust property because the distinction between legal and beneficial ownership due to the fact that this was alien to the laws of the province of Quebec.[54] For this same reason the common law trust, or anything similar to it, can not be implemented under current Dutch law.[55]
[1] Dijk/Van der Boeg, Van vereniging en stichting, coöperatief en onderlinge waarborgmaatschappij, 1997, p. 9
[2] Dijk/Van der Boeg, Van vereniging en stichting, coöperatie en onderlinge waarborgmaatschappij, 1997, p. 9. See also: Versteeg en storm, Ars Notariatus III and Feenstra, R. L’histoire des fondations, Tijdschrift voor Rechtsgeschiedenis deel XXIV, p. 381
[3] HR 30 juni 1882, W 4800
[4] Section 2:285 paragraph 3 Dutch Civil Code
[5] Algemene overgangsregeling wetgeving en bestuur AB 1987 no. GT 2 and subsequent changes on September 19th, 1989 (AB 1989 no. 52) and September 3rd, 1999 (AB 1999 no GT 3)
[6] Including the author of this paper in his capacity of lawyer and past president of the Aruba Financial Center Association
[7] Providing that the articles of incorporation of such legal entity contain provisions allowing for incorporation or formation of other legal entities person allows such incorporation
[8] Section 1 paragraph 1 on the National Ordinance on Foundation
[9] Such is also the case under Aruba Law
[10] Book 2, Section 4 paragraph 1 CCNA
[11] Book 2, Section 5 paragraph 1 CCNA
[12] Book 2, Section 5 paragraph 3 CCNA
[13] P.B. 1968 No. 108
[14] Unless those appointed reject their appointment as board members
[15] Unless those appointed reject their appointment as board members
[17] Section 1National Ordinance on Corporate Profit-tax A.B. 1988 G.T. 47
[18] Section 17 National Ordinance on Corporate Profit-tax A.B. 1988 G.T. 47
[19] De Parlementaire Geschiedenis van het Nederlands Antilliaanse (nieuw) Burgerlijk Wetboek, Murray. M. (red) 2005, p. 181
[20] Book 2: Section 50 paragraph 3 CCNA
[21] Book 2: Section 50 paragraph 1 CCNA
[22] Book 2: Section 50 paragraph 1 CCNA
[23] Book 2: sections 70-89 CCNA
[24] Book 2: Section 10 Book 2 CCNA
[25] Such is also the case under Aruba Law
[26] See Annex A: sample deed of formation section 1 paragraph 2
[27] The articles of formation determine the authority and function of the resident agent.
[28] Book 2: Section 24 paragraph 1 CCNA
[29] Unlike the formation of an English Trust where the presence of res is a condition sine quod non for the valid formation of a Trust i.e. no res, no trust
[30] Book 2: Section 57 CCNA
[31] Book 2: Section 51 j.o. 5 CCNA
[32] When the foundation was included in book 2 of the CCNA, this requirement was not included in the text, but was moved to book 2: section 3400 covering the aspects of corporate conversions. From the parliamentary discussions it is further evidenced that a common foundation can not be converted into a private foundation. See: De Parlementaire Geschiedenis van het Nederlands Antilliaanse (nieuw) Burgerlijk Wetboek, Murray. M. (red) 2005, p. 220
[33] Book 2: Section 57 CCNA
[34] See for example sections 6, 7 and 8 annex A
[35] Section 9 paragraph 1 annex A
[36] Section 9 paragraph 1 annex A
[37] Section 9 paragraph 2 annex A
[38] Section 9 paragraph 3 and 4 annex A
[39] Stavert, William E., The Quebec Law of Trust, HeiOnline – 21 Est. Tr. & Pensions J. 130 2001-2002, p. 130
[40] Civil Code of Quebec, Chapter II, Sections 1260 through 1297
[41] See paragraph 4.3 supra
[42] Section 1261 CCQ
[43] Paragraph 4.5 supra
[44] Section 162 CCQ
[45] See paragraph 2.1 supra
[46] Section 1266 CCQ
[47] See paragraph 2.5 and 4.5 supra
[48] Section 1270 CCQ
[49] Section 1274 CCQ
[50] See paragraph 4.9 supra
[51] Section 1278 CCQ
[52] Section 1282 j.o. 1284 CCQ
[53] See paragraph 4.10 supra
[54] Stavert, William E., The Quebec Law of Trust, HeiOnline – 21 Est. Tr. & Pensions J. 130 2001-2002, p. 130
[55] Koppenol-Laforce, M.E. and Kottenhagen, R.J.P. The institution of the trust and the Dutch law, http://www.library.uu.nl/publarchief/jb/congres/01809180/15/b8.pdf
