International Private Investment Funds for owner-managers are very often Limited Partnerships (LP) that have a General Partner Company GP. The GP is the Fund Manager. The LP issues units in the LP to investors. The LP owns the Local Operating Company (LOC) that owns the oil field or the mining operation.

 

The GP company shares are usually owned by the owner-manager as the owner is responsible for managing the operation and earning the profits that generate the return for investors. The LP/GP is a very common and typical structure for Private Equity. Unlike US domestic LP/GPs the GP company needs to be “regulated”. That means that either the GP has a director that is a regulated entity, a regulated asset manager owns shares of the GP, or the GP hires a Co Fund manager who is a regulated asset manager.

We explained elsewhere that Latin American and African projects that want to raise capital from US investors have to realize that they are viewed as high risk. The US Private Equity industry is highly US domestic. International projects run by an owner manager cannot be compared in terms of risk to large international private equity firms. These firms however are not like hedge funds operating under an exemption, they are registered with the US SEC.

Captive Insurance companies are insurance companies owned by a business owner. The simplest way to explain them is that they are companies that enable self-insurance. Captive Insurance is very important for owner-managers from Latin America and Africa who have oil & gas and mining firms and want to raise capital in the USA.

 

We explained that international projects are viewed by US investors as high risk. If you are raising capital in the USA you are competing with US domestic projects and your project is at higher risk. The offer of a higher return is not enough alone. You need to reduce the risk of your project in a way that US investors find credible.

 

The owner-manager can set up a Captive Reinsurance company in Barbados. That reinsurance company can then reinsure the risk of the African or Latin American business.

 

When raising capital from US investors an owner-manager has to prepare an offering memorandum (OM) or investment prospectus. There has to be a section on risks explaining the risks of the project. The law of the USA requires transparency on risks in the OM otherwise there will be a legal liability.

By including in the OM a Captive Insurance or risk mitigation section, the owner is providing potential investors with a tangible risk mitigation strategy. The owner can also use the captive insurance company to incentivize potential investors with independent board seats on the board of the captive insurance company.

 

They can also issue shares of the captive insurance company to US investors, which are highly tax-efficient when held by a U.S. Corp.

The owner can also structure a debenture over the assets or shares of the captive insurance company in favour of US investors.

As the Captive insurance company is outside of the Latin American operational jurisdiction, the Captive is an attractive risk reduction strategy for US investors.

CORPORATE SERVICES
The main purpose of good corporate services is to make sure the company is tax resident in Barbados, Canada, or the USA as appropriate. If the company is properly tax resident then it has access to tax treaties. The most important tax treaty for the US is the USA Barbados tax treaty. We use this often when agricultural exporters want to maintain their warehouse, staff, and office in the US but not be subject to US corporation tax. This means directors, staff, offices, and function of the Barbados company has to have a commercial reality. Barbados companies have to get an audit if there is more than US2M on any of the financial statements. The audit has to be done by a Barbados-qualified professional. This is an added cost but the compliance assists clients greatly when it comes time to present their source of funds to one party or another.

 

US DOMESTIC TRUST SERVICES
Owner managers who are raising capital in the USA need US Asset protection trusts. US Asset protection trusts protect the owner’s property from litigation in the USA. If the owner-manager is a US person or going to become a US person they should set up a US domestic trust. If they are not going to become a US person then they should consider a US foreign trust. A US foreign trust is not subject to tax in the US, but it is still a part of the US legal system.

 

FOUNDATIONS AND TAX-EXEMPT ENTITIES
Quite often owners are moving to the USA and setting up businesses there. Owners who already have international businesses need to understand the options for use of tax-exempt businesses and foundations that can greatly enhance their wealth management in the USA. Foundations and tax-exempt trusts of one type or another are used by wealthy US persons for long-term tax deferral. Compliance and attention to detail are extremely important however when using these types of arrangements. Most importantly, all arrangements should be legitimate.

 

CANADA/BARBADOS TRUST SERVICES
Sometimes clients don’t want US-domiciled trusts for holding long-term assets and wealth management. Canada has a very clear rule when it comes to the tax residence of trusts. It is similar to the US but in a different way. A client can have a Canadian trust that is a tax resident in Barbados. This gives the protection of Canadian law but the zero tax environment of Barbados.

The purpose of international tax planning is to reduce the costs of doing international business, investment, and wealth management as allowed by the law. US withholding taxes of 30% can be reduced to 5% by a Barbados company that has access to the US-Barbados DTA.

Many owner-managers, in fact, all of our clients use BVI companies to hold shares ultimately in operating companies in Latin America. The benefit is that the shares are easily transferred if the company is sold or restructured.

 

This remains true in the world of international structures for owner-managed companies. Barbados is similar to the BVI but has additional benefits such as the USA Barbados Tax treaty. It is possible to reduce tax costs if the owner-manager chooses to later on. Uruguay, Panama, nor BVI have a DTA with the USA.

US tax planners make extensive use of “check the box” and paying full taxes in the USA. This is simplifying for some persons but not owners who do not plan to become US persons. International or non US persons
have much more options when doing business in the USA or making investments into or from the USA. The US tax lawyers we work with are truly international and work with us to do what is best for the client. They are prepared to put a range of options in front the client not simply tell them the CFC or PFIC rules are too complex.