Family Office – Legal Setup
Since a family office is a business, the question of which jurisdiction provides the best environment for such activities often arises. Legal and tax structures may impact the structure and operational performance of the family office and should be given substantial consideration.
Given that the family is at the center of the family office, choosing a location close to the family, or at least to the central members, may be more important than a tax-optimized choice of location. Nevertheless, legal, tax and regulatory aspects relevant for the setup, as well as for the operations of a family office, should be reviewed carefully by a tax attorney or other professional advisor. Depending on the framework provided by the jurisdiction, many aspects should be considered in order to optimize the individual situation within the given legal or tax frameworks.
Asking the right questions on location
As outlined above, the most crucial aspect of choosing a location for a family office is not the legal and tax environment. Nevertheless, there are a few jurisdictions that stand out as centers of family office excellence. There are many other relevant aspects of location choice beyond legal and tax, and it is important to establish which questions have to be asked – and answered – in the process of setting up a family office.
The regulatory environment of the jurisdiction must be carefully checked, as does the level of services provided by the jurisdiction. The requirements that need to be met in order for the office to perform services under the laws of the location must also be verified. In many countries, special registrations or permits are required in order to give investment advice or to act as an attorney or trustee on behalf of the principal family or certain family members.
Those setting up a family office need to be aware that in some countries non-compliance with such rules is a criminal offence, with severe consequences for those who fail to follow the correct procedures. Furthermore, there may be restrictions on the provision of legal and tax advice, which may only be offered by certified professionals and registered professional service firms. In some jurisdictions, such professional services might be incompatible with the tasks covered by the family office, such as financial services.
In view of these potential limitations, the scope of work for the family office must always be matched with the regulatory framework in the jurisdiction. For services that cannot (or will not) be provided by the family office itself, other trusted advisers should be identified.
Regulatory aspects also impact the choice of personnel, especially senior management. Several jurisdictions require employees to have certain skills before they will grant and maintain permits to provide investment advice and other services that might potentially be provided by the family office.
Once the family office is established and all regulatory requirements have been met, operations may start. In this context, the legal and contractual basis for the family office services has to be considered. This not only includes the type of agreement between the family and its individual members with the family office, but also – and much more importantly – the extent of the family office’s liability. In this context, the legal framework as well as possible measures to limit liability should be scrutinized. The same applies for insurance against financial damage.
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