Family Office Jurisdictions: Choosing the Right One
Published in The International Family Office Journal, April 2018
Over the last years, an increasing amount of high-earning business owners and families who have sold their businesses are turning to a family office solution for support, instead of standard financial management services.
When families weigh the question of whether to set up their own single-family office or use the services of an existing multi-family office, they often overlook the matter of the jurisdiction in which that family office should be located or established. In reality, this is actually an essential aspect that deserves serious thought.
In this article we discuss a considerable number of factors related to jurisdiction and the reasons why those are relevant.
- Where to start – establishing a single-family office
- Where is support required?
- Where are the family assets located?
- Staff and leadership structure
- Local infrastructure and expertise
- Legal form
- Data protection and privacy
- Taxation and costs
- The obvious suspects
- Stability and wealth preservation
- Conclusion - suitability and selection
Where to start – establishing a single-family office
The family office industry is a relatively challenging environment as such for those wealthy families who start to explore it. When families consider the establishment of a single-family office, they often do not know where to start. There are a lot of challenges to face at the same time, such as establishing the objectives of the family and the family office, identifying the assets to be managed and controlled, identifying the services required, budgeting the costs involved and selecting the proper legal structure.
One element that often does not receive the necessary attention in this process is the actual selection of the jurisdiction in which the single-family office should be located. There are quite a few questions that should be answered before a family decides on the best jurisdiction for their family office.
All aspects of setting up a family office correlate in some way with the actual jurisdiction in which it will be established. As these aspects are closely connected to the family and its objectives, there is not a simple ‘one size fits all’ solution. It is advisable to weigh the criteria of the family with the elements of the family office and select the most suitable jurisdiction for the family’s specific needs.
The best way to approach this topic is to first establish a longlist of jurisdictions based on all relevant criteria, and then filter down to specific jurisdictions by analysing all relevant criteria and prioritizing which are most important for the family.
Where is support required?
A good starting point for drafting a longlist of potential jurisdictions for the establishment of a single-family office is analysing those jurisdictions in which the family will need to receive support. This support relates to the jurisdictions in which family members live and in which assets are held.
This is best explained with a comparison between two different families. We assume that family number one lives in Germany and consists of a couple with three adult children, of which two are married. All the family members live in Germany, and they all hold a German passport (only). Their assets consist of the family business and real estate investments, both located in Germany. They also hold bank accounts in several jurisdictions. As this family is centred in Germany, Germany clearly should be on the longlist. Moreover, as the family office staff should be well acquainted with German legal and tax issues (which are relatively complex) and preferably fluent in German, jurisdictions such as Austria, Liechtenstein, Luxembourg and Switzerland should also qualify for the longlist. Depending on the proximity to where the family is located, one of those jurisdictions might be ranked higher on the list than others.
The second example involves a family with a Russian background. The family consists of a couple with two children, one already of legal age and one a minor. The father owns a large company in Russia and is primarily based there. The minor attends a boarding school in the United Kingdom (UK), where the mother also resides. The young adult is a student at a university in the United States (US). He intends to stay in the US when he finishes university. They all hold a Russian passport. The mother and minor have a residency permit in the UK. The young adult holds a visa to study in the US. Purely based on where the family is residing, Russia, the UK, and the US should be put on the longlist of potential family office jurisdictions.
Based on these two examples, one can conclude that the home jurisdiction(s) of the family should always be on the longlist, but it should be clear that it is not automatically the right jurisdiction to establish the family office. Especially in the case of larger families involving several generations, family members are often spread over numerous jurisdictions. In order to serve all those family members properly, a central location would most probably be more suitable. Due to time differences between jurisdictions it should be avoided, if that be the case, that some family members only have access to the staff of the family office for a limited number of (odd) hours and other family members have, very conveniently, a relatively unlimited access.
Where are the family assets located?
The family assets also need to be taken into account when considering the potential location of the family office. When a family lives in jurisdiction A and holds the majority of its assets (e.g. in the form of a company or real estate investment) in jurisdiction B, jurisdiction B should clearly qualify for a place on the longlist. This should even be considered with non-fixed assets such as bank accounts.
Of course it is not compulsory to have the family office located in the same jurisdiction as that of the family’s assets. It is also possible to have the main family office operations based in one jurisdiction and some of the staff acting primarily in another jurisdiction. A good example of this situation is where household staff is taking care of large holiday homes in foreign jurisdictions. Although such staff might be directly employed by the family office, and in that sense be part of the family office staff, the family office does, by definition, not need to be located in the jurisdiction(s) where the holiday homes are located. When assets are spread all over the world, which is often the case with wealthy families, the family should clearly consider adding jurisdictions to the longlist that are centrally located in respect of those assets, also taking time-zones into account.
Staff and leadership structure
In most cases, a single-family office has the main task of managing financial assets. Therefore, the family office is normally staffed primarily by personnel with a financial background, administrative staff and some additional members of varying expertise.
For those jurisdictions on the longlist, the family should investigate the availability and possibility of recruitment of experienced, motivated, accurate and educated staff with financial experience. This is often the case in the more established financial centres and developed western jurisdictions, but not so in developing jurisdictions. Some good examples of well positioned jurisdictions in this respect are Switzerland, the United States and the United Kingdom.
As a second step, the family should check if local immigration rules allow staff from abroad to be employed in that jurisdiction. There should be the possibility to recruit staff from different jurisdictions with different citizenships. There are a considerable number of jurisdictions that do not allow foreigners to take up residency or that have a limited annual quota of residency permits available. This could interfere with the recruitment policy of the family office.
Even when it is legally possible to recruit and appoint staff from abroad in the preferred jurisdiction, this jurisdiction may not necessarily be attractive for this group of potential employees. The overall quality of life, standard of living, affordable housing and the local tax environment all play a role in this respect. One can easily imagine that it is not particularly attractive for professionals to move to a jurisdiction that is under-developed and offering a very low standard of living.
The level of personal income tax is always an important point for consideration when aiming to attract financial talent. Generally, professionals working in the financial industry are very focussed on financial compensation and when the family office is to be located in a jurisdiction with a high income tax it could be difficult (or very expensive) to attract the right talent to manage the family’s affairs. This also automatically implies that staff costs can be expected to be higher overall. The family should be aware of the fierce international competition to acquire the right talent. Offering a highly attractive compensation package could be of huge benefit in this process.
Last but not least, the family should consider the employment laws of the jurisdiction. Particularly in some European jurisdictions it is relatively easy to find and hire talented employees, but very difficult to dismiss these individuals at a later stage. The legal inability to fire staff without difficulties could not only be problematic for the family, but this would almost certainly entail extra expenses.
Local infrastructure and expertise
The quality of the local infrastructure is also of relevance when selecting the most appropriate jurisdiction. The family office should preferably be easily accessible. Family members should be able to reach the office without much effort. If the office is located outside the home jurisdiction of family members, the jurisdiction should at least have good flight connections to such home jurisdiction. Staff should be able to travel without too many hurdles. Within the jurisdiction there should be a decent network of highways and train connections to enable easy travel.
Proximity to external expertise is another important element of what we consider infrastructure. Although there are many remote communication possibilities these days, (i.e. video conferencing, WeChat and Skype), it is still highly beneficial for a family office to be located close to expertise of all sorts. The proximity of solid (private) banks and other financial service providers is advisable, as one of the primary tasks of a family office is to manage the family’s wealth. This is even more relevant for very wealthy families as regular face-to-face contact is a must when discussing problems, reviews, made to measure solutions and complex production issues etc. As a result, most family offices prefer to be located in a jurisdiction with a solid and reputable financial centre. It simplifies activities considerably.
Proximity to other high-standard specialists such as tax advisors, law firms, financial planning specialists, notaries, audit firms and trust companies is also very advisable. As a family office, you do not want to be in a situation where you must travel long distances to discuss issues with all your important stakeholders or advisors, or visa versa.
Another part of the local infrastructure of a jurisdiction is a reputable, trustworthy and solid legal system. Simply put, the wealthier a family becomes, the more legally complicated things are. As the amounts invested are then (very) large and less straightforward, and investments such as private equity and co-investments are executed, it is important to have a solid legal framework to form the basis for drafting and executing reliable contracts. Being based in a legally stable and reputable jurisdiction that meets with expectations is of great value to a family. Another benefit of a jurisdiction with a good infrastructure is that it is also attractive for other family offices. When the family office is based close to similar firms, it stimulates cooperation, co-investment and shared knowledge and experience.
Defining the legal form of the family office and selecting the most suitable jurisdiction go hand-in-hand. In connection to the legal structure, two main issues need to be focussed on:
- The selected legal structure of the family office itself should be the one most preferred and most suitable for the family. It should be verified that it is in fact possible to establish this preferred structure at the preferred location. (Selecting the right structure for a family office is in itself a challenge and as such deserves an article of its own).
- The legal framework of the jurisdiction should allow the family office (once established) to manage all the family’s entities, such as on- and offshore companies, trusts and foundations out of that jurisdiction. If, for example, the family has settled one or more trusts and the single-family office is acting as trustee, it would be highly beneficial, if not absolutely necessary, that the jurisdiction in which the family office is located has ratified 'The Hague Convention on the Recognition of Trusts'. This will enable the family office to act as trustee on the family's trust structure without any negative (tax and) legal consequences.
Based on these two points, an analysis should be carried out to establish which of the longlisted jurisdictions will enable the family to establish their preferred structure without negative legal consequences. The difference between common law jurisdictions and civil law jurisdictions in relation to the main home jurisdiction(s) of the family should be taken into account in this analysis.
Data protection and privacy
Data protection, cyber security and privacy are increasingly important topics for affluent families. The jurisdiction in which their family office is to be located should enable them to protect their interests as much as possible. The family should be able to safeguard, shield and protect themselves. Local legislation protecting the privacy of individuals should therefore be strongly in place. It is also advisable to save the electronic data of the family office in the same jurisdiction as where the office is located (especially when the office is located abroad). This is not just advisable for privacy reasons, but also as part of risk management.
One important element of privacy protection nowadays is the review of local legislation with respect to Ultimate Beneficial Ownership (UBO) registration. A rapidly increasing number of jurisdictions are introducing UBO registers. Some will have registers completely open to the public, others will have more privacy safeguards in place or may not (yet) have introduced such a register. As wealthy families nowadays are regularly in the spotlight, we believe it to be relevant that this aspect is also taken into account when selecting the jurisdiction for the family office and the appropriate family office structure (and clearly also for the structures which the family office will manage).
Taxation and costs
Setting up a single-family office is known to be a costly exercise. Keeping the costs under control is an objective in itself for most families. The majority of these costs consist of staff costs and the costs of office infrastructure; consisting of the actual office costs and the necessary software solutions. As the implementation of software solutions does not differ per jurisdiction this should normally not be an influence when selecting.
Although real estate (rental) prices are really high in some jurisdictions, this will not be a strong influence in most cases when selecting that specific jurisdiction. As a single-family office does not need to be located in the main streets of a city, there is a certain amount of flexibility when selecting suitable office space and avoiding the highest rents.
Whereas for most businesses the cost of corporate tax is one of the most relevant costs to take into account, this is not as much of an issue for most single-family offices as the majority do not have the objective of operating for profit. Most single-family offices operate as a cost centre, which means that they charge the family (or their structure) for their services just to cover their costs. No profit simply means no taxes. If the family office is operated commercially (which is primarily the case with multi-family offices) the costs of taxation can be relatively high, depending on the jurisdiction. This, in turn, means that the family would need to take this aspect into account when selecting the jurisdiction.
Normally, service agreements are put in place between the family office and the family’s entities (or even with the family members directly). An important tax aspect of such service agreements is the applicability of value added tax (VAT). Depending on the jurisdiction, these agreements will potentially be exposed to VAT, which means that when the jurisdiction has a high tax levy, the overall costs for the family will increase. Both the exposure to and the level of VAT should therefore be examined. Another issue is the transfer pricing aspect of such service agreements. The family office should provide the services based on an arm’s lengths principle. If it does not do so, this could trigger a dispute with the local tax authorities, with a revision of the compensation for the service agreements as a result – meaning costs.
Another tax aspect, although resulting more indirectly in costs, is the risk that offshore structures, which are used by the family, but managed and controlled by the family office, are brought into the tax net of the jurisdiction where the family office is located. When, due to the involvement of the family office (by them actually managing and controlling those structures), certain entities are considered to be located in the family office jurisdiction instead of offshore, this can expose the family assets to a high level of taxation. It is therefore important to establish that the family assets and structures located in low tax jurisdictions can indeed be managed out of the preferred jurisdiction before the family office is actually established there.
Social security premiums also form a potential cost for the family office. In some jurisdictions social security premiums are much higher than in others. The family should consider this in the selection process.
The obvious suspects
In the selection process of jurisdictions one should not forget to consider the obvious suspects: financial centres. Nearby financial centres should, therefore, be added to the longlist of jurisdictions under consideration. As already lightly touched upon when discussing the infrastructure of a jurisdiction, financial centres can be of great value to family offices.
Most financial centres offer a combination of attractive taxation and a solid and flexible legal framework. This almost always allows for the establishment of interesting family legacy structures, such as trusts and foundations and corporate investment vehicles. This results in a lot of professional trust providers, lawyers and tax lawyers being located in the jurisdiction, which is of benefit to family offices. Financial centres are always home to numerous banks - commercial, private and investment. Both local and more renowned global banks. Proximity to banks is not just attractive but is even advisable for single-family offices.
It is for this reason that a considerable number of single-family offices (and a large number of multi-family offices) can be found in financial centres all around the globe. Asian based families almost always take Hong Kong and Singapore into consideration. In the Middle East, the United Arab Emirates is home to an increasing number of single-family offices. In Europe, Luxembourg, Switzerland and the United Kingdom are often considered, but also the smaller financial centres such as Gibraltar, Guernsey, Jersey and Monaco promote themselves as ideal jurisdictions for the establishment of a single-family office. In the Americas, the obvious subject is clearly the United States.
Financial centres do not only attract single- and multi-family offices but a considerable number of them are also known to attract wealthy families themselves. An increasing number of ultra wealthy families combine the establishment of a single-family office with the relocation of one or more of the family members to another jurisdiction. This can be because one of the family members takes up a leadership role within in the single-family office, or because one or more family members relocate for tax and/or lifestyle reasons.
Especially when a family business is sold, a lot of changes occur for the family members. They no longer own a family business, but have large amounts of cash and equity which changes the way they are taxed in their home jurisdiction considerably. Many react to this by relocating. Their daily business changes completely as they no longer have to manage the family business and this opens up the possibility to relocate away from the original family business jurisdiction.
Most jurisdictions do not require a single-family office to obtain a license to operate as a single-family office. In fact, most jurisdictions do not even have such a thing as a single-family office license. The majority of jurisdictions only have financial licensing requirements for those who manage the financial assets of a diverse group of clients (the public). If only the assets of a single family are managed, an exemption almost always applies.
Only a very limited number of jurisdictions have introduced an official single-family office license or specific family office regulations over the last years. An example of such a jurisdiction is the United Arab Emirates, where the Dubai International Financial Centre currently encourages families to apply for a single-family office license/registration.
Although in most jurisdictions a single-family office license is not required, a considerable number of family offices still apply for a general license to manage financial assets in the jurisdiction where they are established, as if they were providing services to the public. Although we strongly believe it should be clearly reviewed by the family if and which license requirements exist in the jurisdiction of choice, we are not convinced that the existence or absence of a single-family office license is of much relevance for the selection of the right family office jurisdiction.
Stability and wealth preservation
A common mistake families make is to simply establish the family office in the same jurisdiction they live in, instead of executing a thorough research. Because it appears to be the easiest solution, little time is invested in analysing alternative jurisdictions. Although the home jurisdiction can be very practical from a communication point of view (proximity), this is often not the best choice when examined from a wealth-preservation perspective, especially for families living in developing jurisdictions.
One of the primary roles of a family office is to safeguard assets and to assist the family under various circumstances. This means that the family office should not merely manage the family assets and execute its daily tasks, but it should also be able to protect those assets against geographical, political, religious, personal and economic risks, while remaining fully operational in all or at least most circumstances. Therefore, it is only logical for families living in less developed and risky jurisdictions that the family office be located in a secure and stable one instead. This does not necessarily mean that the entire staff or services be located in foreign territory; roles like local secretarial support, lifestyle management services and local real estate management can be based in the family’s original jurisdiction.
Because the number of unstable and unsafe jurisdictions around the globe still outnumbers the stable and safe ones by far, one could conclude that the majority of families’ single-family offices should be located outside their home jurisdiction. This is not completely true of course. The majority of wealthy families still originate from developed, relatively stable jurisdictions. But, as we all know, this is changing rapidly.
Conclusion - suitability and selection
As every family is unique and has unique needs, we can conclude that there is simply no single ideal jurisdiction to establish a single-family office. Although we have outlined many aspects that should be taken into account when deciding on the jurisdiction, we are very much convinced that there are always different priorities for each family.
We would advise that a family initially starts with drafting a longlist of potential jurisdictions for the establishment of their single-family office. Then, as a next step (and similar to peeling the layers off an onion) the most important criteria for the family and family office should be cross-checked with the actual possibilities and restrictions of those jurisdictions. The obvious result of such an analysis is that the family will end up with a shortlist of most suitable jurisdictions for the establishment of their family office. Only then should personal preference be a decisive factor in the choice of the actual jurisdiction.
Nevertheless, all the elements to be taken into consideration highlighted above will ultimately limit the best possible jurisdictions to only a few. That is exactly why you will find the majority of single-family offices and multi-family offices in a mere handful of jurisdictions, such as the United States of America, Singapore, Switzerland, the United Kingdom and Luxembourg. In our opinion, these countries, along with about a dozen others, including some well-known financial centres and highly developed jurisdictions, are the only jurisdictions a native family can seriously consider for the establishment of their single-family office, rather than relying on a foreign jurisdiction.
Jan van Bueren is Head Wealth Planning Zurich & Basel at the Swiss private bank Union Bancaire Privée (UBP) and Co-Founder of UBP’s award-winning family office advisory service - FOSS Family Office Advisory. He holds a Master’s degree in Tax Law from the University of Groningen, the Netherlands. Through FOSS, Jan assists families with the establishment of a single-family office or alternatively supports them with the selection of a multi-family office in Switzerland or abroad. He also regularly supports affluent families with their relocation to fiscally (more) attractive jurisdictions.
Thomas Ming is a Senior Product Specialist at the Swiss private bank Union Bancaire Privée (UBP) and co-founder of UBP’s family office advisory service - FOSS Family Office Advisory, located in Zurich. He holds a Master’s degree in Law from the University of Basel, Switzerland. Through FOSS, Thomas assists families with the establishment of a single-family office or alternatively supports them with the selection of a multi-family office in Switzerland or abroad. Next to family offices, Thomas Ming has focused over the past years on life insurance (e.g. private placement life insurance (PPLI) and (jumbo) universal life insurance (ULI)) as a compliant wealth planning structure for wealthy families from around the globe.