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Trust Registration In Cook Islands

Cook Islands General Information

Geography, Population, Languages

The Cook Islands are a group of 15 islands located in the Central Pacific, in Polynesia, between Tahiti in the east and Samoa and Tonga in the west. The total area of the Islands is 241 sq. km. The main island of Rarotonga is 3,000-km north-east of Auckland, New Zealand. The township of Avarua on Rarotonga is the administrative and commercial centre of the Cook Islands. The climate is tropical and humid and there are frequent hurricanes.

The total population of the Island group is approximately 19,000. The indigenous population is Polynesian, but English is spoken by most of the community. The official language is English; Cook Islands Maori is widely spoken.

History, Political Structure And Law

The Islands were discovered by Captain Cook 1773-74 and named after him. Great Britain proclaimed a Protectorate over the Cook Islands in 1888. In 1901 the Islands were ceded to New Zealand. Since obtaining self-government in 1965 under the Cook Islands Constitutional Act 1964, the Cook Islanders have retained New Zealand citizenship, and New Zealand retains responsibility for foreign affairs and defence. The Government has reaffirmed continuing support and encouragement for the development of Rarotonga as a financial centre.

Government of the islands is by a locally elected Parliament consisting of 24 members, however, executive authority is vested in Her Majesty, the Queen of England, in her capacity as Head of the Commonwealth.

The Queen's Representative is appointed upon the advice of the Cook Islands Government. Executive power is exercised by a Cabinet comprising the Prime Minister and nine other Ministers appointed by the Prime Minister. There are two main political parties, the Democratic Alliance and the Cook Islands Party which share seats in the Parliament. Both parties support the Cook Islands' status as an offshore financial centre.

The Cook Islands have a growing international stature and are members of the South Pacific Forum, the Asian Development Bank and the Economic Commission for Asia and the Pacific.

The legal system is Common Law and is closely based on English Common Law.

Economy And Infrasructure

The Cook Islands economy is primarily based on tourism and fishing. In recent years the offshore industry has expanded enormously due to the innovative and progressive legislation, which facilitates the establishment of numerous offshore structures, such as international business companies, offshore banks, offshore insurance companies and wealth preservation trusts.

Rarotonga has a highly developed communication system, with satellite telephone, the Internet, e-mail and fax facilities. Direct dialling to Rarotonga is available from most countries. New Zealand Airlines fly via Rarotonga to and from Auckland, Tahiti, Hawaii, Los Angeles and Fiji, and provide direct access to the USA, South East Asia and Australia, as well as Europe.

Currency

The currency in the Cook Islands is the New Zealand Dollar (NZD). Exchange control is exercised only in relation to certain dealings in NZD. There are no local restrictions on the movement of funds to or from the Cook Islands in other currencies. Businesses can be run in any currency.

Cook Islands

A Progressive Offshore Jurisdiction

The Cook Islands is a progressive offshore jurisdiction with sophisticated and innovative legislation designed for

• Asset protection trusts
• International companies
• Mutual funds
• Offshore banks
• Insurance companies,
• International partnerships

Next, we outline the Cook Islands offshore legislation and the services provided by Our Firm

Trust Companies

A Company is not permitted to carry on business in the Cook Islands as a trustee company unless it is registered pursuant to the provisions of the Cook Islands Trustee Companies Act 1981-1982

Carrying on business as a trustee is widely defined and includes acting as trustee, executor or administrator.

The control of the registration of trustee companies lies with the Cook Islands Financial Supervisory Commission, which looks at the suitability of the applicant and the experience of this associated with the applicant. Minimum capitalisation requirements also apply.

International Companies

The Act 1981-1982

A Company can be incorporated under the International Companies Act 1981-1982 as an international company if its shareholders are non-resident of the Cook Islands, however, a trustee company registered under the Trustee Companies Act 1981-1982 may hold shares in an international company and may be the sole shareholder. Our Firm can incorporate an international company within 24 hours of receipt of instructions.

Capital Requirements And Shares

There are no minimum capital requirements and shares may be of no par value. Shares may be designated in most major currencies and bearer shares may be issued (but must be “immobilized” with a Cook Islands custodian, which can be a Trustee Company), unless this is prohibited by the Articles of Association.

Directors And Secretary

Only one director of an international company need be appointed and there is no obligation to appoint a resident director. It is obligatory to have a resident secretary who must be an officer of a registered trustee company. Additional secretaries may be appointed who need not be residents.

An international company may be incorporated for any lawful purpose, other than that of a trustee company, but shall not carry on the business of banking or insurance, unless it is licensed under the relevant Act.

Anonymity

Principals or promoters of international companies may remain anonymous as there is no obligation to disclose any details of beneficial ownership of shares.

Such anonymity is further guaranteed by virtue of the provisions of Section 8(5) of the Act which impose penal sanctions on any person who discloses information derived from an inspection of the records of an international company

The documents lodged with the Registrar of International Companies are only available for inspection by directors, members and debenture holders. Court proceedings relating to the rights or obligations of officers or members or debenture holders must be heard in camera, unless the Court orders otherwise.

Annual Returns

All companies must lodge annual returns accompanied by audited accounts unless the members of the Company (being a private company) resolve at each annual general meeting that auditors should not be appointed.

Taxation

The legislation expressly provides that international companies and foreign companies registered under the International Companies Act 1981-1982 and their shareholders will not be subject to any form of taxation including stamp duty. The legislation also provides such entities with a guarantee that the Crown will not compulsorily acquire or expropriate their property situated in the Cook Islands except under specified circumstances defined by law.

A foreign company incorporated outside the Cook Islands may register under the International Companies Act 1981-1982 if it has a place of business or is carrying on business from within the Cook Islands. Once registered under the Act it is subject to the same provision as an international company.

The Cook Islands Leads The Offshore World

Cook Islands Asset Protection Trusts

The concept of using trusts to protect assets has been established for several centuries. Asset protection trusts, as they have come to be known, were created to protect beneficiaries from a wide range of potentially adverse eventualities. The common objective has been essentially to protect the assets of the Settlor against the consequences of financial disasters which may arise from the imposition of excessive death duties, the extravagance of family members, mismanagement of business ventures, or from the actions of third parties.

In recent years greater emphasis has been placed upon the need to preserve wealth from the ravages of litigation, political risk and government expropriation, marital or family breakdown, and contingent creditors.

This trend has been fuelled by the economic downturn of the late 1980’s, major political changes in Europe and elsewhere, and the growing influence in international law of the US generated penchant for litigation.

In various jurisdictions we have seen over the past 10 years, an escalation of personal risk as a consequence of penal awards by juries or overzealous courts, increased exposure of non-executive directors as corporate laws become overly protective of creditors and shareholders, and in the case of the latter, the loss of traditional protection as the corporate shield has been removed by legislation. As a consequence liability and professional indemnity insurance protection has become inadequate and, where available, expensive.

Increasingly, wealth protection planning has become an essential consideration in the development of financial strategies of high net worth individuals, company directors and professional practitioners.

In turn asset protection trusts, particularly those based offshore have emerged as a primary component in such planning.

The starting point of any asset protection plan is a consideration of the laws of the client’s domestic jurisdiction. Laws which may be relevant would be those governing issues such as exchange controls, estate duties or inheritance taxes, capital gains taxes, bankruptcy and in particular fraudulent conveyances, and matrimonial settlements.

The relevance or otherwise of such laws will in many instances help determine the nature of the assets which the client will settle into the asset protection trust, and whether or not such trust should be located in an offshore jurisdiction.

It must be recognised that basing an asset protection trust offshore will not absolve the client from the need to comply with his domestic laws. As the principle objective of the client will be to protect assets against the prospect of his or a beneficiary’s future bankruptcy, the domestic laws against fraudulent transfers of property are of paramount importance. In most jurisdictions there are laws which operate to set aside transfers of property which are made with the intent to defraud creditors.

Such intent need not be express and in many instances intent to defraud is deemed to occur where transfers of property are made within a specified period of time.

Often criminal prosecution may result from such actions. It is essential that asset transfers are made well ahead of any potential creditor action, properly documented, and placed in a legal environment which offers the utmost protection from potential attack.

There are a number of reasons why most advisors recommend that asset protection trusts be established offshore. Obviously assets held in a domestic trust are more susceptible to attach. However, one of the principal attractions for placing assets in an offshore trust is the legislation which has been introduced in some offshore jurisdictions specifically to facilitate asset protection.

The Cook Islands was the first offshore jurisdiction to enact such legislation under the International Trusts Amendment Act 1989. Further amendments were enacted in 1991, 1996 and 1999.

As a result the Cook Islands currently has the most modern international trust legislation with particular emphasis on the protection of assets, the protection of beneficiaries and flexibility of “control” by the Settlor.

The Cook Islands international Trust law is derived from English common law but the legislation has removed some of the problem areas of the common law pertaining to trusts.

Features Of The Cook Islands Legislation

Inclusions

1. An international trust will not be void or voidable as a consequence of the settlor’s bankruptcy, notwithstanding any law to the contrary in the settlor’s domestic jurisdiction.

2. If a creditor establishes that an international trust was settled with the principal intent of defrauding a creditor and such settlement rendered the settlor insolvent or without property by which the creditor’s claim could be satisfied, the settlement shall not be void or voidable but the trust shall be liable to satisfy that creditor’s claim from trust property which was the subject of such settlement.

3. Generally foreign judgements cannot be entered against an international trust in the Cook Islands.

4. An international trust shall not be fraudulent against a creditor or the settlor if:

(a) The transfer of property takes place more than two years after the date upon which the creditor’s cause of action arose; or

(b) Such a transfer takes place within two years from the date of the cause of action accruing to that creditor and the creditor fails to bring that action within one year from the date of such transfer.

5. The settlor may retain certain powers and benefits without invalidating the trust.

6. The interest of a “spendthrift” beneficiary in an international trust may not be alienated by a creditor.

7. The avoidance of forced heirship rights shall not render an international trust void or voidable.

8. A trustee may delegate its functions, discretion’s and powers (other than dispositive powers) beyond the general common law rule on delegation.

9. Co-trustees may make valid decisions as a majority rather than unanimously. Title to trust property may be held by a single co.-trustee.

10. The settlor, beneficiaries and the international trust are not subject to any form of taxation in the Cook Islands. It is important to note that whilst the legislation allows such flexibility, the provisions outlined in 5. - 9. above do not apply unless specifically adopted in the trust document.

It will be apparent that the Cook Islands constitutes an ideal legal environment for asset protection trusts whilst preserving commercial responsibilities to the creditors.

A New Twist On Private Trustee Companies

A private trustee company can provide savings, control, and privacy for clients who prefer not to place their assets with a trustee company owned by a financial institution.

There is a high degree of flexibility in structuring control over the international

company. Control over the business of the company, and thereby the day to day business of the trust, rests with the directors of the company.

While the client is in control of the offshore company, he must be careful to maintain its separate identity as a trustee to avoid any accusation that the structure is a sham.

Most offshore jurisdictions require a grantor. To appoint a licensed trustee company to act as trustee of an offshore trust if the trust is to be domiciled in that jurisdiction.

In some jurisdictions, however a client may form a separate offshore company (a private trustee company) for the special purpose of acting as trustee of his

or her trust or trusts, instead of appointing a licensed offshore trustee company.

There are many situations where it may be advisable for a client to form a private trustee company.

The Cook Islands has special provisions ensuring that private trustee companies are easy to establish and operate, as well as being effective. Most importantly, in the Cook Islands there is no need to form a separate purpose trust to hold the shares of a private trustee company, as the different forms

of corporate ownership of a Cook Islands offshore company make this extra entity unnecessary.

Reasons For Forming A Private Trustee Company

A licensed trustee company may be unwilling to act as a trustee of a client’s trust, whether because of the litigation risk applicable to that client, or because of the nature of the asset to be held, or because of the investment activity planned by the client. The planned investment activity may involve the trustee in potential liability, or it may require on the spot decision making which is not practical with a trustee in another time zone.

Some trustee companies require complete control of the trust’s investment activity without client participation. Furthermore, it is common for licensed trustee companies owned by financial institutions to require the investment of client trust funds in financial products of entities related to that financial institution, whereas clients normally want to have the right to choose the funds and products the trust will invest in, as well as the fund manager.

Often the only licensed trustee companies giving the client the security of being owned by a financial institution are exposed in jurisdictions such as the United States because of their worldwide links.

The alternative of placing assets under control of an individually owned trustee company may not be comfortable for the client or his advisers, nor can this risk

be negated by fidelity insurance. Some clients may not even want to disclose the affairs of their trust to the staff (often expatriate) of a licensed trustee company, particularly where the information is politically sensitive.

Finally, where a trust or a group of trusts has a substantial amount of activity, or where the trust assets themselves are substantial, a client can achieve savings by carrying out his own administration rather than have these activities carried

out on a time cost basis or on a percentage fee basis by a licensed trustee company.

Problems With A Private Trustee Company

The principal issue is the consequence of the client owning the private trustee company, or having control over the activity of the private trustee company.

In an asset protection environment, ideally the client should not have personal ownership or personal control of the private trustee company. In the event of a threat to the trust, the client must not be subject to court orders exposing the trust assets.

A purpose trust (i.e. a trust that is created for a stated purpose rather than for stated beneficiaries) is permitted to be established with objects limited to holding the shares in the private trustee company. The client is thereby able to control the activity of the purpose trust and, indirectly, the private trustee company.

This “solution” does have some problems however. Purpose trusts are a creature of statute, and there is still some discussion about their effectiveness, particularly in dealing with the issue of ultimate beneficial ownership.

Further, there are the extra costs involved in maintaining an extra entity.

Private Trustee Companies In The Cook Islands

Establishing Nexus

The Cook Islands International Companies Act (1981-82) (ICA) contains special provisions for a client to form an international company (a private trustee company) for the purpose of acting as a trustee of an international trust, without being independently licensed in the Cook Islands as a trustee company.

Before registering as a Cook Islands international trust, a trust must establish a nexus with the Cook Islands jurisdiction. Section 2 of the International Trusts Act 1984 (ITA) requires a trust to appoint either a licensed trustee company, or a Cook Islands international company, as its trustee.

The international company is permitted to act as trustee for no more than three trusts, but otherwise must not carry on business as a trustee company.

When forming a trust, therefore, the client can first incorporate his own specially structured international company. That international company is eligible for appointment as trustee of the client’s trust, making the trust eligible for registration as a Cook Islands international trust.

Structure Of The Private Trustee Company

The structure of the international company will depend on the level of control the client wishes to exercise over the activity of the company, and thereby the trust. Control over an international company is normally vested in the shareholders and the directors.

Exit Strategy For Asset Protection Trusts

If a threat develops against the client, the client must be in a position where he cannot be forced to repatriate the assets of the trust. Cautious clients will not allow themselves to be in this position at any time, but the two shareholding structures described above are particularly suited to immediate transfer of any residual control without formality.

In the case of the default shares, the shares can be issued subject to terms that vest the shares of the private trustee company in a licensed trustee company in the event of any threat against the client.

In a similar situation with a purpose company, a cautious client can transfer the bearer debenture by simple delivery. If a change of jurisdiction is called for, then as an alternative to re-domiciling the trust by a change of trustee, the private trustee company itself may be re-domiciled.

Establishment

The client must first form the international company in collaboration with a licensed trustee company, which appoints a resident secretary, provides the registered office for the international company, and often provides a director to attend to initial transactions.

The international company can then be appointed as the trustee of the client’s trust.

The trust is then registered, with the licensed trustee company also being appointed as the registered office of the trust. The licensed trustee company will attend to the filing of the annual return for the international company and the annual renewal of registration of both the international company and the trust.

Taxation Consequences

No taxes are payable by either the private trustee company or the international trust of which it is appointed trustee.

Comparison With Other Jurisdictions

A Cook Islands private trustee company structure has several advantages over similar structures in other offshore jurisdictions.

First, no Purpose Trust Required. In other jurisdictions the shares of a private trustee company must be held by a purpose trust to separate legal ownership by the client of the private trustee company. Although a purpose trust may be established in the Cook Islands, it is not necessary given the company structures available.

Another Advantage Is That No Local Appointments Are Required

In other jurisdictions a local person must be appointed as a trustee in addition to the private trustee company, or as a director of the private trustee company.

These appointments add cost and give opportunity for disclosure. No such appointments are required in the Cook Islands.

Finally No Audit Is Required In The Cook Islands

In other jurisdictions the accounts of the private trustee company must be audited annually. In the Cook Islands the need for an audit can be dispensed with by a shareholders’ special resolution.

Case Study

Conclusion

A private trustee company formed in the Cook Islands can form a useful and inexpensive part of a client’s offshore structure, as well as provide a level of comfort for the client not prepared to surrender all control of his or her affairs to an offshore trustee.

The structure is familiar to clients, easy to explain and understand, and has adequate safeguards in the event of a challenge to the trust assets.

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