A “hybrid company” is limited both by guarantee and by shares. Therefore such a company has two classes of members – shareholders and Guarantee Members. While the concept of shareholders is very well known there is a general lack in the understanding of Guarantee Members although there are many clubs and societies which are limited by Guarantee and the members who join in become Guarantee Members.
The directors of the company elect Guarantee Members to the company on a condition. The condition is that these members would contribute a certain part of the company’s debt. This amount is pre-fixed and it is generally a very nominal amount. The main difference between a Guarantee Member and a Shareholder is that the former holds a contingent liability to the company while the latter posses’ asset(s), - shares. The obligations attached to a Guarantee Member and the rights attached to a Shareholder can be either stated in the Articles of Association or be decided by the company directors in the board meeting. The advantage of the second procedure is that the terms and conditions for membership will remain confidential. The arrangements are highly flexible and can always be adjusted in order to suit the needs of the each class of membership which the company offers. Similarly the arrangements are also very flexible when it comes to the needs of the client.
In civil law countries which don’t recognize trusts, residents use the Hybrid Companies as quasi trusts. Generally the structure of these companies is such that each share carries only one vote. The term and condition is that the shareholder will not gain from the company’s income in any way. This means that the shareholder will neither get dividend on the share nor any other form of profit. In case of Guarantee Members the members enjoy no right of vote but there right to have a share in the income of the company. So we see that while the decision making right remains with the shareholders the profit flow down to the Guarantee Members. The profits therefore only flow to the Guarantee Members and so in a way they are like the beneficiaries of the classical trust system. On the death of a Guarantee Member there is no issue of inheritance tax, estate duties etc. for the simple reason that the interests of the Guarantee Member automatically extinguishes on the death of the member and is therefore non-transferable. This in turn results in no inheritance or estate taxes.
The aim of the tax anti-avoidance legislation as enacted in most of the countries tries to tax the undistributed profits of offshore companies which pay very low tax. The attitude toward these companies is such as if the profit has been received by the shareholders. Different countries achieve this differently. However most of them concentrate on the quantity of shares held. The control of the shares can also be taken into consideration especially if the control has been achieved by some way other than the direct ownership of the shares. Going by the above mentioned guidelines the guarantee Members don’t have any right to vote and therefore no right to decision (as professional managers act as shareholders) and so this may be seen as an efficient way to avoid the taxing of the profits in a Hybrid Company. Reporting requirements in such companies for Guarantee Members will not be brought about. So, generally undue attention from onshore revenue authorities is avoided..
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