In today's globalised world, an offshore employee benefit trust (EBT) remains the principal avenue to enable multinational corporations to give their employees a stake in their success. However, offshore EBTs have often been subject to questions and misconceptions that hinder a clear understanding of their potential benefit.
In the below Q&A, Michelle Merola, Business Development Director at Ocorian, provides an overview of offshore EBTs, focussing on their purpose and function.
What is an offshore employee benefit trust?
An offshore EBT is a discretionary trust established by a company for the benefit of its employees. The principal offshore location is Jersey. Multinational companies commonly use this structure to manage and distribute employee compensation and incentives.
How does an offshore employee benefit trust work?
The employing company that establishes the employee benefit trust transfers funds and/or assets (such as company shares) into the trust. The trust is managed by a professional trustee appointed by the company. The trustee holds and administers the trust assets according to the terms of the trust deed. The trust assets are held solely for the beneficiaries of the trust, these being the company's employees.
What are the benefits of an offshore employee benefit trust?
1. EMPLOYEE RETENTION AND MOTIVATION
EBTs hold company shares which are used to reward and incentivise employees. The shares can be transferred to employees by the trustee in accordance with the company's incentive plans. This may be by way of option, restricted awards, or acquisition by the employee.
2. ASSET PROTECTION
Assets held within the trust are held independently, for the benefit of beneficiaries, and safeguarded against potential risks, including legal claims or bankruptcy proceedings.
3. TAX PLANNING
A key advantage of establishing an EBT in a jurisdiction such as Jersey is the shelter afforded from capital gains tax (CGT) on any growth in value of the shares held by the trustee throughout the life of the trust. In contrast, a UK-resident trustee will be subject to CGT on all trust fund gains.
How common is it to set up an offshore employee benefit trust?
The majority of publicly listed companies (and a vast number of private companies) in the UK operate offshore EBTs, with only a few exceptions. An EBT is typically established onshore only when it is a requirement under a tax-approved incentive plan (such as the Share Incentive Plan). A company will typically operate an offshore and onshore EBT side by side if its incentive plans require it.
Among offshore locations, Jersey is widely regarded as the preferred choice for EBTs. Jersey has a long history of providing trustee services for EBT structures. Its specialised trustees are highly regulated and subject to strict compliance requirements. Annual external audits of the trustees are conducted to ensure compliance with capital adequacy and insurance requirements, safeguarding the EBT's assets, beneficiaries, and the company that appointed the trustee.
Can offshore employee benefit trusts be regarded as a form of tax avoidance?
No. The majority of UK-listed companies (and a vast number of private companies) utilise offshore EBTs as a permissible (if not essential) means of holding shares for employee incentive purposes. Offshore EBTs (and ancillary documentation) are typically subject to UK law and the legislation governing EBTs and employee incentives is well understood. Professional trustees will only consider acting for new companies in line with the company's tax and legal advice.
How can Ocorian help with offshore employee benefit trusts?
With over a quarter of the UK's FTSE 100 companies using our services and over 400 employee benefit trusts/incentive structures under our administration, Ocorian's employee incentive services team is widely regarded as a leading independent provider of trustee, administration, and system solutions for employee incentives arrangements.
This is a core business for Ocorian's Jersey office: our dedicated team has been operating in the employee benefits industry for over two decades, gaining significant experience providing tailor-made solutions for our clients.
Our broad client base ranges from high-profile FTSE 100, 250, and 350 companies to private companies across all industries, including many backed by private equity investors. Incentive plan participation ranges from bespoke arrangements for a small number of senior executives, through to tens of thousands of employees participating in all-employee arrangements.
Our share plan administration and employee portal solutions assist clients in delivering efficient and effective incentive arrangements, as well as encouraging employee engagement. We are always happy to discuss a company's incentives needs and to demonstrate our proposed solutions to them.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
