Family and money Family offices in Ukraine: certain legal and tax aspects Albert Sych, Law Leader in Ukraine 4 5 June 2013
Family office: what they are and their types. Ukrainian practice
Family office: what they are and their types. Ukrainian practice Family office (FO) is a structure to manage assets of one or several high net worth families Traditional and modern FOs (class A, B, C) Family (private) offices and multi-family / multi-client offices (recent trends) Very limited use in Ukraine for the time being FO vs. business holding structures / corporate vs. private holding Young capital vs. wealth accumulated in the past and passed on to the next generations Will FOs become a conventional instrument to manage assets in Ukraine? Current perception and will FOs become trendy? Alternatives (private banking, trust, offshore company)? Page 3
Functions of a family office
Functions of a family office (1/2) A full-fledged FO may undertake most or all of the activities below (directly or using third party services): Family capital investment, investment management, including direct investments Asset management, including non-liquid assets Managing business related to the family Financial administration (payments, debt management) Accounting and reporting Provision/coordination of banking, brokerage, legal, insurance, HR services The primary goals are to protect and preserve assets, and ensure inheritance, but not a rapid increase of capital (FO is not a business tool per se) Page 5
Functions of a family office (2/2) Tax structuring, planning, accounting and reporting Retirement planning, pension plans Inheritance planning and ensuring smooth transfer (succession) of assets/business, holding/transferring assets in case of death, divorce or insolvency (bankruptcy), etc., transfer of management rights with respect to FO (business) Management of the family s affairs: arranging for education, prevention and resolution of conflicts inside the family to preserve harmony (overall balance) of interests in the family, reputation management, charity Administrative and other assistance and support of family members, assistance in travel arrangements (business/tourist) Page 6
How does (should) a family office work?
How does (should) a family office work? (1/2) FO s organization: own vehicle vs. third party services (bank, asset management company etc.) Jurisdiction: Ukrainian vs. foreign structure. Where is the money? In Ukraine how to move to a foreign holding (transfer of corporate rights, license for making investment outside Ukraine)? Abroad how to legalize in Ukraine? Culture and language factors Traditional international structure for Ukraine: Ukraine Cyprus / the Netherlands top-level holding (offshore, Cyprus, etc.) New double tax treaty with Cyprus FO s legal form: limited liability company, trust (private trust company) Page 8
How does (should) a family office work? (2/2) Establishing an FO abroad Antimonopoly issues. Establishing an FO and restructuring of asset holding structure may require merger clearance from the Antimonopoly Committee of Ukraine, if certain conditions are met Currency control issues. Acquisition of fixed or intangible assets, corporate rights, securities and derivatives abroad by Ukrainian residents is an investment transaction and requires an individual license from the National Bank of Ukraine Taxation of the transfer of corporate rights. How should the corporate rights transfer be transferred (sales, share capital contribution, exchange, share capital dilution)? What will be the tax implications? Fair market price of corporate rights Page 9
Requirements re a family office Depend on jurisdiction, mentality and individual preferences Five C s costs control convenience coordination confidentiality Other criteria legality price vs. value risk management integration social aspect FO s personnel acting in good faith familiar structures and jurisdictions efficiency and flexibility (including tax) Page 10
Specific issues related to FO s activity
Specific issues related to FO s activity (1/5) As FOs focus on maintaining all benefits afforded by family ownership and supplementing them with good governance processes and structures, FOs may face unique challenges FO s structure and mechanism should ensure: Separate functions of ownership, control and management Distinguishing interests of individual family members and the family s common interests; interests of the family and those of the business Development heirs, their skills and knowledge so they can become responsible owners as they assume various roles within senior management Resolution of conflicts of interest inside the family Page 12
Specific issues related to FO s activity (2/5) Maintaining equilibrium in the family: Formal procedures should be based on the principles determined by the family council, but should be binding and strictly observed The right to withdraw from the family Establishing the liquidity fund to be used by family members wishing to withdraw (to sell their shares, etc.) and pursue their own interests outside of the family business Page 13
Specific issues related to FO s activity (3/5) Executive body: family members and independent directors Engaging an independent director: Independent and objective perspective on strategy and control Discipline with regard to business rather than family matters Business contacts and connections outside the family s area of interest Ability to play a buffer and arbitrator role among different family members if there are dissenting views on strategic issues New skills and knowledge brought from outside Hiring, promotion and termination decisions are independent of family ties Page 14
Specific issues related to FO s activity (4/5) Reputation management as part of FO management FO and external stakeholders Admission: what is the family, who are family members and is it appropriate to let in a stranger? Disclosure of information Resolution of conflicts of interest Page 15
Specific issues related to FO s activity (5/5) Succession issues Timeliness. Importance of early resolution and formalization risk of business interruption and crisis if postponed until the last minute Business ownership. Different jurisdictions might have certain specifics of family and inheritance law preventing complete succession. Legalization of foreign assets in Ukraine FO s senior management. As the FO grows and diversifies, several potential senior manager candidates emerge from different branches of the family. The senior management planning process will differ from one RFO to another depending on (I) the complexity of the business model, (II) the degree of involvement of family members and (III) availability of experienced senior management candidates from within the family Family growth. As young family members get married, issues of joint ownership arise Page 16
Albert Sych Law Leader in Ukraine Tel +38 044 499 2011 Mobile +38 067 536 0507 Fax +38 044 490 3030 Email Albert.Sych@ua.ey.com Albert has practiced law and tax in Ukraine for about 12 years He received MA in Law (civil law) degree from Kyiv National Taras Shevchenko University. Albert is a certified Attorney-at-Law in Ukraine (2005). He is fluent in Ukrainian, Russian, and English Albert specializes in M&A, both Ukrainian and cross-border, legal due diligence and contract and corporate law. He worked on more than 35 large and mid-size transactions Albert possesses professional experience in various industries, including, inter alia, oil and gas, FMCG, real estate and construction, banking and financial services, sports and media Albert was engaged in tax and legal restructuring of two out of top five largest Ukrainian business groups He provides complex tax and legal advisory support on Ukrainian issues to several leading global oil and gas companies, several largest Ukrainian companies from real estate industry and one of the leading global FMCG producer and seller. He manages legal and tax business structuring and restructuring projects, both Ukrainian and cross-border, assists large foreign companies in establishing their business-presence and investing in Ukraine Albert has a truly unique experience of tax and legal advisory work with respect to production sharing agreements concluded/being concluded in Ukraine
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