Because of the nature of the global economy and the reality that it relies upon the equilibrium and floating mechanism of rates, financial collapse of a country’s currency has become a real financial risk. A world economy integration remains in its earliest stages of development. Developed, emerging, and underdeveloped economies have become bound by the General Agreement of Tariffs and Trade, GATT and the World Trade Organization, WTO. Trade and currency valuations are intertwined in total coherence.

Each nation experiences populism that brings about a pressure to provide employment and higher standards of living. Some have conceded to alarming national fiscal financial irresponsibility. Exporting to enhance current account surpluses and thwart balance of payment has become paramount. These imbalances shatter currency positions and government planning. Political instability in negotiating these parameters often can lead to country solvency and liquidity issues. Constant liquidity pressures and the inability of a sovereign to obtain requisite foreign exchange to service its foreign debt have been evidenced by sovereign financial collapse. Of recent the entire International Monetary System instability has occasioned unprecedented sovereign central banks reaction. It brings home to bear the attendant systemic effects lurking in the linked global financial markets.

Certain global economies are well managed and provide fiscal stability. Instances may occur which make it prudent for one to consider certain hedging models to insure against currency devaluation and instability. Of recent, currency devaluation has overridden the provisions of member International Monetary Fund (IMF) members by the printing of currency in innovative attempts to use velocity of money in its system to relieve these financial stresses. Frightening volatility has been an ancillary affect.

An illustration of planning precipitated by such concerns can be understood from the following. A United States lawyer could have eleven United States citizens as clients with liquid financial assets in excess of 11 million United States dollars, respectively. Those assets could be completely denominated in United States dollars.

To protect assets for each client from currency fluctuations inherent in the global economy, the lawyer could establish a Foreign Personal Holding Company in Luxembourg. Luxembourg provides preferential tax-exempt treatment to holding companies and its financial center character offers deep access to financial instruments. (1) Subsequent to establishing the Luxembourg Foreign Personal Holding Company, one could draft an irrevocable trust instrument for the benefit of each of the clients’ spouse and issue. The trust instrument could name an independent trustee, non-resident alien, such as a Turks & Caicos Trust Company.

Each trust could be funded with $1,000,000 with the gift tax offset by a portion of each Settlor’s unified gift and estate tax credit. The amount of initial funding of each trust is based upon the notion that for each $10,000 increment, an investor can control $125,000 of currency. Full investment in a particular trust would provide the ability to control a substantial basket of currency.

The Luxembourg Foreign Personal Holding Company then issues to the trustee of each trust a 9 percent interest of voting power and value of the foreign corporation. Each trust’s interest is equal to $1,000,000 of original capitalization or a 9 percent interest in the foreign corporation. The fiduciary servicing these clients would have a special appreciation for international banking and currencies. Forward contracts with respect to all corporate cash assets are purchased in staggering intervals, ranging from 90 days to 180 days. For each 9 percent interest, the Foreign Personal Holding Company controls $125,000 equivalent United States dollars for each $10,000 option contract of currency. For the ensuing five year period, the forward contracts or option contracts purchased hypothetically appreciate with respect to the dollar valuation resulting in gain for each trust, shareholder. But more importantly, the framework would primarily be designed as a private assurance to a shareholder of his or her currency not being subjected to whimsical devaluation occasioned by irresponsible sovereign management.

A Foreign Personal Holding Company is subject to Subpart F Income treatment only in the event it is determined to be a controlled foreign corporation. A foreign corporation is deemed to be controlled if more than 50 percent of the total value of stock issued is owned by United States shareholders. (2) A United States shareholder is a United States person who owns directly or indirectly 10 percent or more of the total combined voting power of all classes of stock issued by a foreign corporation. (3) A United States person is defined as any trust other than a foreign trust if certain criteria are met. (4)

Because a particular trust does not own 10 percent or more of the total combined voting power of all classes of stock entitled to vote, it is not a United

States person. Therefore, the Foreign Personal Holding Company would not be deemed a controlled foreign corporation and is not subject to Subpart F Income treatment. Each shareholder would not be a United States person and not a United States shareholder subject to Subpart F Income. Or would they?

A United States person who transfers property into a foreign trust is usually treated as the owner and subject to income tax, regardless of whether the trust is irrevocable as long as the foreign trust has a United States beneficiary. (5) A trust is deemed to have a United States beneficiary if trust corpus or income can be paid or accumulated for the benefit of a United States person and, if terminated, the trust would pay income or corpus to or for the benefit of a United States person. (6)

A Settlor to an irrevocable foreign trust may arguably not have a United States person as a beneficiary in this structure because the United States shareholder owns less than 10 percent of a foreign corporation and therefore would not be deemed subject to grantor taxation of Section 679 of the Code. Or would grantor trust provisions be applicable?

A particular trust may be determined to be a nonresident alien individual. A nonresident alien fiduciary would be classified as a nonresident individual when the individual has a residence not within the United States and is not a United States citizen. (7) Nonresident alien individuals are taxable only upon certain income from sources within the United States and sources without the United

States that are determined to be effectively connected with the conduct of a trade or business in the United States. (8) This model would not involve any particular issues of transfer pricing.

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Footnotes

1. See generally, International Offshore Financial Centres, CCH International, Horvath & Horwath International, CCH New Zealand.

2. IRC Section 957 1986.

3.. IRC Section 951 (b) (1986).

4.. IRC Section 7701 (a) (30) (E) (1986).

5. IRC Section 679 (1986).

6. IRC Section 679 (1986).

7. IRC Section 871 (1986)

8. IRC Section 871 (1986).

In accordance with Circular 230 Disclosure