Anthony R D'Aniello reports on Dubai's emergence as a new centre for trusts.
In a fast-changing global environment, the Dubai International Financial Centre (DIFC) has confirmed its status as an important new jurisdiction due to its stable country environment, and transparent, world-class legal and regulatory infrastructure.
The global economic environment and the international financial services industry are evolving at a rapid pace, perhaps more quickly than at any time in the past 50 years.
While this means that firms must work hard to keep abreast of these changes, it also creates new opportunities. New financial centres and jurisdictions are developing, particularly in the Middle East and Asia, and the DIFC is foremost among them.
Less than a decade ago, international investment banks would not have thought to come to Dubai. Now they are not only setting up offices but also moving senior executives to the city to manage the increasingly important business coming from the region.
They are doing this not only because of Dubai’s central location and excellent transport and communication infrastructure, but also because of the world-class legal and regulatory environment which has been put in place in the DIFC over the past four years.
In fact, the City of London’s Global Financial Centres Index (GFCI) has charted the growing importance of Dubai, identifying it as the leading financial centre in the region between Europe and Asia, and the 23rd most important international financial centre overall.
In Dubai, the DIFC offers tremendous benefits to practitioners across the financial services spectrum, including those in the field of trust and estate planning.
Dubai and the United Arab Emirates
Established in 1971, the United Arab Emirates (UAE) comprises seven emirates: Abu Dhabi (the country’s capital and home to most of the country’s massive oil reserves), Dubai, Sharjah, Ras Al Khaimah, Umm Al Quwain, Ajman and Fujairah. The country has a federal system that provides broad autonomy to the rulers of each emirate. It is one of the most stable countries in the world, from both a political and economic perspective.
Dubai, which has a small and declining reserve of oil, has traditionally been the second largest of the emirates after Abu Dhabi. However, the dramatic diversification and expansion of its economy over the past decade means that in 2009 it is projected to have a larger population than Abu Dhabi.
The twice-yearly City of London study ranked Dubai (for the third time in a row) as the international financial centre most likely to become more significant in the next several years and where firms are most likely to open an office. Dubai was ranked as the fifth most important centre outside of Europe and North America. As noted, the DIFC is driving much of this, establishing itself as an increasingly important jurisdiction for a variety of financial services.
Hierarchy of Laws
A clear legal structure on both the federal and emirate level shows the provenance of controlling law, generally, and in the sphere of trust and estate planning.
The UAE constitution was established at independence in 1971. Constitutional Amendment no. 1 of 2003 allows the federation to enact a Financial Free Zone Law. Federal Law no. 8 of 2004 provides the basis for financial free zones throughout the UAE. Significantly, it exempts financial free zones from all federal, civil and commercial laws within the UAE, except for UAE criminal laws, administrative laws and the anti-money laundering law. The DIFC is, therefore, empowered to create its own legal and regulatory framework for all civil and commercial matters.
Federal Decree no. 35 of 2004 establishes the DIFC as a financial free zone and prescribes the geographical area and location of the DIFC in the Emirate of Dubai.
Dubai’s Law of DIFC no. 9 of 2004 marked the operational launch of the DIFC. This law recognises the financial and administrative independence of the DIFC and also exempts it from certain rules and regulations that are otherwise applicable in the Emirate of Dubai. It establishes the component bodies considered necessary for the DIFC’s operations and also authorises the President to create other bodies that may be deemed necessary.
The Judicial Authority of DIFC no. 12 of 2004, enacted by the Ruler of Dubai, establishes the DIFC Judicial Authority and the DIFC court system. This law guarantees the independent administration of justice in the DIFC and sets out the powers, procedures, functions and administration of the court and its judges, who are appointed by the Ruler.
DIFC Law no. 11 of 2005, the Trust Law, applies to express trusts, charitable or non-charitable, and trusts created pursuant to law or judgment that requires the trust to be administered in the manner of an express trust.
It is important to note that the DIFC follows common law practice, unlike most other jurisdictions in the region, including in the UAE outside of the DIFC, which follow civil law practice.
The DIFC was launched four years ago and has already become a mature, world-class onshore financial district that has attracted more than 700 companies, including leading firms from across the region and the globe. With its location in Dubai, the DIFC helps bridge the time gap between the financial centres of London and Hong Kong, and serves a vast region stretching from central Asia and the Indian subcontinent to north and east Africa.
It has seven areas of focus: banking services, capital markets, asset management and fund registration, reinsurance and captive insurance, Islamic finance, ancillary services, and business processing operations.
Some of the most important aspects of the DIFC include allowing 100 per cent foreign ownership, 0 per cent tax rate on income and profits, an extensive tax treaty network for UAE incorporated entities, freedom to repatriate capital and profits without restrictions, and a state-of-the-art district infrastructure.
Apart from these more technical and legal attributes, the DIFC is also an attractive and increasingly popular destination for financial services professionals from around the world who enjoy Dubai’s high quality of life, open and welcoming culture, and vibrant lifestyle.
DIFC Trust Law
The DIFC Trust Law of 2005 was developed following extensive study of existing law in jurisdictions around the globe. The best elements of these were identified and incorporated into the DIFC law, which has a number of commonalities with the trust law in place in the Cayman Islands – widely recognised as one of the most progressive jurisdictions in the world.
The law provides clarity and certainty, which gives financial services providers tremendous flexibility in meeting their clients’ needs. It also forms part of the legislation and service infrastructure at the DIFC designed to serve the needs of families, family businesses and family offices in the region and beyond. This is an important focus because the DIFC recognises that historically, most family-run businesses the world over do not survive past the third generation. This is a crucial point given that many leading firms in the region are in the second and third generation. Ensuring their survival and success is an important way to promote economic growth in the region and the vibrancy of the private sector.
A couple of other points should be made regarding relevant regulatory issues at the DIFC. For example, there is no law or regulation that addresses ‘shelf companies’, although a special purpose company regime is being drafted. Disclosure is not an issue, as the DIFC is a zero tax jurisdiction. Bearer shares are not allowed. A public share registry is available to the general public through the DIFC website’s ‘Special Purpose Company Register’.
Waqf Trust Services
As noted above, Islamic finance is one of the DIFC’s key areas of focus. In implementing this, the DIFC promotes the sector, not only by providing a conducive legal and regulatory infrastructure and attracting leading firms in the industry, but also by encouraging innovation in Sharia-compliant structures and products.
One example of the DIFC’s innovative engagement in this regard was its participation in a strategic joint venture through its investment arm, DIFC Investments, with Dubai Islamic Bank (DIB), the world’s oldest fully fledged Islamic bank. Together, they formed Waqf Trust Services Ltd (Waqf), the first exclusive Sharia-based trust service provider in the world.
Providing personal, corporate and charitable trust services, Waqf is based in the DIFC and therefore subject to its trust law, which is based on a common law model. Given its Sharia-compliant mandate and ownership by DIB, Waqf also acts in a way that conforms to Islamic jurisprudence. This is assured through oversight from its Sharia board. The board is made up of some of the most esteemed scholars in the industry from DIB’s Sharia board.
Because of DIB’s heritage, this board is known both for being one of the most conservative boards, as well as one of those most open to certifiably Sharia-compliant innovation.
Waqf Trust’s activities are more intricate and complex than those of a conventional trust provider because it must conform to, and balance, two laws: the DIFC Trust Law and Sharia law. Waqf Trust achieves this by creating a custom-made trust deed for each client that achieves the objectives of the settlor, meets the Trust Law requirements, and earns a fatwa from the Sharia board.
This means that the trust is qualified as Sharia-compliant during the lifetime of the settlor, making it unlikely that anyone could or would try to challenge the trust in Sharia court. The trust is not like a conventional one with Sharia products, or a trust deed effected by the Islamic window of a conventional trust provider, as these would be more open to scrutiny in Sharia court.
Waqf Trust’s team of practitioners, with experience from five of the leading trust jurisdictions around the world alongside experts in Sharia trust services, ensures that this complex legal balance is always achieved.
The financial services industry across the globe is in a period of transition. The industry’s geography is changing as new areas of wealth arise, particularly in Asia and the Middle East, and new jurisdictions come up as part of these changes. Given this new reality, trust and estate planners are well served by exploring the benefits these new jurisdictions may offer – and first among them are Dubai and the DIFC.
A stable political and economic environment, a clear legal structure and world-class regulatory environment, as well as a cosmopolitan and liveable city, the DIFC is an ideal jurisdiction for trust services, including Sharia-compliant services, such as the expert and custom-made structures provided by Waqf Trust Services.
Anthony R. D’Aniello, BA, MBA, LLB, JD, TEP, Managing Director,