Family-owned businesses are a cornerstone of the Gulf Cooperation Council (GCC) economy, making up approximately 75 per cent (i) of the GCC's private sector. In the UAE, family-owned businesses account for a significant segment of the non-oil GDP of the country, employing 70-80 per cent of the workforce in the private sector (ii). The need for effective asset protection and succession planning structures, which can help to ensure business continuity, is clear.
The UAE's economic landscape has developed over recent decades with one of the primary objectives being to promote foreign investment within the country. Notable steps on this journey were the creation of the Dubai International Financial Centre (DIFC) in 2004 and the Abu Dhabi Global Market (ADGM) in 2013. Both the DIFC and the ADGM are financial free zones, which are designated areas within the UAE that have their own independent but interconnected legal systems based on common law. The intent of the financial free zones is broadly the same: to create internationally recognised and market leading financial centres. Although the approach to the adoption or reliance on English common law differs within DIFC and ADGM, in order to achieve their objectives the financial free zones provide individuals and companies with access to an English language common law legal system backed by an independent judiciary whose decisions are generally enforceable within the UAE (and beyond).
In recent years, the UAE has seen a number of significant developments aimed at the needs of foreign and local wealth creators. Some of the most notable changes concern alternative structuring vehicles for family wealth management, asset protection, and succession planning. Many of these changes have been driven by the DIFC and ADGM. More recently, the UAE government has addressed the issue head on. In this article, we take a look at some of the recent developments within the UAE and how structures are being utilised together with our expectations for the future.
Wills In The UAE
One of the first steps taken to cater to the needs of the UAE's expatriates was the introduction of the DIFC Wills and Probate Registry, which made it the first jurisdiction in the Region where a non-Muslim could register a Will under common law principles of freedom of testamentary disposition.
Abu Dhabi subsequently announced in May 2017 that it would introduce its own registry for Wills and probate, giving non-Muslim expatriates greater freedom to pass their local (and international) assets to their chosen beneficiaries when they pass away, rather than the default rules based on Shariah fixed share principles.
More recently, in November 2020, a number of Presidential Decrees were approved to amend the UAE Inheritance Laws so that the principal determining factors will be the deceased's nationality and whether or not they left a Will. The exact effect of these changes is yet to be seen but we believe that a valid Will governed by the laws of the deceased's nationality will be enforceable in respect of UAE situated moveable assets. However, it is not yet clear whether the rules apply to expatriate Muslims, or what happens in cases of dual nationality or whether guardianship provisions will be followed. For now, separate DIFC or Abu Dhabi wills are recommended for those with assets in the UAE.
DIFC And ADGM Trusts
Offshore trusts have long been used by Middle Eastern and international clients to protect and manage their wealth. Both ADGM and DIFC laws provide for the creation of common law trusts within the UAE. In practice, however, ADGM and DIFC trusts have gained relatively little traction.
Cognisant of actual and perceived weaknesses in the trust law, the DIFC updated its trust law by introducing the Trust Law DIFC Law No. 4 of 2018, superseding the Trust Law DIFC Law No. 11 of 2005. The new DIFC Trust Law is largely based on the American Uniform Trust Code, with specific and significant adaptations designed to address local issues. For example, the DIFC Trust Law provides for the role of the "advisory trustee" who can be empowered to advise the actual trustee on particular matters set out in the trust without becoming a trustee. This may be particularly useful where Shariah compliance is required. The Trust Law is comprehensive and although it leaves relatively little to interpretation, there will always be potential gaps to be filled by case law. The relative lack of precedent has often been cited as a reason not to establish a DIFC law trust. In part to address this issue, a request for interpretation was recently made via the DIFC Authority and heard by the Court of Appeal, putting a series of questions to the Court and on which the Court's judgment was issued on 13 January 2021. The judgment provides welcome certainty in a number of specific areas as well as being a useful guide on the approach of the DIFC Courts.
UAE Federal Trusts
While trusts have been an established structuring arrangement in the DIFC and ADGM for a number of years, trusts were not specifically provided for under UAE federal law until very recently (although it should be noted that the Islamic equivalent of the trust, the Waqf, which some see as the model for English trusts, has existed for centuries). The UAE promulgated the Federal Trust Law by Federal Decree-Law No. 19/2020 in September 2020. This creates a codified framework for the creation of trusts on broadly similar terms to trusts in common law jurisdictions. The Federal Trust Law governs the formation of a trust, its purpose, operation and dissolution as well as setting out the rights and obligations of the settlor, beneficiaries and trustee. However, in a departure from common law trusts, a UAE onshore trust has separate legal personality and is required to be registered. Notably, the Federal Trust Law excludes from its scope trusts created within the DIFC and ADGM which shall be governed by their own laws. The legislative recognition of the sanctity of DIFC and ADGM trust laws is important and should further increase confidence in the market for the use of trusts in DIFC and ADGM within the UAE.
It is hoped that Federal Trusts will be used alongside DIFC and ADGM trusts and foundations as family wealth holding structures to include holding land, family businesses, and other assets.
Foundations In The UAE
ADGM was first to introduce foundations into the wealth management landscape of the UAE under the Foundation Regulations 2017. The DIFC has now followed suit by virtue of the DIFC Foundations Law No. 3 of 2018. In addition, Foundations may also be established in RAK International Corporate Centre under the RAK ICC Foundations Regulations 2019.
Foundations offer a compelling alternative to trusts. As with most jurisdictions which have adopted foundation laws, foundations can be utilised for multiple purposes including succession planning and asset protection.
Foundation laws in the UAE are broadly in line with other jurisdictions which have adopted them, such as Guernsey and Jersey. Like foundations in many other common law jurisdictions, they are best viewed as a "hybrid" between a trust and a company. Like companies, they have a separate legal personality and therefore can hold assets in their own name, but as they do not have shareholders they are orphan entities and therefore very useful in succession planning. Local foundations are managed by a Council who is responsible for acting within the powers conferred by the foundation's constitutional documents, namely its charter and by-laws.
UAE based foundations have proved to be popular in the market. Part of their popularity is down to the recognition of foundations with onshore registries, such as the Land Departments in the Emirates, most notably in Dubai. However, families are using foundations to hold a variety of different asset classes including land and trading businesses.
More Flexible Corporate Options
Many business owners and patriarchs prefer the notion of a company, as opposed to trusts or foundations, due to familiarity or they will require a holding company as part of their wealth planning architecture. The DIFC has recognised this and in September 2020, expanded the applicant criteria for its successful Prescribed Company regime to include family businesses with a large presence in the UAE.
Prescribed Companies are categorised as Private Companies under the DIFC Companies Law No. 5 of 2018 but are exempted from certain requirements otherwise applied to Private Companies such as the requirement to audit or file accounts with the DIFC Registrar of Companies. They are also subject to lower incorporation and licensing fees and can use the registered office of a corporate services provider, meaning that they do not have the costs of maintaining a physical office space within DIFC.
The ADGM has also taken measures to introduce flexible corporate options which may appeal to local business owners. For example, The ADGM Companies Regulations 2016 offer the option of a "restricted scope company" to provide a vehicle which has less onerous disclosure and compliance requirements than those that otherwise apply in ADGM.
The Future For Wealth Structuring In The UAE
Given the significant developments over recent years, the UAE is likely to see a very significant increase in the adoption of wealth planning structures in the coming years.
Trusts (free zone or Federal) and foundations offer a great deal of flexibility and can be tailored to meet the needs of different families. They provide a legal framework which allows for family governance principles, previously left to chance in a family constitution (if addressed at all), to be enshrined.
It is important to view these changes against the backdrop of a wider facilitation of foreign investment in the region. Another notable change was the UAE's decision in November 2020 to issue a decree abolishing the requirement for onshore foreign companies to be majority-owned by a UAE national. Although we await details on implementation, this is a very significant change that should allow 100 per cent ownership of certain onshore businesses in due course. In addition, in the past year, the UAE has amended its Visa laws to make it easier to gain rights of residency for longer periods. At the same time, changes have been made regarding the position of individuals living in the UAE, including matters such as cohabitation and the application of divorce laws for expatriates.
Taken together, it appears that the UAE is committed to being a world leading jurisdiction in which to live and work and to grow and preserve wealth. The recent legal developments are key to supporting its vision for the future. In terms of the legal framework, the options available make the UAE a more attractive alternative for high net worth families and the future for wealth holding structures in the UAE appears to be bright.
[ii] Article published in The National Business on 19 May 2020, 'Covid-19 is strengthening UAE family businesses' corporate governance structure' by Basco Rodrigo and Rana Hamdan.
Partner - Private Wealth
Associate – Private Wealth