What Is Behind The Popularity Of Foundations In The UAE?

The numbers are more impressive when compared to an established offshore centre such as Jersey which has a similar number of Foundations registered but has taken twice as long to reach a comparable number. Although there are a number of factors behind their popularity, the success of Foundations should be viewed in the context of wider developments. Over the last ten years, the UAE has made significant strides in becoming a recognised wealth management centre. A large part of its success in attracting and retaining regional and international capital has been the legislative framework within the UAE's financial freezones. More recently, government policy during and after the Covid pandemic has been widely credited with attracting the internationally mobile to the UAE, bringing with them additional capital and investment.

The Role Of The Freezones

The UAE is a federal state made up of seven Emirates, the two most well known are Abu Dhabi and Dubai. Laws are made at both Federal and Emirate level and is largely a civil law construct. However, within the Emirates of Abu Dhabi and Dubai, specific areas of land have been carved out creating two of the more developed financial freezones in the UAE: Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM). Both DIFC and ADGM have their own distinct legal systems based on common law (with DIFC heavily influenced by English law and ADGM adopting English law with amendments and additions).

The financial freezones have been at the forefront of changing the legal landscape for wealth management. For example, the DIFC introduced a Wills Service Centre in 2015 allowing non-Muslim expatriates to draft wills with freedom of testamentary disposition. Outside the freezones, Abu Dhabi has introduced a wills office for non-Muslims with similar flexibility. A large part of the rationale for such rules is to give expatriates more comfort when investing in the UAE.

Living In The UAE

Changes have also been introduced in recent years to create a more appealing environment for residents to live and work. The UAE's management of the Covid pandemic has also been widely applauded and has contributed to the influx of newcomers to the country.

Notable changes include:

• Cohabitation between non-married couples is now permitted, having previously been illegal;
• Divorces for expatriate couples taking place in the local courts may be governed by the laws of the parties’ nationalities;
• The visa regime has been significantly amended with the range of residency visas available increased to include more property ownership options and a longer term "golden visa" which is valid for up to 10 years.

Such measures have added to the appeal of the UAE to international expatriates and has played a role in creating an environment in which Foundations have thrived.

Foundations In The UAE

Foundations can now be established in three different freezones in the UAE: ADGM, where the UAE's first Foundation Regulations came into force on 16 August 2017; DIFC, which introduced its Foundations Law on 21 March 2018; and Ras al Khaimah International Corporate Centre (RAK ICC), through Regulations introduced on 15 December 2019 (UAE Foundations). Since their introduction, UAE Foundations have been used by local and international families and individuals to hold a wide range of asset classes with the key drivers being wealth management, succession planning and asset protection. We have also seen UAE Foundations utilised for a wide range of purposes including family business succession; asset consolidation; real estate ownership; philanthropic purposes; employee incentives schemes and co-investment.

It is also important to note that the UAE has recently introduced a Federal Trust Law, one of the provisions of which confirms that the laws of the financial freezone shall apply to trusts set up in those jurisdictions. Whilst not explicitly dealing with Foundations, by extension the Federal Trust Law lends support to the view that the integrity of the DIFC and ADGM legal systems will be respected in proceedings relating to foundations as well as trusts.

Key Features Of UAE Foundations

UAE Foundations are best thought of as a hybrid between a trust and a company as they share features of both. The key from a succession perspective, is that a Foundation exists in its own right so unlike a company there are no shares which pass on death of the owner(s).

All of the UAE regimes are flexible and allow the Founder and their legal representatives to tailor the Foundation to meet the needs of the individual Founder and their family. This can include, for example, the Founder retaining an appropriate degree of control and the ability to benefit from the assets during their lifetime, which is particularly useful for family businesses.  The Foundation architecture, which allows Founders (and other family members) to sit on the Foundation's council (the council makes decisions on behalf of the Foundation) during their lifetime is particularly appealing. The legal architecture also allows for appropriate governance to be introduced. One of the most important roles is that of Guardian, which is a person (or committee) who can be appointed to oversee the council and who is usually given powers to veto certain decisions of the council.

Of course, there are differences in the three UAE Foundation regimes, which may make one more attractive than the other as a jurisdiction of choice depending on the assets to be held, the purpose of the Foundation and individual preferences. However, most of the broad principles are similar. UAE Foundations must be managed in accordance with their constitutional documents, namely the Charter and By-Laws.  The Founder can either be an individual or legal entity, and the council can be situated anywhere in the world (although often tax or economic substance rules will drive this decision). Under all the UAE Foundation regimes, access to information on the constitutional documents of the Foundation is limited to both the public and to the Foundation's beneficiaries. 

 Comparison Of Key Features

	DIFC	ADGM	RAK ICC
Minimum Council Members	Two	Two	Two
Registered Agent	Optional but Foundations are required to have a physical presence in DIFC	Optional but Foundations are required to have a physical presence in ADGM	Mandatory and Foundations are required to have a physical presence in the UAE
Guardian	Optional but mandatory for charitable purposes	Optional but mandatory if there is no surviving Founder	Optional but mandatory for charitable purposes
Ownership of Real Estate	Permitted for Dubai properties	Permitted for Dubai and Abu Dhabi properties	Permitted for Dubai properties
Charitable Objects	Yes	Not permitted under Foundation regulations	Yes
Reserved Powers for Founders and/or Guardians	Yes	Yes	Yes
Conversion of a Company to a Foundation	Yes	No	Yes
Lifespan	Can continue in perpetuity	Can continue in perpetuity	Can continue in perpetuity
Arbitration Provisions	Yes	No	Yes
Minimum Capital Requirements	No	No	US$100

 

Foundations As Part Of Succession Planning

One of the key advantages of a Foundation over a Trust is its ability to hold and register assets in its own name. This appeals to many families in both the UAE and wider GCC as there is no need to transfer assets to unknown third-party trustees in foreign jurisdictions.

Foundations And UAE Real Estate

One area where UAE Foundations have attracted particular attention is real estate. A significant benefit of UAE Foundations is that they are permitted to own real estate located in the UAE (as well as shares, bank accounts and investment portfolios). Unlike overseas Trusts, UAE Foundations are (with variances in the different Emirates) recognised by the Emirate level Land Departments, meaning they have become the succession vehicle of choice for local real estate. 

Foundations As Part Of International Structuring

We have advised on structures where the UAE Foundation is used as an integral part of an international structure. For example, a number of DIFC Foundations have been established to act as trustee of trusts established overseas[1]. For many clients the private trustee foundation structure is more palatable than the additional layers typically involved with a private trust company structure.

Costs And Taxation Of UAE Foundations

Foundations benefit from a favourable tax environment in the UAE; there is 0 per cent personal income tax and access to a wide network of ‘Double Taxation' treaties. Although a corporation tax of 9 per cent (or up to 15 per cent for large multinationals) will be introduced in the UAE from 2023 it is not expected to directly affect Foundations which are not trading and will generally receive passive income.

Foundations have relatively low administrative costs under all three UAE Foundation regimes.

Looking Forwards

Although some of the popularity of Foundations may be explained by other factors such as satisfying  existing, pent-up demand for effective succession structures in the Middle East and the emphasis that Covid and a series of high profile local estate administration matters has placed on the need for families to structure and plan for the succession of their wealth, we believe that moving forwards the uptake of Foundations will continue to grow and they will "compete" alongside other, perhaps more widely understood structures, such as Trusts (including Federal Trusts). UAE Foundations have certainly been a welcome addition to the wealth structuring landscape of the region and will continue to assist local families and investors into the UAE in structuring their affairs to meet with their wishes.

 

Footnotes:

[1] The Judgment of the DIFC Authority [2020] DIFC CA 002 (13 January 2021) confirmed DIFC Foundations can hold assets as trustee.