A Quarterly Newsletter from the UAE and Oman member firms of the PKF International Ltd. network

VOL 19, Issue 4 October 2017

OFFSHORE & FREE ZONE UPDATE

FOUNDATIONS IN THE UAE
Background

The concept of a “Foundation” is widely known in many European countries. In the offshore world, the Principality of Liechtenstein enacted a Law on Persons and Companies in 1926 that created the concept of family Foundations. Foundations are widely used in countries like Luxembourg and Austria in Europe as well as in Panama. Panamanian Foundations are still in vogue in the offshore world. As a concept, a private foundation may be generally defined as a legal entity that is set up by an individual, a family or a group of individuals, for a purpose such as philanthropy or other legal economic object.

A foundation is a corporate body with features and uses similar to a company but with similar features to a common law trust. The structure is an incorporated entity with a separate legal personality but one that, unlike a company, does not have shareholders. Unlike a company, a foundation cannot carry out commercial activities, other than those necessary, ancillary or incidental to its purposes. A foundation typically holds assets in its own name on behalf of beneficiaries or for particular purposes, or both, and operates in accordance with a constitution.

Foundations in the UAE

ADGM FOUNDATIONS
The UAE’s first legal structure for foundations was recently introduced in mid-2017 by the Abu Dhabi Global Market (ADGM) – the capital’s financial free zone, that provides an alternative mechanism for wealth management and the safeguarding of assets for individuals, companies and families.

The foundation structure is used for financial planning and structuring purposes, and works as an effective alternative to the cumbersome trust mechanism and other corporate vehicles. The ADGM Foundation is available to international clients, as well as, those based in the UAE. ADGM’ foundations regulations and regime are largely based on similar regulations in Guernsey and Jersey.

ADGM Foundations allow the personal and corporate community to locally access a much sought-after product from a world-class international financial centre for the first time in the United Arab Emirates, as well as offering an attractive alternative jurisdiction to international clients.

The regime was developed in close consultation with the advisory community to be highly flexible and to strike an appropriate balance between transparency and discretion, as well as competitiveness in terms of cost and ease of process, with features benchmarked globally.

ADGM Foundations are fast and simple to set up and manage (registered agents are voluntary), with straightforward ongoing reporting requirements.

ADGM Foundations can be used for a variety of purposes, including but not limited to, wealth management and preservation, family succession planning, tax planning, asset protection, corporate structuring, and for public interest foundations (excluding charities).

DIFC FOUNDATIONS
The Dubai International Financial Centre (DIFC) will also introduce a new legal structure for foundations in early 2018 to offer enhanced wealth management and succession planning options to individuals, family offices and companies in Dubai and elsewhere, following in the footsteps of ADGM.
The DIFC has already launched a consultation on a new foundations law, that signals the introduction of the legal structure in a Dubai-based free zone for the first time. It also launched a consultation on revisions to its existing law governing trusts.
The new foundation law is expected to come into effect during the first quarter of 2018, according to DIFC reports. The DIFC Foundations is reported to draw its legislation from various jurisdictions including the Netherlands and Luxembourg.
The proposed new laws form part of the DIFC’s implementation plan relating to the 56 recommendations made by the DIFC’s Wealth Management Working Group to the Governor’s Strategy & Policy Committee and approved by the DIFC Higher Board in December 2016. The recommendations also include the establishment of DIFC’s Family Business Centre, which will support and service regional and international family offices looking to relocate their private wealth and succession planning structures to the Centre.
The Working Group consisted of more than 20 senior lawyers, barristers and accountants, as well as executives from DIFC Authority, Dubai Financial Services Authority and the DIFC Governor’s Office, and consulted on a global scale before finalizing its recommendations.
The DIFC Governor, HE Essa Kazim was quoted saying that “The proposed new Trust Law and Foundations Law will significantly enhance DIFC’s wealth management proposition by ensuring that lifetime and succession planning for families at the Centre will have a robust legal status. We have earned our place among the world’s top ten financial centers by having a legal and regulatory ecosystem that is progressive and draws on the considerable expertise of the global leaders in financial services operating from DIFC. We will continue to work closely with the financial community to maintain the evolution of our business environment, in line with DIFC’s 2024 Strategy”.

Benefits / Advantages of the Foundations Regime
For the first time in the UAE, the local private and corporate community and the Private Banks can work together and efficiently deploy an international product for a variety of services including wealth management and preservation, family succession planning, tax planning, asset protection and corporate structuring, without relying on foreign regulations and practice.

International clients who seek to effectively manage and supervise their wealth and assets under a competitive and international jurisdiction will be able to easily tap on the ADGM or DIFC Foundations regime. Apart from providing alternative to trusts for financial planning and structuring other benefits that a Foundation could provide are:

  • Access to UAE’s Tax Treaties (subject to the Ministry of Finance Requirements)
  • Wealth Management
  • Provide a robust governance structure – Foundation Council acts in an equivalent manner to a board of directors. Council members’ duties are prescribed in the Foundations Regulations.
  • Assurance through Guardian oversight – Guardian supervises the Foundation Council and ensures that it acts in accordance with the Foundation’s Charter and By-Laws. Appointment of the Guardian is compulsory upon Founder’s death and optional during Founder’s lifetime.
  • Separation of liability whilst maintaining control of assets – Foundation is a distinct legal entity which allows for separation of liability between Founder and the Foundation.
  • Perpetual existence after lifetime of Founder – like a company, a Foundation is a perpetual concept, allowing arrangements to continue and therefore providing certainty after the Founder’s death
  • Asset protection mechanisms – increased protection from bankruptcy claims, claims in the event of divorce and from the effect of forced heirship rules.