Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ discusses foundations from all angles as well as their multiple uses in practice.
In our first episode, Lead Partner / Legacy Kath Zagatti and Managing Partner Yann Mrazek discuss foundations’ basics
Key takeaways
What is a foundation
A foundation is an independent legal entity that holds assets separately from the founder’s personal wealth. It shares similarities of functions and mechanisms with both company and trust, while not strictly considered a hybrid of the two.
It is similar to a company in that it has its own legal personality. However, it does not issue shares or any other legal title of ownership – it is an “orphan” structure. A foundation must further have one or more objects, which may be a purpose and/or serve for the benefit of beneficiaries, just like a trust.
A foundation is governed by its charter and by-laws, which together reflect the desires of the founder. It is managed by a foundation council and may be supervised by a guardian.
The assets of a foundation are owned by the foundation in its own name and maybe held directly by the foundation or consist of shares in an underlying company.
When is it used?
Foundations are being used for a variety of reasons, chief among which are:
Foundation and trust
Generally speaking, foundation regimes provide more flexibility with regards to the powers of the founder. Foundations having their own legal personality offer advantages in the management of operations and are more widely accepted in civil law jurisdictions like the UAE where trusts often face ownership restrictions.
Conclusion
Compatible with all asset classes (Dubai Real estate, shares, portfolios), foundations enable both Muslims and non-Muslims to consolidate and protect their assets against attacks as well as exclude these assets from probate.
In our second episode, Senior Associate Celia Titouni and Managing Partner Yann Mrazek discuss the similarities and differences between Wills and Foundations.
Key takeaways
What is legacy planning?
Legacy planning is the financial and governance strategy that prepares you to bequeath your wealth and life achievements to the generations to come. Beyond the basic elements of estate planning, legacy planning aims at providing and implementing a roadmap in line with the patriarch’s vision according to which a legacy is established, assets will be managed and protected, as well as passed on to future generations.
Legacy planning is therefore key for individuals with businesses or other assets that require professional management and/or preservation.
Subject to personal priorities the main objectives of legacy planning are:
Why is it important to implement a legacy planning strategy?
Planning to leave your legacy to your heirs can be complex and difficult to face. There is no easy way to say it – anticipating one’s death is an uncomfortable topic. In order to leave a financial legacy for the next generation(s) it is important to first ensure financial security to amass such legacy. Maintaining such financial security on a long-term basis can be a real challenge – especially for globalized families as the risks are numerous and sometimes hard to predict.
With a proper legacy planning strategy, the following risks may be addressed:
What are the tools?
There are numerous legacy planning tools available (locally), chief among which are wills, foundations and trusts. The tools need to be chosen and implemented carefully in order to achieve the objectives.
What factors to consider?
It is paramount to evaluate the priorities, consider the types and location of assets/business as well as the circumstances of the principal and the beneficiaries. As many life events and market or regulatory factors may change the requirements over the course of time, the flexibility of such tools is key.
Notarial will
Wills executed before the UAE Notary can partly structure one’s estate to the extent permitted by Sharia and address guardianship matters.
For Muslims, it is governed by Sharia law and, therefore, as a general rule enforceable within the limit of one-third of the testator’s estate upon the approval of all other major heirs. The remaining two-thirds of the balance of the estate shall be distributed amongst all the heirs, and this distribution will be in accordance with fixed shares as prescribed by Sharia.
From the non-Muslim perspective, the UAE legislation protects the freedom of non-Muslims to elect their own laws governing inheritance and that measure can be taken only through the execution of a will. Hence, wills executed by non-Muslims may in principle be governed by the law of the country of which he/she is a citizen at the time of his death. If the individual has dual nationality, the will must clearly state which law shall govern the testator’s inheritance and will. This does not extend to immovable assets located in the UAE to which UAE laws will be applied regardless.
From a practical standpoint, the will must be drafted in English and Arabic and be executed in front of a notary public. Probate procedures and disputes will be referred to the local Courts.
DIFC WSC Will
The DIFC Will Service Centre (WSC) allows non-Muslims – resident or not – over the age of 21 – to register wills.
Initially restricted to assets located in Dubai and Ras Al Khaimah, it has broadened its scope and can now cover assets located across the UAE and worldwide. This being said, there is little uncertainty as to how the DIFC Courts and more importantly, foreign judges, will deal with the asset distribution [especially for assets located abroad].
It is based on the UK Estates Act and Probate rules, so unlike a notarial will, it gives complete testamentary freedom to the testator and can cover up to 100% of one’s assets. Objections may still be lodged with the competent authority, the DIFC Courts. E.g. (presumably, disgruntled) heirs may challenge the asset distribution per the terms of the DIFC will as falling foul from forced heirship rules pursuant to the law of the state of the overall estate.
DIFC WSC Will allow parents to designate guardians for their minor children should both parents pass away in the jurisdiction. An interim guardian can be appointed to immediately take care of the children while the permanent guardian, if abroad, makes the arrangements for the trip.
What are the limits of wills?
Wills fail to address key concerns e.g.:
This is where a Foundation adds value!
A foundation is an independent legal entity which holds assets separately from the founder’s personal wealth.
Compatible with all UAE and most international asset classes (real estate, shares, portfolios), Foundation enable entrepreneurs and their families to consolidate and keep control over income-generating assets and investments, while protecting them from potential threats. They are equally effective for Muslims and non-Muslims. Foundation can be used in combination with corporate structures or as a direct owner of assets, thereby guaranteeing business continuity and smooth intergenerational planning.
Foundations are being used for a variety of reasons, chief among which are:
Conclusion
Ever since the Dubai real estate market opened up to foreign ownership, investors have been looking for the best structure to ring-fence their assets. The search is over.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets, and possibly no other asset class has benefited more than real estate.
In a series of podcasts, team M/HQ is discussing the multiple uses of foundations in practice from all angles.
In our third episode, Partner − Private Clients, Kath Zagatti and Managing Partner Yann Mrazek discuss selected topics around the use of foundations for Real estate structuring.
Welcome to M/HQ’s Foundation 101!
Stay tuned for more episodes of ‘Foundation 101’. If you have any questions, get in touch with your usual M/HQ contact or email Kath or Yann.
How the DLD’s practice with respect to foreign ownership evolved?
The right to ownership of Dubai real estate was given to foreigners back in 2006 in certain areas called “Designated Areas”. The number of Designated Areas has been updated and increased since then.
From 2006 till 2012, the DLD was assessing foreign ownership on a case by case basis. During this period, the DLD accepted registering properties in the name of entities incorporated out of UAE, for instance, BVI companies, which could hold the property directly or through another passthrough company, usually incorporated in the UAE.
After 2012, the DLD decided that JAFZA IBCs was the only type of offshore entity being able to directly own properties in Dubai; and restricted the corporate structure holding the property up to 2 layers till the Individual Beneficial Owners. At that time, it was standard practice to use JAFZA IBC owned by a BVI entity.
This previous DLD practice has always been a challenge, as it prevented investors from using sophisticated structures to own properties in Dubai.
What’s new?
Since 2018, the DLD has become flexible in terms of property ownership. The DLD has executed a series of Memorandums of Understanding with few Free Zones in the UAE, for instance, the DIFC, ADGM, RAK ICC and RAKEZ allowing entities incorporated in these free Zones to directly own properties in Dubai.
The game-changer is that investors can now invest in Dubai real estate using sophisticated structures, incorporated in a common-law regulatory framework: companies, partnerships, funds and foundations
Foundation and Real Estate, compatible?
Yes, definitely! For the past year, we have been registering Dubai properties directly and indirectly with Foundations.
An important observation though is that so far, the DLD is only accepting DIFC Foundations as direct or indirect owner of Dubai properties. And the same happens with the Land Department in Abu Dhabi, which currently only accepts ADGM Foundations as owner of Abu Dhabi properties.
What is the impact in practice of using a Foundation to invest in Dubai properties?
The use of foundations for investments in Dubai real estate tackles 2 important issues:
The use of a foundation to hold the property eliminates the above 2 issues. Once the property is registered with the Foundation, the property does not make part of the Founder’s personal assets and estate. If the Founder passes away, nothing will happen to the property which will remain under the foundation. There will be no probate procedure. Also, considering that the foundation is a domestic structure, no costly legalization of documents will have to be prepared but only the translation of few documents as the UAE Free Zone Authorities already issue some of the corporate documents in Arabic and English.
What is the procedure to register Dubai real estate under a foundation?
There is no difference between registering a property with a foundation or a company. In the case of a Foundation, the DLD will require a NOC from the DIFC to confirm that this Authority has no objection to the foundation hold property in Dubai. Along with the NOC, the corporate documents of the Foundation (Charter, By-Laws, Certificate of Incumbency) will have to be submitted to the DLD. Once the applicable transfer fee is paid, the DLD will register the property under the foundation’s name and issue the Title Deed.
Transfer/registration fees
The standard transfer fees applicable by the DLD is 4% of the market value of the property. This rule however has an exception: when the property transfer is made among direct family members (spouse, parents, or children) or between the same Beneficial Owner, the transfer fee is reduced to 0.125% of the market value of the property.
In this context of Foundation, what is important to note is that: if the owner of a property wishes to transfer his property to a foundation where he is the Founder and sole Initial Beneficiary, or the beneficiary along with his spouse and children, the transfer fee applicable by the DLD will be only 0.125% of the market value of the property.
Change of beneficiaries, any impact?
Yes, if the beneficiary changes, the DLD will apply transfer fees. So for instance, if the father was the sole Beneficiary of the Foundation and he passes away, transfer fees will apply due to the change of beneficiaries in the foundation, which in most of the cases are the spouse and children of the previous beneficiary, and therefore the applicable fees would only be 0.125% of the property price.
Change of controllers, any impact?
No. If the Founder passes away or the Guardian or Council members change, there will be no impact or transfer fee to be paid.
Financing
A number of banks have recognized the importance of the tool and adapted their offering accordingly. Mortgaging properties held by a foundation is a reality.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ discusses foundations from all angles as well as their multiple uses in practice.
In our fourth episode, Senior Associate Célia Titouni and Managing Partner Yann Mrazek discuss the use of foundations by and for Muslims.
Key Takeaways
The context
Over the next 10 years, assets worth an estimated one trillion dollars are about to go from one generation to another in the Gulf region. At the same time, only one family out of seven has some sort of legacy plan in place!
These assets– mostly composed of real estate and businesses – are at risk every day: business risk, political risk, family disputes. Succession is now a risk that families, Muslim or non-Muslim, can control and plan for using foundations.
What are the succession rules in the UAE?
The legal basis for inheritance in the UAE is found in the Personal Affairs Law, which is a codification of Sharia. Inheritance is subsidiarily regulated by the Civil Code. Both the Personal Affairs Law and the Civil Code provide that inheritance shall be governed by the law of the deceased at the time of death. The law of the deceased shall be understood as the law of his own country or community, applicable to his inheritance and will whenever he passes away.For non-Muslims, the UAE legislation provides the freedom to elect one’s own law to govern inheritance. UAE courts will however not apply foreign law to the inheritance of Non-Muslim in absence of an executed will.
How about Muslims?
Sharia principles will mandatorily govern the succession of a Muslim and the inheritance distribution process, regardless of his/her nationality.
The exact divisions prescribed by Sharia will vary depending on one’s gender and family situation.
There are different categories of heirs, including forced heirs. Heirs must be Muslims and they cannot have willfully caused the death of the deceased. Illegitimate and adopted children are excluded from being heirs.
The guidelines surrounding how the heirs’ portions are calculated are complex, and in each case, a probate procedure shall be opened with local courts and a Sharia scholar will be appointed to decide how the estate is to be distributed.
Some male heirs– e.g. one or more son, one or more grandson, and one or more germane or consanguine brother – are favored over the correspondent female heirs in a 2-1 proportion.A mechanism of exclusion is provided for, which debars an heir of all or part of the succession because of the presence of another more entitled heir.
Can Muslims plan their succession?
Of course and they should! Legacy planning is key to preserve and pass on the estate to the next generations in a smooth manner.
Why is it important to do so?
Whilst Sharia provides very well for a Muslim family in terms of fair allocation of assets, it does not specifically address certain risks that may lead to dilution and/or destruction of value, such as:
How can I do it?
There are numerous legacy planning tools available (locally), chief among which are wills, foundations and trusts. The tools need to be chosen and implemented carefully in order to achieve the objectives.
Muslims can register a will with a UAE Notary. However, the testamentary freedom is limited to 1/3 of the estate and subject to the approval of all major heirs. The remaining 2/3 shall be distributed as prescribed by Sharia.
Wills fail to address key concerns e.g.:
This is where a Foundation adds value!
A foundation is an independent legal entity that holds assets separately from the founder’s personal wealth.
Compatible with all UAE and most international asset classes (real estate, shares, portfolios), Foundations enable entrepreneurs and their families to consolidate and keep control over income-generating assets and investments while protecting them from potential threats.
They are equally effective for Muslims and non-Muslims. Foundations can be used in combination with corporate structures or as a direct owner of assets, thereby guaranteeing business continuity and smooth intergenerational planning.
Do UAE Foundations work for Muslims?
Absolutely! It was with Muslim families in mind that the tool was first introduced, and local authorities have widely embraced the concept.
Both the UAE Civil Code and the UAE Personal Affairs Law provide for the possibility of a lifetime gift.
A donor may lawfully make a gift of his property during his lifetime (a disposition inter vivos), or he may give it away to someone after his death by will (a testamentary disposition). Islamic law permits both kinds of transfers; while a testamentary disposition is limited to 1/3 of the estate, a disposition inter vivos is unfettered as to quantum.
A Foundation can be used to structure lifetime gifts, which are thereinafter no longer subject to Sharia inheritance rules, and can be made by a Muslim individual without circumventing Sharia principles.
Potential distributions to beneficiaries can also – but do not have to – be made according to the principles of Sharia.
Any key considerations in practice?
It is key for the founder to document the lifetime gift of his assets from him/her-self to the Foundation and the intent to safe-keep these assets in perpetuity for the benefit of his family.
Islamic law does not include claw-back provisions. A lifetime gift is defined as an unconditional transfer of property made immediately and without exchange or consideration by one person to another and accepted by or on behalf of the latter. It must be accepted by the receiver and can be revoked during the lifetime of the giver only after approval of the receiver. Once validly created, it cannot be revoked and the transaction is considered final.
However, if the gift was granted during a period of sickness or if it was given under duress or deceit or from a person who does not have the legal capacity or capability, the transaction could be contested by potentially rightful heirs of the property / asset in question, and revoked via a court order.
For founders wishing to abide by Sharia rules, a Foundation may be structured in a Sharia-compliant fashion. Asset distribution that does not follow Quranic rules of inheritance may also be considered Sharia-compliant to the extent that distribution mechanisms are documented by the Founder by means of a letter of wishes and are based on the concept of fairness and justice.
It can be vetted by an Islamic scholar. An opinion – or “fatwa” – from the local Awqaf authority can also be sought to confirm the compliance of the structure and its governance with Islamic succession principles.
Precedents of authorities formally taking position on the use of foundations being compatible with the law of the land are now available. As a matter of illustration, the following question was recently brought to the Awqaf authority’s attention:
The answer provided by Awqaf was unequivocal. It confirmed that the Sharia – as applied by the UAE – allowed such endowments of assets during one’s lifetime while still benefiting from the income generated by said assets.
From a structuring standpoint, we can also witness an increasing number of economic registrars accepting foundations as shareholders.
In our fifth episode, Legal Director Kath Zagatti and Managing Partner Yann Mrazek discuss the roles of the Founder and Council Members.
Founder
What is the Founder’s role in the Foundation?
Aside from founding the Foundation, the Founder’s role is to determine how the Foundation shall be managed and controlled, who shall be the Foundation’s members (i.e. Council Members, Beneficiaries, Guardian), and how the proceeds of the Foundation’s assets – or the assets themselves – shall be allocated/distributed.
The Founder has the freedom to specify the conditions, restrictions and rules of the Foundation in the Foundation’s constitutive documents – i.e. the Charter and the By-Laws – as well as through Letter of Wishes.
Whenever a Foundation has more than one Founder, the co-Founders shall, unless agreed otherwise, take these decisions jointly.
A Founder can also be a corporate structure.
Does the Founder have any obligations?
Yes. To register the Foundation, the Founder must define the following:
What about rights? Can the Founder keep any?
Yes, definitely!
For starters, the Founder can be appointed as one of the Council members, thereby being one of the persons in charge of the foundation’s day to day administration and management. Even if he/she opts not to be part of the Council, the Founder can retain certain special powers called “Reserved Powers”, which allow the Founder to control key decisions without jeopardizing the integrity of a Foundation.
Unless expressly stated in the Charter and the By-Laws, the Reserved Powers cannot be inherited or passed on to Founder’s heirs. Where this option has been provided for, it is possible to appoint a “substitute Founder”, who will be able to exercise the Reserved Powers once the Initial Founder passes away.
Founder’s reserved powers can address many different issues, including the right to:
Broad Founder’s reserved powers: any red flag?
The excess of Founder’s control can potentially trigger tax requalification and angles for attacks against the foundation and its assets by third-parties, including but not limited to creditors and forced heirs.
Legal advice should always be sought when creating a Foundation and determining the Founder’s reserved powers, depending among others on the Foundation’s purpose, the Founder’s faith, place of domicile.
Council Members
The Foundation Council must be composed of a least 2 Council Members, initially appointed by the Founder. Subsequent Council Members can be appointed by the Founder (if he reserved the powers to do so) or by any party empowered to do so by means of the Foundation’s constitutive documents.
What is the Council Member’s role?
The Council Members’ role is to administrate and manage the assets of the Foundation in accordance with the Foundation’s constitutive documents – the Charter and Bylaws.
Similar to a Board of Directors in a company, the Council Members do not hold personal title to the Foundation’s assets and, therefore, no personal liability towards the Foundation, save for negligence for any breach of that foundation’s obligations or fraud.
As opposed to a Board of Directors, the Council Members have no shareholders or investors to report to. The independence of the Council in managing the assets of a Foundation is however not absolute; it is limited by the Founder and/or Guardian by virtue of the Reserved Powers.
Considering acting as Council Member? Beware of responsibilities!
A Council Member has the duty to manage the affairs of the Foundation in accordance with its constitutive documents – Charter and By-Laws –, also considering Letters of Wishes issued by the Founder from time to time, which provides further guidance to the Council Members on the management of the Foundation’s affairs according to the Founder’s wishes.
Council Members shall therefore only exercise powers that have been given to them by means of these documents, failing which a Council Member may be found liable towards the other Foundation’s members or 3rd parties for acting beyond the powers conferred to him/her.
A Council Member is also expected to act honestly and in good faith in the best interests of the Foundation, exercising independent judgment and reasonable care, skill and diligence.
Engaging professionals to act as Council Member/s is a good option to guarantee regulatory compliance and a high-level quality of management of the day-to-day affairs of the Foundation, in view of the professional’s expertise and knowledge on succession planning strategies and asset management and protection.
In our sixth episode, Senior Associate Celia Titouni and Managing Partner Yann Mrazek discuss roles of the Beneficiaries and Guardian
Beneficiaries
A beneficiary is a person (individual or corporate) who benefits from the Foundation, e.g. its assets, proceeds generated therefrom. The Founder decides on the designation and hierarchy of beneficiary/ies, his/her/their rights and entitlements.
Can the founder be a beneficiary?
Yes, the Founder can be the (only) beneficiary during his lifetime – i.e. where a Foundation is being created for succession purpose –; after his passing, he is usually substituted by previously defined secondary beneficiary/ies. Alternatively, the Founder may outline only certain features in respect of how the family members shall benefit.
Who can appoint, add and remove beneficiaries?
The Founder has wide discretion towards the appointment of beneficiary(ies) – the only statutory requirement is that such appointment must be specified in a defined or definable manner.
If included in its list of so-called ‘reserved powers’, the Guardian can also validate or refuse the Council’s request to add or remove beneficiaries as well as amend their distribution entitlements.
What are their rights?
Beneficiaries have no rights or interest to any or all of the foundation’s assets, which belong to the Foundation. They do however have proprietary rights including the receipt of benefits and information about the economic status of the Foundation. Beneficiaries also have the rights of an administrative nature such as to take action against and hold the Foundation Council liable in case their interest and rights are infringed (i.e. when given a right to a fixed periodic distribution).
The rights arising from the beneficiary status are specified in the constitution documents of a Foundation. They can, at the Founder‘s discretion, be very limited or deliberately extensive. A beneficiary may, by way of writing request, seek (limited) information regarding the Foundation.
Guardian
The appointment of a guardian is voluntary as long as there is a surviving founder and the foundation does not have strictly a charitable object. If there is no surviving founder or if the foundation has one or a specified non-charitable object, it must appoint a Guardian in relation to that object.
What is the Guardian’s role in the Foundation?
The role of a Guardian is generally to oversee the conduct of the Foundation’s Council with respect to the management of the Foundation. A Guardian is a person whom the Founder trusts to monitor the proper fulfillment of the objectives and to protect the interest of the Beneficiary(ies) – typically a family member, a friend or a professional advisor. The Guardian can be one/several individual(s) or a body corporate.
Who can be appointed as Guardian?
Anyone can be appointed as a Guardian, including the Founder. However, a Guardian cannot simultaneously be a member of a Foundation’s Council, to ensure the separation of powers. Engaging professionals to act as Guardian is a good option to guarantee separation of power and a high-level quality of Council supervision, in view of the professional’s expertise and knowledge on succession planning strategies and asset management and protection.
In our seventh episode, Legal Director Kath Zagatti and Managing Partner Yann Mrazek discuss the key differences between the three UAE Foundation Regimes.
1. Foundation regimes available in the UAE – Since when?
A Foundation regime was first introduced in the UAE in the Summer of 2017 in ADGM – the first of its kind in the larger Middle East. The DIFC, and eventually RAK ICC, introduced their own regimes.
So these are three domestic foundation regimes to chose from:
2. What are the main differences between these regimes?
The three regimes are similar in most aspects, with few exceptions :
Key Differences:
In the DIFC and RAK ICC, a company can be morphed into a Foundation, whereas in ADGM this is not possible. So in this respect, DIFC and RAK ICC have a flexibility advantage over ADGM.
Another critical difference is that both the DIFC and RAK ICC regimes accept Foundations to have purposes that are exclusively charitable, whereas this is not acceptable for an ADGM Foundation.
With respect to Council Members, both DIFC and RAK ICC accept both Council Members to be corporate entities, whereas as per ADGM rules, at least one Council Member must be an individual.
Privacy is increasingly becoming a key factor when considering structures of any kind, and UAE foundation regimes differ here to. RAK ICC is the only Registrar not open for public inspection. Only authorized persons will be able to have information about the members of the Foundation.
ADGM is a public registrar, but the data accessible is limited to name and address of the Foundation; name and address of the Founder; Foundation charter; and the Foundation’s Registered Agent.
DIFC’s approach is similar to ADGM save for the name and address of the Council Members of the Foundation, which are public.
It is important to point out that privacy rules are not all; practical approach to these is what matter. e.g. The privacy objective can still be met in any of the three Foundation regimes by using a nominee Founder and/or professional Council Members, as discussed in our previous Podcasts.
3. How do assets to be held by the Foundation influence the choice of Foundation regime?
The 3 regimes are very similar when it comes to holding of assets, i.e. the three types of Foundation can own shares in companies (although few Registrars may have some restrictions if the Foundation is to directly hold the shares); cash, stocks, portfolios and etc.
Also, all three types of Foundations can hold real estate properties, in the UAE and abroad; however, when it comes to UAE properties, one should first consider where the properties are located.
Per current practice, and the Memorandums of Understanding in place, Land Departments across the UAE have different approaches when registering properties with Foundations.
We would expect that over time, Land Departments become increasingly more familiar with Foundations and relax their practice, i.e. accept Foundations to own properties in different Emirates, similarly to the practice with respect to companies.
In our eighth episode, Senior Associate Célia Titouni and Managing Partner Yann Mrazek discuss the similarities and differences of the use of Foundations and Companies in practice from all angles.
In our ninth episode, Regional Director Laurence Black and Managing Partner Yann Mrazek discuss the similarities and differences of the use of Foundations and Trusts in practice from all angles.
In our tenth episode, Gail Goring, Head of Regulations & Compliance at Re/think, joins Managing Partner Yann Mrazek to discuss the similarities and differences between Foundations and Funds, as well as their use in practice.
Key Takeaways
Nuts and Bolts to Foundation & Funds:
Depends on your objectives i.e.
In our eleventh episode, Ismael Hajjar, Director at EY MENA Private, Family Enterprise, Family Office Advisory joins Yann Mrazek, Managing Partner at M/HQ to discuss the basic steps of starting a Single Family Office (SFO), as well as their use in practice.
Key Takeaways
Single Family Office (the “SFO”) structures are increasingly gaining in popularity among family businesses in the Gulf Cooperation Council (the“GCC”).
Regionally, there are three jurisdictions providing SFO regimes: the Dubai International Financial Centre (the “DIFC”), the Abu Dhabi Global Market (the “ADGM”), and the Dubai Multi Commodities Centre (the “DMCC”).
See our fact sheet:
Private Wealth Series (II)
SFO in the UAE: Which Options?
[Yann Mrazek] What is a SFO?
[Ismael Hajjar]
A SFO can be compared to a commercial enterprise. But a very special one as:
A SFO may remain virtual. Alternatively, it may be incorporated as a distinct private legal entity separated from the family business.
The assets under management are the family’s own wealth, often accumulated over several generations.
A SFO is restricted to provide services to members of one single-family, contrarily to a multifamily office (the “MFO”).
[YM] What are the services provided by a SFO?
[IH]
It is essential for each and every SFO to design a menu of services that is fully aligned with the family’s circumstances, wishes and expectations.
At EY, we have developed a methodology to support families with the design of bespoke FO menu of services that is based on 4 pillars:
[YM] talk to me about these 4 pillars!
[IH]
These 4 pillars include many sub-pillars that represent services that the FO could provide to its clients such as e.g. financial advisory and reporting, succession planning, family training and education, investment management, philanthropic management, tax and legal, conciergerie…. We named our approach Family Office Leading Practices as it was developed based on interactions over the years with thousands of family offices around the Globe.
[YM] Why to set up a SFO?
[IH]
There are many reasons why one would consider setting up a SFO, but the main two are to (i) professionalize how the family’s overall wealth is managed and protected and (ii) ensure a smooth intergenerational transfer of wealth and reduce intra family disputes, especially as complexity increases from one generation to the next.
The Main benefits of a SFO are:
[YM] Some key considerations before setting up a SFO
[IH]
Some key considerations include:
Definition of the Family requirements and obtaining buy-in from the Family members
Capital vs. Costs:
Ecosystem:
Make-or-buy services (in-house or outsourced):
Governance and management strategy:
[YM] SFO and Foundations; compatible? Any benefits?
[IH]
Yes, absolutely! While a SFO will not always hold the assets but merely manage them, a SFO is still exposed to 3rd parties’ attacks and shares held in an individual capacity remain subject to probate procedure in case of demise.
This is where a Foundation adds value to a corporate structure. Compatible with all UAE asset classes (real estate, shares, portfolios), Foundations enable the entrepreneur and his/her family to consolidate and keep control over income-generating assets and investments, while protecting them from potential threats. They are equally effective for Muslims and non-Muslims.
Single Family Office (“SFO”) structures are increasingly gaining in popularity among family businesses in the Gulf Cooperation Council (the “GCC”).
In our twelfth episode, Célia Titouni, Senior Associate at M/HQ joins Yann Mrazek, Managing Partner at M/HQ, to compare the available SFO regimes locally, as well as their use in practice.
Key Takeaways
What is a SFO?
A SFO is a private entity aimed as managing the investments and affairs of one single family. The assets under management are the family’s own wealth, often accumulated over several generations. A SFO is restricted to provide services to members of one single family.
In addition to investment management, these entities typically also provide the following services:
Consolidating under one Family Holding – what advantages?
Consolidating high-value assets under one (or several) company/ies has a lot of advantages – e.g. asset/asset classes segregation, limited liability with respect to those assets, ease of (re)financing, facilitated transfer of ownership interests.
How is the current offering in the UAE?
Regionally, three jurisdictions have created designated tools, namely: the Dubai International Financial Centre (the “DIFC”), the Abu Dhabi Global Market (the “ADGM”), and the Dubai Multi Commodities Centre (the “DMCC”).
How can one choose a regime?
All three are sophisticated options but ADGM and DIFC are in a class of their own in terms of sophistication and credibility.
ADGM has historically had the most flexible regime, with no minimal share capital nor investible funds and no requirement for a physical office. It also has no publicly available information. You can set-up a SFO in as short as a week.
In contrast, if one wishes to seek a DIFC SFO license, the centre imposes a minimum capital of USD 50,000, minimum liquid assets of USD 10 million and a physical office – save for exemptions where pre-existing substantial local presence can be demonstrated. It has slightly higher compliance and reporting requirements than its peer and a number of data, including the name of the current and former shareholders, will be available publicly. The set-up timeframe stretches to 1-2 months.
Both allow for the options to evolve within a regulated or supervised regime. They are also both common law centers with independent courts.
Of late, more flexibility has been introduced in the DIFC with the launch of Prescribed Scope Companies, and their subsequent reform, which can be used the same way.
A DIFC Presco is a light requirement / low costs structure designed for the conduct of passive activities, e.g. such as Holding Company, Proprietary Investment or Managing Office. It can be established by a Qualifying Applicant or for a Qualifying Purpose, as defined in the relevant regulations. DIFC Prescos are exempted from being physically present in the DIFC.
With the definition of “Qualifying Purpose” enlarged and of “Qualifying Applicant” expanded, large entrepreneurial families with operations and investments in the Gulf can easily avail access to the sophisticated DIFC regulatory environment.
One of the main USPs is that they are compatible with foundations. They can indeed be used in conjunction with foundations to notably re-structure local conglomerate with large UAE presence.
How about DMCC?
If one wants an office, DMCC has the advantage of having a lot of options at all prices. But DMCC’s offering is less flexible, and arguably less credible. A “supervised” SFO can be established with a lower capital requirement (AED 50,000) and a minimum of USD 1 million of liquid assets which must show on the account within a year after set-up.
This option also imposes higher compliance and reporting requirements. In terms of privacy, it has the same amount of publicly available information as DIFC. The set-up timeframe is 2 months.
DMCC is the only option outside a common law center and, more importantly, where local courts will be competent.
Single Family Office (“SFO”) structures are increasingly gaining in popularity among family businesses in the Gulf Cooperation Council (the “GCC”).
In our thirteenth episode, Ismael Hajjar, Director at EY MENA Private, Family Enterprise, Family Office Advisory joins Yann Mrazek, Managing Partner at M/HQ to discuss the top 5 Do’s & Don’ts of managing your Single Family Office (SFO).
Key Takeaways
The top 5 Do’s
Treat your Family Office like a business
Select the right jurisdiction
Segregate private from business
Promote transparency
Aim for diversification
The top 5 Don’ts
Think your Family Office should do everything by itself
Proceed without a clear and well-articulated strategy
Think only billionaire families can afford a Family Office
Think that it is over when the Family Office is set up; it has just started!
Think that a Family Office must (necessarily) own assets
In our fourteenth episode, Christian Knie, Managing Partner & CFO of Engaged Aviation, and an active member of the GetNED platform joins Yann Mrazek, Managing Partner at M/HQ to discuss the added value of a NED in managing your Single Family Office (SFO).
Key Takeaways
What is a SFO?
A SFO is a private entity aimed as managing the investments and affairs of one single family. The assets under management are the family’s own wealth, often accumulated over several generations. A SFO is restricted to provide services to members of one single family, contrarily to a multifamily office (the “MFO”).
In addition to investment management, these entities typically also provide the following services:
A SFO can be compared to a commercial enterprise. But a very special one as:
A SFO may remain virtual. Alternatively, it may be incorporated as a distinct private legal entity separated from the family business.
Who is a Non-Executive Director (NED)
What is the role of a NED?
The NED’s role sticks out by independence and expertise.
How does a NED add value to a Single Family Office?
The NED contributes with advisory- and oversight expertise to transform
“founder-led”- into proper governance structures.
In our fifteenth episode, Karim Ghandour, Founder & Family Succession Strategist at Legacy Line Family joins Yann Mrazek, Managing Partner at M/HQ to discuss the importance & benefits of Family Governance used in conjunction with Foundations.
Key Takeaways
[Yann Mrazek] Family Charter, family Constitution. What is it?
[Karim Ghandour]
Having different requirements and existing in different stages of life, each family has a diverse set of priorities and values that it wishes to sustain.
The big question is how the business progresses as the family dynamics change?
Family governance ensures the interrelation between the family and the business by establishing fairness and an open transparent culture of communication between family members. This provides a forum for constructive discussions, problem-solving and decision-making about the family and the business alike.
The Family Charter is a family agreement: written principles and rules that regulate the relationship of the family with its business. It is particularly designed to help make sense of those dynamics, to keep the group coordinated around common goals and to govern the relationships between the owners, family members and managers.
[YM] What are the Benefits?
[KG]
[YM] Foundations and Family Charter – what impact?
[KG]
Until recently, we had limitations applying succession policy on ownership. e.g. while it is common among Middle Eastern families to opt, while drafting their Family Charter, to exclude in-laws from owning shares in the Family Business, this was unenforceable legally for Muslim individuals. Upon the demise of a Muslim Family Member, who is a shareholder, the spouse (in-law) would automatically inherit. Now that assets can be held legally by a Foundation and were transferred as life gift in line with Sharia Law, the beneficial ownership will go to the bloodline as intended originally by the Family.
A Foundation can assist in the power transitions, wherein legal ownership will be relinquished from the “Now Generation” to a neutral entity (ie. Foundation), to the benefit of the “Next Generational”. The Protector/Guardian can manage the outcome as additional security for the Now Generation, to relinquish his/her/their powers.
[YM] Can Foundations help avoid family feuds?
[KG]
Undoubtedly. Traditionally, all children and their married mothers were entitled to inherit among them all the assets within the estate of the demise Muslim patriarch, according to Sharia Law. Now, each branch can have its own Foundation, with clear ownership separation between branches, which will increase the family harmony by avoiding unnecessary friction among inherently rival parties (houses/branches).
Since the legal owner of the assets are the different Foundations, ownership will not be contaminated among branches.
[YM] Will having UAE Foundation as GCC entity count for something in other GCC?
[KG]
While there is now a clear track record in the UAE, Foundation regimes have yet to be tested in all GCC countries. In my opinion, it is only a matter of time before the tool becomes widely accepted across the GCC for all asset classes e.g. movable and immovable. Having the Foundation registered as a UAE legal entity (GCC entity) definitely gives it an advantage over Foreign Foundations or structures.
Another aspect that should evolve in time, is the use of Foundation for Charitable Planning.
In our sixteenth episode, Kath Zagatti, legal director at M/HQ joins Yann Mrazek, Managing Partner at M/HQ to discuss the new UAE UBO regulations’ impact in practice on UAE structures and foundations in particular.
Key Takeaways
[Yann Mrazek]
The UAE is taking AML/CFT very seriously. Substantial resources have been put towards the topic which is at the top of the policy agenda. In a short time, the country has taken significant steps in strengthening its framework.
But outside of the DIFC and ADGM, there was a pressing need to uniformize ongoing compliance requirements across a vastly fragmented system of registries (39 different company registries) spread between non-financial free zones and the UAE mainland. This is what the Resolution tackles.
[Kath Zagatti] Beneficial Ownership Regulation in a nutshell
The Resolution came into force on 24th August 2020 and is applicable to UAE mainland, Free Zone and Offshore entities, excluding the Financial Free Zones of DIFC and ADGM as they already have in place internal regulations tackling the registration of BO and nominee Directors.
[YM] What an entity must do and by when?
[KZ] Here are the following actions an entity must do:
The deadline for the entities to submit the updated Registers falls on the 23rd of October 2020.
While this exercise is ongoing, it is important to stress that the registration of the information with the Authorities will not be public, unless the written approval of the BO or the Nominee Director is obtained.
[YM] What is the definition of BO and Nominee Director
[KZ]
Pursuant to the Resolution, a Beneficial Owner is:
[YM] and if no natural person meets the criteria?
[YM] and if no such natural person can be identified?
[YM] What about the Nominee Director?
[YM] M/HQ’s top tips
[KZ]
Collect key data; create
Forget not to file! 23/10
[KZ]
Although the deadline to submit the Registers is set, so far, the Free Zone Authorities and the Ministry of Economy have yet to published the method though which the entity must submit the Registers. We expect the Authorities to release their guidelines in the upcoming weeks.
In any event, we advise that the entities have the Registers ready beforehand to avoid any potential penalties for not complying with the set deadline.
In our seventeenth episode, Kath Zagatti, legal director at M/HQ joins Yann Mrazek, Managing Partner at M/HQ covering a second batch of frequently asked questions on the use of foundations for Real Estate structuring.
Key Takeaways
[Yann Mrazek]
Real estate is always a hot topic when talking investment holding. This Podcast is meant to answer another round of FAQ on the topic
with a focus on transfer of Dubai properties to Foundations or to entities ultimately owned by a Foundation.
On the menu: procedure, transfers fees, different Registrars of properties in Dubai, as well as financing & refinancing.
[YM] How many Registrar of Properties are there in Dubai?
[Kath Zagatti]
Dubai counts with two different Registrars of properties: the Dubai Land Department (DLD), and the DIFC Registrar of Real Property.
The DLD is responsible for registering all properties in the Emirate of Dubai, except for properties located within the DIFC, which fall under the jurisdiction of the DIFC Registrar.
[YM] and then, there are different types of property rights, correct?
[KZ]
Yes, one can have:
[YM] How do both Registrars work?
[KZ]
The procedures and fees involved in a property transfer with the DLD and the DIFC Registrar are slightly different
| DLD | DIFC | |
| Standard Transfer Fees | 4% of the market value of the property | 5% of the market value of the property |
| Gifting Fees / Internal Transfer | 0.125% | No fees |
| Gifting Fees / Internal Transfer – Application |
Beneficial Owner(s) + Immediate family members |
Same Beneficial Owner(s) |
| Procedure | Buyers / Sellers / Reps in person |
Online [DIFC Portal] |
The DLD applies a standard transfer fee of 4% of the market value of the property; whereas the DIFC Registrar applies a standard transfer fee of 5%.
[YM] A DIFC premium for you!
That’s right! That said, there are some exemptions.
The DLD has the concept of “gifting fees” which means 0.125% of the market value of the property (as opposed to 4%). The gifting fee applies to transfer of properties involving immediate family members (i.e. parents, children and spouses) and transfers or restructuring involving the same Beneficial Owner(s). The DIFC Registrar, on the other hand, considers a transfer or restructuring “internal” if it involves the same Beneficial Owners. In this case, no transfer fee is applied by the DIFC Registrar but only administrative charges.
Also, differently from the DLD, the DIFC Registrar does not deem “internal transfer” a transfer of property between immediate family members. In this case, 5% transfer fees will be applicable.
In terms of procedure, a property transfer in DIFC is completed remotely, through the DIFC online Portal, whereas the DLD requires the presence of the buyers and seller (or their representative) in front of one of the Registration Trustee Offices.
[KZ]
Yes! Both Registrars accept Foundations as direct or indirect owner of properties in Dubai.
[YM] So, give me some illustrative examples of how this transfer works
[KZ]
Example 1: property held in name being transferred to a DIFC Foundation where the owner of the property is the Founder and Initial Beneficiary – 0.125% gifting fees apply for DLD and zero fees for DIFC
[KZ]
Example 3: shares in JAFZA entity being transferred to a DIFC Foundation, where the previous owner of the JAFZA is the Founder and Initial Beneficiary of the Foundation – 0.125% gifting fees apply for DLD and zero fees for DIFC
[YM] What if, in these examples you showed us, the Founder and Initial Beneficiary are different from the person who owns the property?
[KZ]
Example 4: property held in name being transferred to a DIFC Foundation where the immediate family of the owner of the property is the Founder and Initial Beneficiary – 0.125% gifting fees apply for DLD and 5% fees for DIFC
[KZ]
Example 5: shares in JAFZA entity being transferred to a DIFC Foundation, where another individual (not related to the owner of the JAFZA entity) is the Founder and Initial Beneficiary of the Foundation – 4% fees for DLD and 5% fees for DIFC
[YM] What about mortgaged properties: possible to be transferred to a Foundation?
[KZ]
Yes. Mortgaged properties (or properties to be mortgaged) can also be transferred to a Foundation, as long as the bank accepts (re-)mortgaging the property in favour of the Foundation. This is becoming very common lately due to the increase in the number of private and retail banks being willing to accept mortgaging properties in favour of Foundations.
[YM] Re-mortgage cost? how long?
[KZ]
The fees for mortgaging a property in Dubai are 0.25% of the market value of the property, added to administrative fees (around AED 6,000) to de-register the previous mortgage (if this is the case) and register the new one with the DLD.
In our eighteenth episode, Ashok Sardana, Managing Director at Continental Insurance Brokers & Financial Services joins Yann Mrazek, Managing Partner at M/HQ to discuss the similarities & differences between Foundations & Universal life solutions.
Key Takeaways
[Yann Mrazek] What is Universal Life Insurance?
[Ashok Sardana]
Universal Life insurance provides high death benefit protection, (often not available to clients in their local jurisdiction) combined with sophisticated underwriting and guaranteed minimum cash value accumulation. The result is a uniquely flexible wealth transfer solution with enhanced potential for cash value growth.
Universal life insurance almost always enjoys tax benefits in the home jurisdiction of the policyholder and/or beneficiary. Depending on the lifetime goals of the client, a Universal Life solution can be held in one’s own name but is usually combined with a wealth planning structure such as a company or foundation.
[YM] What are the Multi-Generational Benefits?
[AS]
PHILANTHROPY:
Achieving philanthropic goals is a common usage of Universal life insurance. The foundation could apportion all, or some, of the insurance proceeds to chosen philanthropic causes.
ESTATE PLANNING:
As a liquidity planning tool in case of demise. An insurance policy would typically be held in Trust or by a foundation and in an offshore company. The cash pay out can be used by the council members to replace the family’s lost future income.
This can also be used to avoid probate.
TAX PLANNING:
The insurance proceeds can be used by the foundation owning the policy to pay worldwide wealth taxes that become due upon the death of the life insured. They can also be used to compensate for inheritance tax charges on foreign property. E.g. UK inheritance tax will be applicable on the value of the UK real estate on the demise of the owner. This amount can be offset by these solutions held in the correct structure. The aim is to pay the taxes due rather than creating complex structures that seek to avoid payment.
SUCCESSION PLANNING:
To plan for complex asset transfer.
These solutions can prevent a fire sale of assets being made to repay debt secured against them, thereby leaving the assets intact to be enjoyed by the family.
WEALTH PLANNING:
To provide family security and protect the family’s lifestyle and standard of living in event of a tragic loss. A large cash lump sum payment would be made by the life insurance policy in the event of the life insured’s death. This cash could be used to protect a family’s lifestyle if the insured life was the main income earner.
BUSINESS CONTINUITY:
In the event of the loss of a founder or key employee, life insurance proceeds can provide a business the cash flow it needs to maintain operations. The policy provides a pool of liquidity to hire a qualified replacement, purchase the additional human capital or assets necessary to keep operations intact and help replace lost profits.
These solutions could also help fund buy/sell agreements, where cash from an insurance policy can be used to provide the funding needed to purchase a deceased’s partner’s shares.
DIVERSIFICATION:
Seen as an alternative asset class that has the ability to generate cash in the future, life insurance is one of the few assets with a guaranteed value and predictable cost. It offers value by providing both peace-of-mind now and potential death benefit payments later.
Foundations with Universal Life Insurance
In our nineteenth episode, Stuart Paterson, Partner, Head of Middle East Disputes at Herbert Smith Freehills, joins Yann Mrazek, Managing Partner at M/HQ, to discuss the Do’s and Don’ts in using Fiduciary Structures for Asset Protection.
[Yann Mrazek] Foundations, trust – unfairly vilified?
[Stuart Paterson]
Trusts have a poor reputation in the court of public opinion, in particular in the UK and many other countries with high levels of personal taxes. They are widely and simplistically seen as vehicles to hide property, avoid taxes and otherwise to conduct one’s affairs furtively, behind closed doors, often in far-away offshore jurisdictions and probably for unlawful purposes. They are also associated with the young and idle rich, who live a champagne lifestyle from the proceeds of a trust fund established by prior family generations. These colorful impressions have been exacerbated by several leaks of information, such as the notorious ‘Panama Papers’ that revealed information about high-profile individuals using offshore structures and trusts for a range of purposes some of which were unlawful and the vast sums that are invested into such structures.
However, the general public suspicion towards the use of offshore trust structures is of course not the whole picture. Many wealthy individuals use offshore trust structures, not for tax evasion or similar nefarious purposes, but for succession planning; the passing of wealth from generation to generation and other lawful reasons. As the English High Court commented in a decision in April 2020 “The use of complex offshore corporate structures or trusts is not, without more, a ground for believing that they have been set up, or are being used, for wrongful purposes… There are lawful reasons – privacy, security, tax mitigation – why very wealthy people invest their capital in complex offshore corporate structures or trusts”. So I think it reasonable to say that the mere use of a trust or foundation should not be something that raises suspicion, but the many examples of wrongdoers flagrantly misusing trusts has, inevitably, damaged their perception. People have used trust structures since at least Roman times to manage wealth and to pass wealth from generation to generation. There are numerous other legitimate reasons why clients may wish to use trust or foundation structures. E.g.
In many countries pensions and other investment funds are established as trusts and are a key feature of the financial services landscape; and Similarly, trusts and foundations are often used to fund and structure the activities of charities.
[YM] Improper uses of trusts/foundation, give us some examples!
[SP]
There are many instances where fiduciary structures have come under attack due to the way in which a trust has been established. A good example arose in a Cayman court case that reached the UK Supreme Court regarding trusts that had been established by a settlor who later became insolvent following proceedings in which he was found to have misappropriated assets from a Turkish bank.
It is not uncommon for the settlor to reserve certain powers to themselves in connection with the trust, for example to add or remove beneficiaries. In this case, the settlor placed substantial assets into the trust with himself and his wife as beneficiaries. However, he reserved the power to himself to revoke the trust at his own discretion. He could therefore return to himself legal ownership of the property placed into the trust.
Certain creditors sought to access the trust property on the basis that the Court could grant to a receiver an equitable execution order over the power of revocation, ie the insolvent settlor’s right of revocation would be exercised on his behalf pursuant to the court order in order to access the assets for the benefit of creditors. Treating this power of revocation as a form of property, so that it could be the subject of a form of equitable relief, was, therefore, a novel way to attack a fiduciary structure and illustrates the court’s willingness to prevent wrongdoers from, if you like, having their cake and eating it – putting property into trust but having the power to take it out again when it suits them.
We have also recently seen an individual, knowing his creditors were closing in, decide to give up all of his powers as settlor of the trust (so as to prevent them from being exercised by a trustee in bankruptcy) by assigning those powers to other persons. In one case we are involved in, an individual settlor tried to assign all of his powers to the trustee, so that when his creditors, for sums in the region of 3 billion USD, sought payment, he could claim he had removed himself from the trust structure; he claimed he was no longer a beneficiary, and had no powers in relation to the trust anymore. None of these efforts were successful. There were a few different reasons for that:
[YM] and what about the illicit uses of trusts e.g. sham and Illusory trusts?
[SP]
There are of course a number of cases seen where the trust is a sham, meaning, where, on the face of it, it may appear to be a 50-page long trust deed which looks legitimate, none of the parties involved ever intended it to operate in the manner set out in the document. The Pugachev case on illusory trusts is probably the biggest recent case on the topic.
A short summary of what the judge said is that if one were to look at the way the trust worked, even on paper (suggesting it does not necessarily need to be a sham), and reviewed the powers everyone involved has, which in this case was all the powers the settlor had, and grouped them all together and looked at the fullest extent of the powers, one would come to the realisation that the beneficiary is still in control of all his assets and despite appearances, the beneficial interest never passed.
In this case the judge looked at things like who can decide who is hired or fired as a trustee, who can decide who gets distributions out of the trust fund, who can decide on investments and what happens to trust assets, and who can add and take away beneficiaries. When you look at all of these powers in the round, it begs the question of what is left for the trustee to do – are they genuinely acting as the legal owner of the trust property?
The conclusion reached was the individual had not really given away anything as he still had control of all the assets largely to the same extent as he had controlled it before. So whilst it was not a sham trust, as it was intended to work exactly as it was set out on paper, the ultimate effect of this was that the person had not disposed of their beneficial interest so they could effectively “look through” the trust structure.
[YM] Firewall provisions: what are the benefits? what are their limitations?
[SP]
There are also surprising limits to the effectiveness of trusts as asset protection vehicles, depending on what jurisdiction the trust has been formed, and where the assets are located.
Different jurisdictions have different levels of asset protection built into their statutes. Most of the offshore countries have a section in their trust statutes that effectively reads if there is anything to do with the set-up of the trust it has to be determined by the relevant jurisdiction’s courts (ie. if it is Jersey trust it has to be determined by Jersey courts, if it is a Bermuda trust it has to be determined by Bermudian courts). It also tends to be the case that these courts are faithful to upholding their own trust structures. These types of laws are otherwise known as “firewall legislation” and attract a lot of commentaries as they are seen as an additional layer of protection around trusts. And to some extent they are. However, the protection offered may be actually quite limited in practice.
Some jurisdictions have very aggressive firewall/asset protection laws, such as the Cook Islands, who pride themselves on asset protection structures. For most countries, there are insolvency clawback periods, so if one settles an asset in trust within the 12 months prior to going bankrupt or becoming insolvent, that transaction is liable to be set aside, but not afterwards – 12 months is a very short period and in the Cook Islands, this period is significantly shorter than in other jurisdictions, regardless of whether the transaction was conducted fraudulently to defraud creditors or it was done legitimately in aid of setting up a proper structure.
The issue with firewall legislation is that it is only as effective as where the assets are located. The trust is just a wrapper, so if the assets are in a bank account in London, but it is a Bermuda law trust, you can have whatever asset protection laws or firewall legislation you like in Bermuda, but a creditor could go straight to English Courts, the location of the asset, instead of wasting time engaging with the law that governs the trust structure. As a result, individuals may set up trust structures in offshore systems of law that try very hard to protect assets and give the impression they cannot be touched, when in practice, all of that can be undermined very quickly if your asset is placed somewhere that has a more evenly balanced legal system. Most of the world’s wealthiest individuals do not want to keep their money held in a bank account in the Cook Islands.
Key take-aways
In our twentieth episode, Kath Zagatti, legal director, joins Yann Mrazek, Managing Partner at M/HQ, to discuss important questions of the ongoing UAE UBO regulations’ impact in practice on UAE structures and foundations in particular.
[Yann Mrazek] What are the UBO Regulations?
[Kath Zagatti]
Uniformized minimum disclosure requirements for UAE-incorporated corporate entities with respect to shareholders, ultimate beneficiaries and directors. Cabinet Resolution No. 58 of 2020 on the Regulation of the Procedures of the Real Beneficiary (UBOr) came into effect on 28 August 2020.
UBOr are applicable to UAE mainland, Free Zone and Offshore entities, excluding the Financial Free Zones of DIFC and ADGM as they already have in place internal regulations tackling the registration of BO and nominee Directors.
[YM] Why the UBOr? Why now?
[KZ] Substantial resources have been put towards the UAE’s AML/CFT strategy, an item at the top of the policy agenda. In a short time, the country has taken significant steps in strengthening its framework.
But outside of the DIFC and ADGM, there was a pressing need to uniformize ongoing compliance requirements across a vastly fragmented system of registries (39 different company registries) spread between non-financial free zones and the UAE mainland. This is what the Regulations tackle.
[YM] What obligations are mandated by UBOr?
[KZ] Companies must identify their Beneficial Owner(s) and Nominee Director(s) and submit to the competent authorities i) the Shareholders’ Register, ii) the BO Register, and iii) the Directors Register.
[YM] What is a UBO?
[KZ] A real beneficiary as a physical person who owns or controls or has a right to vote over at least 25% of a company’s shares. Companies can have several real beneficiaries.
[YM] What if the company cannot identify the UBO?
[KZ] If no such person is identified, then the real beneficiary is a physical person who exercises control over the company, and in the absence of any of the above, the real beneficiary is the senior manager of the company.
[YM] What is a UBO?
[KZ] A real beneficiary as a physical person who owns or controls or has a right to vote over at least 25% of a company’s shares. Companies can have several real beneficiaries.
[YM] What is a Nominee Director?
[KZ] A Nominee Director is a natural person serving in a director capacity, and acting in accordance with guidelines, instructions or will of another person.
[YM] How can I prepare and submit the registers?
[KZ] UAE’s various registries are free to adopt their own approach towards filing – i.e. notification scope, process, format, deadlines. To help navigate this administrative maze, M/HQ has compiled a “UBOr Tracker” highlighting key procedural steps of most relevant UAE registrars with respect to UBO ongoing compliance.
See our latest tracker, here
[YM] Are there any deadlines to be met?
[KZ] Yes. Nominee Directors serving in such capacity must have notified the company by 23 September 2020. All companies are required to submit UBO information to the relevant Registrar 60 days from UBOr entering into force or within 60 days from the date of a company’s license renewal issuance, whichever comes first.
[YM] Do all companies in the UAE need to adhere to the deadline?
[KZ] The Regulation do not apply to companies established in the UAE’s financial free zones (DIFC and ADGM), or to companies wholly owned by the federal or local government.
[YM] What if the company was setup in 2020, does it still need to adhere to the deadline?
[KZ] The company would have most likely already complied with the Regulations at the time of registration. If that is the case, no further action is needed in that respect.
[YM] What happens to the information shared in the registers?
[KZ] The information contained within companies’ registers will be kept confidential by the relevant authorities.
In our twenty-first episode, Yann Mrazek, Managing Partner at M/HQ, goes through the numbers – how each of ADGM, DIFC, RAK and the UAE as a whole has fared in 2020 in terms of foundation use, and provides an outlook on 2021.
In our twenty-second episode, David Russel QC, who acted on behalf of the Chief Legal Officer, and Yann Mrazek, Managing Partner M/HQ, discuss the key takeaways from the judgment for end-users.
Key takeaways
[YM] What differentiates a Foundation from a Trust?
[DR] A foundation is an independent legal entity derived from civil law jurisdictions, as opposed to a trust which is a common law concept. It also has no members or shareholders but is self-owned. The foundation’s founder endows assets to the foundation and owing to its separate legal status, will hold those in its own name and separately from the founder’s personal wealth. Those assets are then managed by the foundation’s Council in accordance with the foundation’s charter and by-laws (reflecting the intentions of the founder) in support of a cause or a purpose, or for the benefit of beneficiaries.A trust on the contrary, is not a legal entity but only a legal obligation or relationship between the settlor (the person who creates the trust), the trustee (the person in charge of the trust) and the beneficiary (the person who receives benefits from the trust). Legal ownership of the trust sits with the trustees and beneficial ownership with the beneficiaries.Both a Trust and Foundation can be established in the DIFC.
[YM] Can property in a DIFC trust include property located in a jurisdiction which does not recognize trusts?
[DR] Yes. The Court clarified that Art 34(1)(d) of the DIFC Trust Law imposes no restriction on the location of the property, nor is there any restriction by reference to whether the jurisdiction in which the property is located does or does not recognize trusts.
[YM] Can a DIFC Foundation hold property in trust under the DIFC Trust Law (other than property of the Foundation as defined in the Foundation Law)?
[DR] Yes. Not all property held by a Foundation is “property of a Foundation”, pursuant to Art 27 of the Foundations Law, and Art 10(3) of the DIFC Trust Law does not prohibit a Foundation from acting as a trustee.
For that purpose, it is important however that the DIFC Foundation clearly provides in its Charter that assets transferred to it to hold upon trust are not “property of the Foundation” and therefore not within the operation of Art 10(3) of the DIFC Foundations Law.
[YM] The reference in Art 10 of the Trust Law:
i. includes the common law of trusts and principles of equity as understood under the law of England and Wales;
ii. is limited to the common law of trusts and principles of equity as understood under the law of England and Wales?
[DR] The Former. The common law of trusts and principles of equity referred to in Art 10 of the Trust Law is the common law of trusts and principles of equity as determined by the Courts of the DIFC from time to time drawing upon the common law of England and Wales and other common law jurisdictions as they see fit. The Court has the authority to develop the common law of trusts and principles of equity in the same way that other common law courts might do on a case-by-case basis.
[YM] If one or more suitably qualified expert(s) in Shari’a law has or have been appointed as an advisory trustee or trustees pursuant to Art 57 of the Trust Law, the responsible trustee may rely and act upon the advice of the advisory trustee(s) in respect of any matter related to Shari’a compliance which is relevant to the administration of the trust or the exercise of any discretion vested in the responsible trustee?
[DR] In a nutshell, yes. The Court has however considered that the trustee is not bound to act or rely upon such advice and must at all times act in accordance with the Trust Law, the common law and principles of equity applicable to the trust. The trustee cannot act on advice which would take him outside the framework of the said applicable laws.
[YM] Does anything in the DIFC public policy precludes the establishment of a trust by a person who is not and has never been a Muslim notwithstanding that it may contain terms which would not, if the trust were established by a Muslim, be Shari’a compliant?
[DR] No, the public policy constraint is directed only to the question of the purpose of the trust. It does not go to the question of the establishment of a trust by a person who is not and has never been a Muslim.
[YM] On the transfer of property by a Muslim to a Trust or Foundation necessarily being made void in application of Art 361 of the UAE Law of Personal Status – which considers “void, every fraud to the provisions governing inheritance by way of sale, donation, testament or other dispositions.”
[DR] On this important point that arises from time to time in practice when advising Muslim clients on the establishment of DIFC trusts or foundations, the Court pointed out the fact that there is nothing in the DIFC Trust Law and Foundations Law inimical to Shari’a inheritance rules.
The Court further commented that:
[YM] On provisions of the Trust Law preventing a settlor of a trust from being a shareholder or a director of a company which is trustee of the trust?
Another important question, as it raises the issue whether or not private trustee companies are permitted under the Trust Law. These typically take the form of companies in which the settlor is either a director or shareholder or both.
The Court pointed out that there is no provision of the Trust Law preventing a settlor of a trust from being a shareholder or a director of a company which is the trustee of the trust.
Also worth pointing out:
[YM] On whether, if a Muslim settlor expressly desires to establish a trust which is Shari’a compliant, but inadvertently includes in the trust instrument a provision which is not Shari’a compliant, the Court can:
(a) determine that the disposition shall have effect on terms which are Shari’a compliant?
(b) vary the terms of the trust so that they are Shari’a compliant?
[DR] The Court has power in appropriate circumstances to make such orders so as to give effect to the settlor’s true intentions. Where a settlor, wishing to make a disposition that is Shari’a compliant, or to create a trust that is Shari’a compliant makes a mistake, then there is nothing precluding the Court from avoiding the disposition or varying the trust as the case may be to give effect to the settlor’s true intentions.
[YM] On a person other than a national of the jurisdiction specified in the provision to have an interest in the Trust or Foundation property or derive any benefit under the Trust or Foundation:
[DR] The Court commented that a variety of ways exist allowing a non-national to assert an interest in the assets of a trust by reason of another DIFC Law or the common law without necessarily having to invoke a variation of the provision in order to assert that interest.
[YM] On whether a waqf that has been validly constituted according to the law of the place of its establishment can be recognized as a trust or foundation in the DIFC or be continued as a Foundation in the DIFC:
[DR] The Court commented that as a matter of general principle, it can be said that most waqfs will be capable of recognition as a trust. Similarly, many with legal personality may be able to be recognized as Foundations. However, those questions should be left to be determined on a case-by-case basis, given diversity of potential waqf – some, without legal personality, can be recognized as trusts; others, with legal personality, can be recognized as Foundations.
[YM] On a Foundation approved by another jurisdiction for continuance as a waqf continuing in that other jurisdiction from the DIFC
[DR] The Court commented that there is nothing in the relevant DIFC provisions which would lead to the conclusion that in no case could a Foundation, approved by another jurisdiction for continuance as a waqf, transfer to that other jurisdiction from the DIFC.
However, the diversity of waqf forms and of other laws would require an evaluative consideration on a case-by-case basis.
With the diversity of nationalities, origins and interest of people living in the Middle East, it is not surprising that many such foundations end up having a ‘US element’, be it holding/controlling assets located in the US, having a US founder and/or having US or US-resident beneficiaries, possibly triggering negative US tax consequences. But with proper advice and pre-planning, Foundations can be made ‘US tax efficient’!
In our twenty-third episode, Matthew Sapowith, Partner at MGO, and Yann Mrazek, Managing Partner M/HQ, discuss the compatibility of UAE Foundations with US planning and key elements to consider as part of a US tax optimization.
In our twenty-fourth episode, Kath Zagatti, Partner at M/HQ, and Yann Mrazek, Managing Partner M/HQ, discuss the basic but paramount ongoing obligations of a foundation.
1. Appointment of Key Parties
At the time of incorporation, the Founder must appoint at least 2 Council Members for the Foundation. The Beneficiaries or Qualified Recipients are usually appointed at the incorporation stage of the Foundation, although there is not legal requirement for such appointment at the onset. A Guardian is also not required to be appointed at the time of incorporation of a Foundation with legacy planning object, unless the Foundation has a specific charitable or non-charitable object.
2. Annual Obligations
A Foundation must be renewed every year with its Registrar, upon the provision of certain documents: i.e. proof of registered office, data protection statement, confirmation statement, and information in case of change of any Key Party. Foundations are also required to maintain annual accounts, which shall be approved by the Council Members within six (6) months after the end of each financial year. The auditing requirement, however, is waived in case the Foundation’s annual turnover is lower than $5,000,000 calculated on a consolidated basis including all the Foundation’s subsidiaries (if any). It is important to note that although a Foundation is required to maintain annual accounts, the Registrar is currently not conditioning the renewal of the Foundation’s license to the submission of the accounting report by the Foundation.
3. Ongoing Ad Hoc
Obligations For the sake of a good corporate governance, it is paramount that any strategic decision being made by the Foundation is properly recorded by means of a Meeting of the Council Members’ meeting. Example of strategic decisions: replacement of Council Members, appointment of a Guardian, addition or exclusion of a Beneficiary, opening of a Bank Account, addition of an Asset. It is also important to note that in case of change in the Key Parties of a Foundation, the Council Members will have to update the Foundation’s By-Laws, and update the Registrar’s records accordingly.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ is discussing the multiple uses of foundations in practice from all angles.
Nancy Chien, Head of Bedell Cristin’s International Private Client team and based in Jersey, meets with Yann Mrazek to compare Channel Islands and DIFC/ADGM Foundations.
Together, they consider how the similarities and differences serve not to put the differing foundations in competition with one another, but rather create a synergy which gives each its place in the worldwide succession planning structure for clients.
David Russell meets with Yann Mrazek to discuss the UAE mainland Trust Law. Together, they compare the new UAE Mainland regime with the DIFC Trust law and ADGM trust Law, and discuss the choice its enactment provides to regional families looking for structure optimization, business continuity and inter-generational legacy planning.
in our twenty-seventh episode, Partner − Private Clients Kath Zagatti and Managing Partner Yann Mrazek discuss selected topics around the use of foundations for philanthropy.
Since their introduction locally, the adoption rate of UAE Foundations has been unprecedently rapid, and accelerating still.
But who is actually using them, and for which purpose?
See our latest publication
In our twenty-ninth episode, Partner − Private Clients Kath Zagatti and Managing Partner Yann Mrazek discuss the workflow of foundations’ council meetings
In our thirtieth episode, Yann Mrazek, Managing Partner at M/HQ, goes through the numbers – how each of ADGM, DIFC, RAK ICC and the UAE as a whole are faring so far in 2021.
In our thirty-first episode, Yann Mrazek, Managing Partner at M/HQ, is introducing the firm’s latest structure optimization and legacy planning comparative support tool.
In our thirty-second episode, Yann Mrazek, Managing Partner at M/HQ and Kath Zagatti, Partner – Private Clients at M/HQ, discuss delegations of power in / in relation to foundations.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ is discussing the multiple use of foundations in practice from all angles.
In our thirty-third episode, Yann Mrazek, Managing Partner at M/HQ, goes through the numbers − how each of ADGM, DIFC, RAK and the UAE as a whole has fared in 2021 in terms of foundation use, and provides an outlook on 2022.
In our thirty-fourth episode, Yann Mrazek, Managing Partner at M/HQ and Kath Zagatti, Partner – Private Clients at M/HQ, discuss digital assets like Bitcoin, Crypto and Tokens / in relation to foundations.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ is discussing the multiple use of foundations in practice from all angles.
In our thirty-fifth episode, Yann Mrazek, Managing Partner at M/HQ and Kath Zagatti, Partner – Private Clients at M/HQ, continue the discussion on digital assets like Bitcoin, Crypto and Tokens / in relation to foundations.
In our thirty-sixth episode, Yann Mrazek, Managing Partner at M/HQ and Keerthi Voodimudi, Associate Director (Tax) at Re/think, discuss the anticipated future impact of Corporate Tax on Foundations and Holding Structures in the UAE.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ is discussing the multiple use of foundations in practice from all angles.
In our thirty-seventh episode, Yann Mrazek, Managing Partner at M/HQ and Kath Zagatti, Partner – Private Clients at M/HQ, discuss the advantages and various options to set-up a SFO, and walk you through the different options of regimes available in the UAE.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ is discussing the multiple use of foundations in practice from all angles.
In our thirty-eighth episode, Yann Mrazek, Managing Partner at M/HQ and Gilson Costa, Managing Partner VAF – Virtual Assets Forensics Compliance, wrap up the Digital Assets Mini Series, by taking the investment advisor perspective, with
the ‘do’s and don’ts of crypto’.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ is discussing the multiple use of foundations in practice from all angles.
Dr. Vladimir Good, Head of Central and Eastern Europe (CEE) Department at Kaiser Partner Wealth Advisors, meets with Yann Mrazek to compare Liechtenstein and DIFC/ADGM Foundations.
Together, they consider how the similarities and differences serve not to put the differing foundations in competition with one another, but rather create a synergy which gives each its place in the worldwide succession planning structure for clients.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ is discussing the multiple use of foundations in practice from all angles.
Daniel Ward – Head of Cult Wines UAE joins with Yann Mrazek to discuss wine as an asset class: why and for whom – and how to optimaly structure it.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ is discussing the multiple use of foundations in practice from all angles.
Shadi Alnasr, Principal – Senior Client Strategist at BNY Mellon Wealth Management joins with Yann Mrazek to share the key findings of BNYM’s Global Family Office Whitepaper and discuss how family offices are responding to rapid economic & social change, by adjusting their structure & more!
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ is discussing the multiple use of foundations in practice from all angles.
In our forty-second episode, Yann Mrazek, Managing Partner at M/HQ, goes through the numbers – how each of ADGM, DIFC, RAK and the UAE as a whole has fared in the 10 months of 2022 in terms of foundation use, and provides an outlook on 2023.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ is discussing the multiple uses of foundations in practice from all angles.
In our forty-third episode, we lean on the expertise of our sister firm Re/think’s tax team, which in its own mini-series of podcasts, has been discussing all things UAE Corporate Tax and how to prepare for it.
In this cross-over episode, we pass the baton to Neil Guthrie, Senior Director of Finance and Tax at Re/think, and Keerthi Voodimudi, Director of Tax at Re/think, discussing the implications of UAE Corporate Tax for Foundations.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ is discussing the multiple uses of foundations in practice from all angles.
In our forty-fourth episode, Yann Mrazek, Managing Partner at M/HQ, and Carl Bolduc, Principal of CW Partners, delve into the topic of Wyoming Private Trust Companies − an ideal estate planning solution tailored for families with US SITUS assets. They explore the intricacies of this specialized trust structure and provide insights into its benefits and applications.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ is discussing the multiple uses of foundations in practice from all angles.
In our forty-fifth episode, Yann Mrazek, Managing Partner at M/HQ, and Kath Zagatti, Partner – Private Clients at M/HQ, explore Purpose Foundations − their key features and benefits for families.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ is discussing the multiple uses of foundations in practice from all angles.
In our forty-sixth episode, Yann Mrazek, Managing Partner at M/HQ, and Kath Zagatti, Partner – Private Clients at M/HQ, delve into the reflections on 2023 and the flourishing of foundations, exploring what the future may bring.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ is discussing the multiple uses of foundations in practice from all angles.
In our forty-seventh episode, Hermione Harrison, Director and Head of Corporate Governance at M/HQ, and David Smylie, Group Head of GSB Private, share the results of a survey conducted on lending to UAE foundations summarized in a recent white paper. They explore the appetite for lending both from the bank and founder perspective and share some key recommendations to ensure that financial institutions can keep pace and service the needs of the growing number of UAE foundations.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets.
In a series of podcasts, team M/HQ is discussing the multiple uses of foundations in practice from all angles.
In our forty-eighth episode, Yann Mrazek, Managing Partner at M/HQ, and Stuart Paterson, Managing Partner – Middle East at Herbert Smith Freehills LLP, delve into the background of the La Dolce Vita vs Zhang Lan case in 2013 and highlight key points to remember.
