The DIFC has proposed new amendments to its Trust Law [DIFC Law No. 4 of 2018 (the “Trust Law”)] and Foundations Law [DIFC Law No. 3 of 2018 (the “Foundations Law”)]. Once in force, the amendments will substantially enhance the asset protection features of DIFC Trusts and Foundations and empower DIFC Corporate Service Providers by granting them further powers to act on behalf of the Foundations they incorporate with the Centre.
1. Key changes introduced to the Trust Law
Different Laws Governing the Trust | Improved Asset Protection
Given that Trusts may hold property in different jurisdictions where specific rules exist on how the property is to be dealt with, amendments to Articles 12 and 40(11)-(12) have been proposed, respectively to allow for Trusts to have severable terms that are governed by a law other than that governing the remainder of the Trust, and to give effect to terms of a Trust dealing with nationality requirements arising by reason of law.
Amendments have also been proposed to Article 14 with respect to antecedent transactions by a settlor transferring property to a Trust. These amendments place a burden on the creditor to prove that the settlor had intentions of defrauding the creditor at the time the property was transferred to the Trust and that such transfer rendered the settlor insolvent or without property from which the creditor could claim against. While the transfer of property to the Trust will not be considered void or voidable, the Trust will be liable to settle the creditor’s claim only to the extent of the interest previously held by the settlor.
Further, in relation to foreign judgments, it has been proposed to expand/add Articles 16/16A to increase the requirements for a foreign judgment passed against a DIFC Trust and/or any of its members to be recognised/enforced. Following the same rationale, should any foreign judgments be made against a DIFC trustee or protector, such trustee or protector must immediately cease to act and a replacement trustee or protector be appointed. This enhances the protection of the Trust’s property by preventing the trustees from having to exercise powers, by virtue of a foreign judgment, which may affect the management and the property of the Trust.
Requirement of Written Instrument | Termination of Interest of Beneficiary
It has been proposed to review Article 33 to clarify that a Trust needs an instrument in writing for it to come into existence.
Article 48 has also been amended to enhance protection for a Trust beneficiary. The amendment clarifies that, if the Trust instrument so provides, a beneficiary’s interest may only be terminated if the beneficiary challenges the Trust or acts in a way that is deemed to be detrimental to the settlor or administrator of the Trust (e.g. the scenario in which the beneficiary challenges the Trust for non-compliance with Sharia Law).
And there is always more! [Trust edition]
Further provisions have been proposed to be introduced to the Trust Law to provide for clarity on the following topics:
- the rights of protective and discretionary Trusts;
- Court’s powers in relation to the division or amalgamation of Trusts;
- powers that the settlor may reserve to itself or a protector of a Trust, and the trustee’s obligations with regard to directions by a protector that affect the Trust;
- circumstances in which other interested persons must accept or reject directions in relation to a Trust; and
- review of Schedule 1 to add a definition of “Relevant Percentage” to align the ownership and control threshold for “ultimate beneficial ownership” with the DIFC UBO Regulations (i.e. 25%).
2. Proposed amendments to the Foundations Law
Improved Asset Protection
Similarly to the Trust Law, the provisions dealing with antecedent transactions by a founder or contributor settling property on a Foundation are proposed to be expanded. Article 14 also proposes to place a burden on the creditor to prove that any settlement of property on a Foundation intended to defraud the creditor at the time the property was transferred to the Foundation and that at the time the property was transferred the transfer rendered the founder or contributor insolvent or without property from which the creditor could claim against. While such transfer would not be considered void or voidable, the Foundation will be liable to settle the creditor’s claim to the extent of the interest previously held by the founder or contributor.
Article 16 has been amended to prohibit the enforcement of a foreign judgment if it is inconsistent with Article 13 (Matters determined by DIFC law) and/or Articles 14 and 15 of the DIFC Foundations Law; and Article 16A has been introduced to require a Council Member, a Guardian or other person with authority over a Foundation to cease acting in relation to the Foundation where a foreign judgment has been made against them.
Further, Articles 19(10)-(11) have been expanded to give effect to terms of a Foundation’s Charter that deal with property rights and any related nationality requirements arising by reason of law; and a new Article 26A (“Duress”) has been added to deal with situations where a person must accept or reject directions in relation to a Foundation.
Empowerment of DIFC Corporate Service Providers
The role of Registered Agents (i.e. DIFC Corporate Service Providers) has been enhanced. In particular, Registered Agents will now be allowed to enter into an arrangement with the DIFC Registrar of Companies to:
- file documents or pay fees on behalf of Foundations;
- perform assessments or checks under DIFC’s relevant laws to ensure the Foundation adheres to AML, UBO and other requirements under DIFC Laws and provide certifications in this regard to the DIFC Registrar; and
- file reports, disclosures or confirmations on behalf of the relevant Foundation with the DIFC Registrar.
And there is always more! [Foundation edition]
Further provisions have been proposed to be added to the DIFC Foundations Law, as follows:
- updating references with regards to the accounting requirements in relation to maintaining accounts, financial years and requirements related to auditing accounts in line with the relevant DIFC Companies Law;
- Courts powers in relation to the division or amalgamation of a Foundation;
- provision of a time limitation (i.e. 3 years) in which actions or proceedings may be brought in relation to a Foundation;
- updating the definition of a Registered Agent to align with that of a Corporate Service Provider;
- clarification that it will not be necessary for a Recognised Foreign Foundation to appoint an Approved Person, on the basis that a Recognised Foreign Foundation is required to appoint a Registered Agent;
- increasing the fee for the issue or renewal of a license for a Foundation from USD 200/- to USD 350/-.
3. Conclusions
The amendments proposed to the DIFC Trust and Foundations Laws provide for improved asset protection features inherent to the use of these DIFC tools.
The amendments made clear that the burden to prove a claim against a settlor/founder/contributor of a Trust/Foundation lies on the creditor, and any such creditor’s claim shall be restricted to the interest of the settlor/founder/contributor in the property prior to the transfer.
The requirements for the enforcement of foreign judgments in respect of a person connected to, or of a property of, a DIFC Trust or Foundation have been strengthened to prohibit the recognition or enforcement of a foreign judgment if it is inconsistent with the applicable DIFC Laws, which reinforces the Centre’s aim to limit matters relating to DIFC Trust and Foundations to be determined solely by DIFC Laws and the DIFC Courts.
Following the same rationale, the Centre reinforced its protection vis-à-vis DIFC Trusts/Foundations by requiring that any trustee/Council Member/Guardian ceases to act in such position immediately upon the passing of a court judgment against them. Such amendment strengthens the asset protection feature of such DIFC tools by ringfencing them against foreign court judgments that may require its members to exercise powers which may affect the purpose of the Trust/Foundation.
The amendments introduced to the Trust and Foundations Laws have no doubt contributed to enhancing the protection these tools may offer to its stakeholder/s, therefore ratifying DIFC’s position as one of the most sophisticated and qualified jurisdictions in the region to incorporate Trusts and Foundations.