The Dubai International Financial Centre (“DIFC”) is once again at the forefront of legislative evolution, elevating asset protection to new heights. The latest amendment 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”)], introduced following a public consultation, unlocks robust asset protection safeguards of DIFC Trusts and Foundations and solidifies the jurisdiction’s role as a cutting-edge wealth management hub.
As ever, asset protection, coupled with privacy, are the most sought-after elements of wealth planning for affluent individuals and family businesses alike.
While the previous legislation laid a solid foundation for asset protection, the recent amendment significantly enhances it to address the sophisticated needs and priorities of holders of DIFC structures [complemented with the introduction of the DIFC Private Register which tackles the privacy element]. The amendments introduced, as laid out below, will allow both existing users of DIFC Trusts or DIFC Foundations, as well as prospective ones considering the use of DIFC fiduciary tools, to reap the advantages the revised Laws offer.
Improved Asset Protection
Prior to the amendments, the Court could invalidate a property transfer to a Trust/Foundation if the settlor/founder was proven to be insolvent at the time of the transfer or to have made the transfer with an intention to defraud creditors.
Recent amendments to the DIFC Trust and Foundations Laws introduce additional safeguards in relation to prior transactions by a settlor/founder transferring property to a Trust/Foundation. Significantly, these amendments place a burden on the creditor to prove the settlor/founder intended to defraud the creditor when transferring the property to the Trust/Foundation, and that such transfer rendered the settlor/founder insolvent. According to the amended Laws, the transfer of property will not be invalidated, and the Trust/Foundation will be liable to settle the creditor’s claim only to the extent of the interest previously held by the settlor/founder.
Moreover, a 3-year statute of limitation in which actions or proceedings may be brought in relation to a Foundation or a property transfer to a Foundation has been introduced by the amendment. In addition, the revised provisions on the treatment of foreign judgments formalize the supremacy of the DIFC Laws and prohibit the enforcement of a foreign judgment if it is inconsistent with the provisions of the DIFC Trust and Foundations Laws.
Creditors who hold foreign judgements may thus encounter increased difficulty in using the provisions of the Laws to reclaim property placed into a DIFC Trust or Foundation.
The newly-introduced duress provisions require a Foundation or a Trust Officer to cease acting in relation to the Foundation or a Trust where a foreign judgment has been made against them. This enhances the protection of the property of the Foundation/Trust by preventing the Council Members/trustees from having to exercise powers, by virtue of a foreign judgment, which may affect the management and the property of the Foundation/Trust.
Conversion of a DIFC Foundation in a Company
Additional provisions have been incorporated into the Foundations Law that were not part of the DIFC Consultation Paper – provisions permitting the conversion of a DIFC Foundation into a company.
Prior to the amendment, the Foundations Law contained provisions permitting a DIFC Company to be continued as a DIFC Foundation but did not formalize the possibility to reverse the action should the clients’ needs/circumstances change. The revised legislation now formally allows for the continuation of a DIFC Foundation as a company, a welcome clarification.
For a comprehensive summary of the amendments, refer to M/HQ Client Alert: DIFC Takes Asset Protection to the Next Level.
Conclusions
The revision of the DIFC Trust and Foundations Laws has introduced an array of changes to the DIFC legal framework, with the overarching purpose of implementing measures that would elevate the existing DIFC wealth management solutions that thrive in the UAE and broader region.
Notably, the DIFC Trust and Foundations Laws contain the strongest firewall provisions amongst tier 1 financial centres that allow settlors and founders to reserve powers without opening a DIFC trust or a DIFC foundation to a challenge as a sham [unlike it may well be in case of UK trusts].
Limiting creditor claims to the interest of the settlor/founder/contributor in the property prior to the transfer and confining matters concerning DIFC Trusts and Foundations exclusively to be determined under DIFC Laws and the DIFC Courts will undoubtedly provide a benefit for individuals, families, and family businesses looking to structure wealth in the DIFC.
These opportune legislative amendments stand as evidence of the adaptability and innovation of the DIFC as a legislator, responsive to the needs of its private client base, at a time when its popularity as a wealth structuring hub is at its highest.
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