DIFC/ADGM Foundations

Introduction

With Switzerland shifting its regulatory and reporting provisions, and Cyprus now affected for over-catering for Russia and CIS family offices, the United Arab Emirates, in particular the emirates of Dubai and Abu Dhabi are becoming a leading hub for international investors placing part, or the entirety of their family once within the same.

This surge has led to a line of products which are backed by strong and predictable laws brought in from England & Wales within the tax free zones of the Dubai International Finance Centre (“DIFC”) and the Abu Dhabi Global Markets (“ADGM”). It is important to note that the DIFC and ADGM freezones are governed by English law, but are not within the English jurisdiction. Thus any issues arising within these zones are dealt with internally.

The two main products coming out of these freezones are the family Holding Company and the for-proﬁt Foundation, the latter backed strongly by the DIFC Family Wealth Centre.

The Holding Company does not, by design, differ at all from any other HoldCo. It is centrally registered and is considered a suitable investment vehicle.

The for-proﬁt Foundation, however, is a much more powerful investment instrument with signiﬁcant beneﬁts.

The DIFC

The Dubai International Financial Center, or rather known as the DIFC, is a leading ﬁnancial hub in the region and is known for being one of the most prestigious and reputable free zones in the world. It has brought in unique change in the region, by adopting a Common Law framework with an independent regulator (DFSA). Moreover, the DIFC is well-known for having an independent English language Common Law judiciary – DIFC Courts. Setup in 2004, the DIFC is mostly known for the large businesses and PLC’S, banks, ﬁntech start-ups, retail outlets, restaurants, and the luxurious lifestyle. It is home to the most exclusive events, galleries, clubs, restaurants, and bars and is the center of lifestyle in Dubai targeting the wealthiest local and international clientele.

It is often described as when Tribeca meets Wall Street, or when Mayfair meets the City, due to the fact that leading city institutions such as banks, law ﬁrms, accountants and other such businesses also have a ﬁrm presence within it; while at the same time it hosts the most innovative hospitality, art and leisure facilities globally. Large private banks, hedge funds and family offices uniquely intermingle with institutional banks in this freezone.

The DIFC is currently the most advanced free zone in terms of development of its own laws in addition to the common law system. It has its own contract laws, company formation, insolvency laws, legal rules of interpretation, real estate regulations, and its own arbitration center and Court system – including a Court of Appeal. While the vast majority of employment relationships in the UAE and its free zones are regulated by UAE Federal Labour Law, the DIFC is excluded from such laws.

The DIFC enjoys tax free beneﬁts for its residents and companies guaranteed for 50 years.

DIFC Foundations

Foundations are legal entities created for speciﬁc purposes, such as asset management and philanthropy. Whilst non-proﬁt foundations have existed for a considerable time, for proﬁt Foundations are typically established for individuals, families, or companies with the goal of intergenerational legacy planning and wealth protection in different international jurisdictions.

A foundation is an orphan structure, a self-owned entity with no shareholders or members. This offers a layer of separation between the founder and the assets of the foundation and offers full protection against third parties.

How does a Foundation work?

The foundation is structured as follows:

Founder: establishes foundation and contributes assets to the foundation. The founder may reserve the right to amend the governing documents or close the foundation during their lifetime.
Guardian: the founder may appoint a guardian during their lifetime, but one must be appointed following founder’s death. The role of the guardian is to supervise the foundation council. The guardian can be an individual or corporate entity.
Foundation Council: manages the assets of the foundation according to charter, by-laws and Regulations. A minimum of two council members are needed. The Founder can also sit on the council.
Beneﬁciaries: the ultimate beneﬁciaries of the foundation. The term beneﬁciary is here is used loosely – this is because foundations do not technically have beneﬁciaries; the Council at their leisure, will provide beneﬁts to individuals or companies.
Governing Documents: charter and by-laws govern the relationship between the parties.
Default Recipient: in the event of the passing of the beneﬁciaries or council members, the Default Recipient can choose who runs or ultimately owns the foundation. If none is chosen, the Foundation will revert to the DIFC.

The charter and by-laws act in perpetuity, even after the founder’s death. They are designed to allow for strict intergenerational inheritance planning and forced heirship, thus combating family inheritance disputes.

What does it mean for your assets?

A Foundation is a separate legal personality holding assets independently in its own right. This is where it differs from a traditional trust. Ownership of the assets is not transferred, but simply governed over by the charter and by-laws set by the founder of the Foundation. This means that the Foundation is its own UBO. There is no beneﬁciary.

The Foundation can decide to provide beneﬁts to third parties from time to time, but that is within the discretion of the council members.

A DIFC Foundation is not centrally registered and offers the utmost level of conﬁdentiality. The beneﬁcial owners remain private perpetually, providing the desired anonymity and asset protection.

The assets of the DIFC Foundation are commonly managed by the council, for the beneﬁt of one or more beneﬁciaries identiﬁed by the founder in the charter/by-laws. The beneﬁciaries are those of the founders choosing, with family members and corporate entities being chosen predominately.

By separating the assets from the beneﬁciaries’ personal or corporate assets, a DIFC Foundation can provide a layer of protection against potential claims from creditors or legal disputes. It also means that there is little or no dispute in the event of an intergenerational transfer – a foundation acts as a living perpetual will.