By Hugh O'Donnell, Head of Equiom Fiduciary, Middle East, Equiom (Isle of Man) Limited (DIFC Branch)
DIFC Law No. 3 of 2018 (Foundations Law) came into effect in March 2018, paving the way for private clients to safely structure their local assets within the leading financial hub for the Middle East, Africa and South Asia; the Dubai International Financial Centre (DIFC). Widely rated in the top ten global financial centres, the DIFC has managed to build on the blueprint of existing foundation regimes and add a local touch in order to offer clients in the region a truly first class wealth planning solution.
Why establish a DIFC Foundation?
Clients holding UAE assets and looking for a flexible civil law structure that can be established according to the specific wishes of an individual private client, should look no further than a DIFC Foundation.
Muslims and non-Muslims alike will find the DIFC Foundation to be a useful wealth management tool to achieve bespoke succession planning as well as asset and creditor protection. DIFC Foundations are fully recognised under UAE law.
Whether established to hold a private banking portfolio, family businesses or local assets such as land, real estate, collections, artwork or even charitable objects a DIFC Foundation should be foremost in clients’ minds.
What is a foundation?
Established by one or more ‘Founders’, a foundation is an independent legal entity which has no shareholders, members or partners. In effect, therefore, a foundation owns itself and can, in turn, own assets in its own name. Nevertheless, the Founder is able to maintain a significant degree of control over the foundation’s assets, provided provision is made in the by-laws. If structured carefully, any assets held by the foundation will no longer form part of the founder’s estate.
General uses of a foundation
- Wealth protection and asset management
- Inheritance/succession planning
- Forced heirship planning
- Charitable and non-charitable purposes
- Orphan vehicle for funds, private securitisation etc.
- Pension funds
- Holding capital, income and specific assets
- As a trustee (as an alternative to a private trust company)
Which assets can be held by a DIFC Foundation?
Foundations are often used to consolidate a private client’s business and private wealth. A DIFC Foundation can hold charitable or non-charitable assets. The foundation itself may not undertake any commercial activities, except those necessary for, and ancillary or incidental to, its objects.
Developments related to the holding of local real estate
- May 2017 - the Dubai Land Department (DLD) and the Dubai International Financial Centre (DIFC) entered into a Memorandum of Understanding (MOU) allowing DIFC-based entities to own property registered with the DLD
- March 2018 - DIFC Law No. 3 of 2018 (Foundations Law) establishes the foundations framework, which can take advantage of the DLD MOU
- April 2020 - Jebel Ali Free Zone Authority (JAFZA) permits DIFC Foundations to directly hold shares in JAFZA companies. Given that JAFZA is a pre-eminent free zone for Dubai real estate holding companies, this is promising news
- A Dubai property transfer fee of 4% will apply for any Dubai real estate transferred into a DIFC Foundation. The fee will be reduced to only 0.125%, if the transferor is the Founder of the DIFC Foundation
Parties to a foundation
- The Founder - e.g. the private client
- The Beneficiaries - This can include the Founder as well their family and any dependents or associates
- The Foundation Council - Appointed by the Founder, the Council must comprise at least two members, which can include the Founder. The Foundation Council must conduct the Foundation’s affairs in accordance with its Charter and By-laws, the DIFC Foundation Law and any other applicable law
- The Guardian - Again appointed by the Founder, the Guardian supervises the Foundation Council and must take reasonable steps to ensure that the Foundation Council carries out its functions appropriately
The Foundation Charter is a public document which can be tailor-made to the wishes of the Founder, as long as it is drafted in accordance with the Foundations Law. A Charter must stipulate its name, the Foundation object(s), a description of the initial capital, the duration of the Foundation (in perpetuity or for a specified period of time), and a declaration by the Founder requesting the Council to comply with the terms of the Charter.
The Foundation By-Laws, although not strictly mandatory, are often used as the forum to provide more detail relating to the appointment and removal of the Council and Guardian, as well as what should happen to the assets if the Foundation is wound up.
Avoiding disputes and conflicts
It is important to respect Sharia principles when setting up the foundation. While the DIFC courts will have sole jurisdiction over the foundation and its assets once in the foundation, Article 361 of the Personal Status Law provides the local courts with the power to consider the original payment into the foundation void and can claw back the funds.
How to register your DIFC Foundation
The place of registration must be the DIFC, a physical presence in the DIFC is a prerequisite, either by the foundation itself or through a Registered Agent, which can be provided by The Equiom Group.
How can Equiom assist?
We aim to give you more control over your assets today, and more confidence about your holdings tomorrow – helping to safeguard your business, family, employees, or favoured charities for years to come.
Equiom Group can provide DIFC Foundation Registered Agent services, can act as Foundation Council or Guardian to your structure.
This marketing material is distributed by Equiom (Isle of Man) Limited (DIFC Branch), which is regulated by the DFSA. It is intended only for Professional Clients or Market Counterparties, as defined by the DFSA, and no other Person should act upon it. For information on the regulatory status of our companies, please visit www.equiomgroup.com/regulatory.