Succession Series - Setting the right Foundations

11 March 2024

Chris Mourant, Associate Director in Private Client discusses the transformative role of the Dubai International Finance Centre (DIFC) and the Abu Dhabi Global Market (ADGM) in shaping the Middle East's financial landscape. As at January 2024, the total number of foundations established in the UAE was 1,000, which is continually rising. The raft of legislative changes within the UAE will not only boost the economy but further provide a clear solution for issues encountered by families considering succession planning.

In the dynamic landscape of the Middle East's financial sector, the Dubai International Finance Centre (DIFC) and the Abu Dhabi Global Market (ADGM) have played pivotal roles in propelling economic and financial growth.

Originally established to foster regional development, they have both now evolved and developed into independent offshore jurisdictions with their own laws and legislation. More recently, there has been a strategic shift in focus with both the DIFC and ADGM aiming to attract foreign investment. They have also set about improving the skillsets and experience of their workforce in order to encourage retention of wealth within the region, rather than it being invested or managed in/by a competitor finance centre. Subsequently, we have seen a raft of legislative changes within the UAE which further aim to enhance the region’s reputation while also boosting the UAE economy. Many draft laws and legislative amendments were established during the “Year of the 50^th” and are intended to keep pace with the developmental achievements of the UAE and reflect the country’s future aspirations. Over 40 laws were implemented, which together represent the largest legal reform in the young nation’s 53-year history, all with the aim of enhancing the openness of the UAE's business climate in a way that supports the competitiveness of the national economy.

This article delves into the significance of these legal frameworks, especially in the context of succession planning, examining how they address longstanding challenges and contribute to the broader economic vision of the United Arab Emirates.

Facilitating Local Asset Structuring: The Introduction of Foundations Legislation

The DIFC and ADGM recognised that, whilst the vast majority of family wealth was held in immovable assets within the Middle East, a portion of wealth was invested internationally and often structured in an offshore jurisdiction such as Jersey, BVI or Cayman Islands. There was also restrictive legislation and red tape that prevented families from being able to structure their local assets using offshore vehicles administered by their existing service providers (often Trust Companies) which resulted in them being forced to own assets in their own name or that of several family members.

Having identified a potential succession issue, the DIFC and ADGM (and later RAK International Corporate Centre) introduced foundations legislation in 2017/18* in order to provide families with a mechanism to be able to properly structure their local assets whilst at the same time, promoting themselves as credible and world class finance centres which cater to family offices. The introduction of such legislation opened the door for existing service providers in the more mature offshore finance centres to begin to assist families with their local structuring requirements and succession planning needs.

Legislative Milestones: Family Business Law and Beyond

Subsequent to the introduction of foundations legislation, The UAE has since enacted the Family Business Law which comes as part of the UAE’s efforts to support family businesses as they have been identified as being of strategic importance to the future economic transformation of the UAE.

A number of initiatives were launched to develop the family business industry, most notably the FB-X family business platform and the ‘Thabat’ programme which aims to turn 200 family-owned businesses into major companies by 2030, with a market value of over Dh150 billion and annual revenues exceeding Dh18 billion. The programme, the first such initiative in the region, supports companies through a five-month programme where they look at how ideas can be transformed into viable business projects by adopting emerging technologies. The first phase of the programme has been a great success, creating new and sustainable business visions for many families, driving the expansion of their businesses into new economic activities and sectors. The second phase of the programme, ‘Thabat 2.0’ has officially launched. H.E. Abdulaziz Al Nuaimi underlined the Ministry’s new vision for 2023-2026, which includes expanding the scope of ‘Thabat’ and as part of these changes, financing opportunities will be offered to family businesses that complete the program to support their business growth. In addition, participation will also be open for family businesses from overseas to develop projects and products in order to enter the UAE market.

UAE Foundation as a Viable Solution

With an increased focus on family businesses it is imperative that these families have access to high quality succession planning advice and they each put plans in place to ensure a smooth passing of assets to future. One of the key objectives when creating a successful succession plan is to ensure that the correct structures are used, which are legally enforceable. The UAE foundation can be a viable solution which not only helps meet family objectives, but also goes some way to remedying a long-standing issue of having to relinquish ownership and control of assets to a Trustee when establishing a Trust.

Benefits of a UAE foundation:

• The foundation itself can be structured in a Shariah compliant manner to ensure compatibility with religious views.
• The founder can retain control over the assets whilst taking advantage of the benefits of having professional Trustees appointed as part of the day-to-day management of the foundation.
• Such professionals can assist families with overall strategy, corporate governance and regulatory aspects that may be required as part of the ownership structure.
• Family members can be appointed as beneficiaries and can also be appointed as council members who make key strategic management decisions.
• Any assets that are owned by the foundation no longer form part of the founder’s estate when he/she passes away, which allows the family business to function without any delays or interference of the courts whilst they determine the succession of the personal estate.

The Rise of Foundations

Interestingly, as at January 2024, the total number of foundations established in the UAE was 1,000. To put this into context, Jersey enacted foundations legislation back in 2009 and only has approximately 216 active foundations. This shows that there has been a real in demand for this type of structure in the region, as well as advisors promoting such structures which can be used to meet a breadth of family objectives.  

It is common that many large high net worth families already have an existing relationship with an offshore service provider. The structure that has already been established is likely to contain assets located in foreign jurisdictions i.e. those assets that are based outside of the UAE. It is expected that the legislative changes will go some way to not only encourage families to begin thinking about legacy planning but also providing a clear solution for some of the inherent issues encountered historically.

Fairway’s Holistic Approach

Fairway is a truly independent, owner-managed fiduciary group that provides a director led approach. We can relate to families looking at legacy planning and recognise that, although the UAE foundation may be the starting point for any structuring requirements, there may be a need to establish a family office arrangement in order to provide a truly holistic approach to family wealth structuring. It is only when we begin to talk to high net worth families that we can establish their overall approach to risk and asset allocation, as well as how the family dynamics will play a prominent role in any structuring discussions.

One can argue that the UAE government has provided the foundations (excuse the pun) to provide all the necessary ingredients for families to be able to access advisors who can assist with establishing the best structure that meets the needs of the family. There is at present no requirement for service providers to have a physical presence in the UAE to be able to act as council members of the foundation, although there is a requirement for a registered agent to be located in the region. This very much provides the family access to existing overseas advisors whilst knowing that the legal structure is incorporated and managed under domestic legislation.

Fairway believes that the upward trend of foundations being established in the UAE will continue and that the differentiating factor will be the experience that professional service providers can provide. Good corporate governance will be imperative to ensure that the foundation continues to comply with local and international regulation and reporting requirements and there would appear to be no greater opportunity for Middle Eastern families to access professionals based in a well-established finance centre such as Jersey.

For further information on how Fairway can assist with the establishment and ongoing management of UAE foundations, please don’t hesitate to contact a member of the team.

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*https://en.adgm.thomsonreuters.com/rulebook/foundations-regulations-2017

https://www.difc.ae/business/laws-and-regulations/legal-database/difc-laws/foundations-law-difc-law-no-3-2018