Introduction
Trusts and foundations in DIFC are mainly looked after by high net worth individuals for wealth planning purposes.
The Dubai International Financial Centre (DIFC) is a free zone located in the Middle of Dubai with its own laws, regulations and tribunals. It follows the common law legal system under the highest regulation standards.
It is the authority leader in the UAE when addressing trusts and foundations in the UAE, common law tools more than civil solutions when discussing wealth management and succession planning.
The purpose of this publication is to cover these two DIFC tools.
What is a Trust?
A trust is an arrangement where the settlor or grantor transfers assets to a trustee (can be a person or an institution) to hold and mange for the benefit of the beneficiaries (one or more individuals or organizations).
The Trustee has a fiduciary duty to manage the assets in accordance with the terms of the trust deed in the best interest of the beneficiaries.
There are number of types of trusts such as:
Revocable/Irrevocable Trusts: depending on whether or not the settlor keeps the right to modify or revoke the trust during the lifetime of the Settlor.
Discretionary/Fixed Trusts: depending on the flexibility to distribute assets among beneficiaries.
In the DIFC trusts are governed by DIFC Law No. 4 of 2018 (also known as “DIFC Trust Law”, repealing and replacing DIFC Law No. 11 of 2005.
What are Foundations in DIFC?
Foundations in DIFC is a legal entity established by a founder/s to hold and manage assets for a specific purpose (i.e. philatropic, charitable or private wealth management objectives)
This is the first difference with trusts. Where trusts are not separate legal entities, foundations are, which allows foundations to own their own assets and enter into contract in their own name.
These legal entities known as foundations are managed by a board of directors or council. Their members are responsible (as the Trustee is, executive members are resonposible for overseeing the activities and ensuring their objectives are pursued.
Like trusts, there are different types of trusts:
- Corporate Foundations usually set up by large corporation to manage CSR initiatives.
- Charitable Foundations: in support of charitable causes and organizations.
- Private Foundations: set up for the benefit of individuals for wealth management, succession planning and philanthropy.
In the DIFC foundations are regulated under DIFC Law No. 3 of 2018, as amended by DIFC Law No. 8 of 2018 and DIFC Law No. 2/2022.
Since its inception in 2018, foundations have become extremely popular in the UAE:
- They can directly own Dubai real estate properties;
- It is a suitable instrument for effective succession planning, as well as for the preservation of family assets for generations;
- Avoids the potential costs and delays associated with distributing wealth through testamentary provisions;
- It enables the consolidation of Family Heritage under a single structure that will facilitate its transmission upon the death of the founder;
- Offers the founder operational control over the Family Assets;
- It is an effective instrument for international tax planning;
- It is suitable for the implementation of a holding company as well as an instrument to safeguard business inheritance cases;
- It allows the discreet realization of the founder’s wishes in an increasingly transparent environment;
- Mitigates risks arising from changing political and economic circumstances
Who is Who in a Foundation in the DIFC
The founder may retain a high degree of control over the foundation’s assets, for example through voting powers or in an advisory capacity. It is also noted that under the DIFC Foundation Law, the founder may also reserve the right to change the articles of incorporation and by-laws or terminate the foundation.
The council is usually the sole governing body of the DIFC foundation. It must consist of at least two members.
A guardian can also be appointed to oversee the implementation of the foundation’s purpose without exerting direct influence on the administration. An entity could also act as a guardian of the DIFC foundation.
It is noted that a member of the council cannot also be the guardian of the foundation. All DIFC foundations must have a physical presence in the DIFC, either through a registered agent or directly.
The founder can designate himself, his family and dependents or associates as beneficiaries in the statutes without expressly revealing their names. A legal entity can also be designated as a beneficiary.
The beneficiaries will have rights over the assets of the foundation only in the manner provided for in the statutes or articles of incorporation.
Conclusion to Trusts and Foundations in DIFC
In summary, trusts and foundations in DIFC are both legal structures designed to hold and manage assets for specific purposes, but they have distinct characteristics and purposes. Trusts involve the transfer of assets to a trustee for the benefit of beneficiaries, while foundations are separate legal entities established to fulfill specific objectives, such as charitable or private wealth management goals.
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We hope this publication will help you understand the concept of Trusts and Foundations in the UAE and remain available for any questions regarding this post of general application.
For more information published in English you can visit all our publications at this link as well as the videos in English of our Partner Maria Rubert.
*The information on this page is not intended to be legal advice. This article is intended to provide an initial introduction to the concept trusts and foundations in the UAE.