The Dubai International Financial Centre (DIFC Free Zone) is a leading financial hub in the Middle East, Africa, and South Asia (MEASA) region. It is one of the top financial centres in Dubai. The DIFC is home to 5,523 active registered firms and employs around 40,000 professionals. DIFC also offers an independent judicial system, a global financial exchange, and various support services.
In 2018, the DIFC Foundations Law introduced DIFC Foundations, which represent a significant addition to the centre’s legal framework. These foundations serve as a common law alternative to trusts, providing a familiar legal structure within the Gulf Cooperation Council (GCC) region.
In this guide, we will learn about DIFC Foundations, DIFC foundation Set Up process, their legal framework, various structures, and wealth distribution mechanisms. So, let’s start by understanding what a DIFC Foundation is.
What are DIFC Foundations?
A DIFC Foundation is a distinct legal entity, separate from its founder, designed to hold and manage assets for various purposes. Usually, a company is driven by shareholders’ interests, such as profit. However, a foundation is focused on its objects, which define its purpose(s) and may identify specific beneficiaries. These objects, along with the founder’s wishes, serve as a guiding constitution for a foundation.
When compared to trusts and companies, DIFC Foundations offer unique advantages. Unlike trusts, foundations have their own legal personality, allowing them to enter into contracts and hold property directly. This distinct feature provides greater flexibility and protection compared to the trustee-beneficiary relationship in trusts.
On the other hand, while similar to companies in having a separate legal personality, foundations differ in their purpose-driven nature. They do not engage in commercial activities beyond those directly supporting their stated objectives.
Legal Framework of DIFC Foundations
The DIFC Foundations Law of 2018 provides the primary legal framework. This framework governs the establishment, operation, and dissolution of foundations within the DIFC. It outlines:
- The requirements for creating a foundation
- The rights and obligations of involved parties
- The rules for asset management and distribution
One of the key strengths of the DIFC legal framework is the role of the DIFC Courts. These courts operate as an independent English language common law judiciary with jurisdiction over civil and commercial disputes. The common law principles provide a familiar and reliable legal environment for international investors and businesses.
Key legal features of DIFC Foundations include:
1. Legal Personality
A foundation is a distinct legal entity capable of suing and being sued in its own name.
2. Asset Ownership
Foundations can own and manage assets in their own right, offering a clear separation from the personal assets of the founder.
3. Perpetual Existence
Unless specified otherwise, a foundation can exist indefinitely, which is ideal for long-term planning and the protection of assets.
4. Flexible Governance
Foundations can have customised governance structures by setting up a charter and by-laws.
5. Confidentiality
Foundations enjoy a high degree of privacy for founders and beneficiaries. However, there are still requirements to maintain confidentiality and transparency with relevant authorities.
Structure and Governance of DIFC Foundations
The governance structure of a DIFC Foundation involves several key parties, each with specific roles and responsibilities:
Founder
A founder is an individual or entity that establishes the foundation and contributes assets in the beginning. The founder typically retains certain powers as specified in the foundation’s charter and by-laws.
Council Members
Similar to company directors, council members govern the foundation’s operations and administration in accordance with its charter and by-laws. The council may include the founder and corporate bodies, which can be professional service providers who manage the foundation.
Guardian
It is an optional role if the foundation has a charitable object or a specified non-charitable object. The role becomes mandatory, especially after the founder’s death. The guardian supervises the foundation’s operation and the council to make sure that the foundation operates as per the founder’s wishes.
Beneficiaries
Beneficiaries are individuals or entities who will eventually benefit from the assets held by the foundation. As per the DIFC Law, the founder can be a beneficiary or even the sole beneficiary.
Foundation Charter
The Foundation Charter serves as the primary constitutional document that contains various provisions. These provisions decide how to govern the organisation, and assets and also highlight the purpose of the foundation. The Charter must include specific information such as the foundation’s name, the founder’s details, the foundation’s objects, and the composition of the council.
By-Laws
The By-laws are an extension of the Foundation Charter. They provide more detailed rules for the foundation’s administration and operation. They may include provisions for appointing and removing council members, decision-making processes, and rules for distributing assets to beneficiaries.
Asset Protection and Management
One of the best advantages of DIFC Foundations is that they have a solid framework for asset protection. The foundation establishes a legal separation between the founder’s personal assets and those held by the foundation.
This structure protects the assets against potential claims from creditors, family members, or other parties who might otherwise have claims against the founder’s personal assets.
DIFC Foundations can hold a wide variety of assets, including:
- Shares in companies (both operating and non-operating)
- Investments in listed stocks, bonds, and commodities
- Real estate
- Intellectual property rights
- Bank accounts
- Aviation assets
Notably, DIFC Foundations are permitted to own real estate in designated areas of Dubai that are open to foreign ownership. A memorandum of understanding exists between DIFC and the Dubai Land Department regarding the provision of this facility. In fact, in some cases, the property transfer fee is reduced from 4% to 0.125%. However, you must demonstrate that the beneficial owner remains the same.
Wealth Distribution Mechanisms
The distribution of a foundation’s wealth is mainly dictated by its charter and by-laws. These documents can determine how the wealth distribution will take place:
Default Recipient
A default recipient is an entity or individual who receives any unallocated assets upon the foundation’s termination.
Qualified Recipient
A qualified recipient is the beneficiary who has a legal claim to a (already decided) share of the foundation’s wealth upon dissolution, as specified in the by-laws.
Beyond these default categories, founders have the flexibility to establish more distribution models. For instance, they can:
- Designate additional beneficiaries other than the default and qualified categories
- Mention the precise distribution ratios for different beneficiaries to ensure a non-equal distribution as per their wishes
- Set conditions or milestones for distributions
Letters of Wishes provide an additional, non-binding tool for founders to express their desires regarding the distribution and future management of the foundation’s wealth. These letters can provide guidance to the council while making crucial decisions to ensure they are aligned with the founder’s intentions. However, the Letters of Wishes are not legally enforceable.
Succession Planning and Generational Wealth Transfer
DIFC Foundations are also used as vehicles for succession planning and smooth generational wealth transfers. Foundations accumulate assets under a single structure. This simplifies the process of wealth management and transfer in various scenarios, including the founder’s incapacity or death.
Privacy is another crucial aspect of succession planning through foundations. They differ from wills, which become public documents upon probate. The details of a foundation’s assets and beneficiaries remain confidential. This privacy can help prevent potential family disputes and protect beneficiaries from unwanted attention.
Tax Considerations
The DIFC offers a tax-friendly environment, and foundations established within its jurisdiction also enjoy the same. Currently, there is no corporate tax on qualifying activities, income tax, or capital gains tax in the DIFC.
For families with international assets and beneficiaries, DIFC Foundations can play a crucial role in minimising global tax exposures. DIFC Foundations allow you to centralise the ownership of assets in a tax-neutral jurisdiction. By doing so, they significantly lower the burden of inheritance taxes and also reduce the complexities of cross-border asset transfers.
It is worth noting that DIFC Foundations are excluded from the UAE’s Economic Substance Regulations. These regulations were introduced in 2019 as part of the UAE’s commitment to the OECD Inclusive Framework. However, foundations do not have such requirements, which simplify their compliance requirements.
Commercial Applications of DIFC Foundations
Beyond personal wealth management, DIFC Foundations have several commercial applications:
1. Complex Commercial Transactions:
Foundations can act as neutral and purpose-driven vehicles in multi-party commercial arrangements.
2. Securitisation Structures:
Foundations can act as special purpose vehicles in securitisation transactions, holding assets, and issuing securities.
3. Long-term Business Holding:
Foundations can own and manage businesses for an extended period of time, ensuring the continuity of management and ownership.
4. Anti-Hostile Takeover Mechanism:
Foundations have a controlling stake in a company with specific objects. This feature makes it quite challenging for external parties to acquire control of the company against the wishes of the founding family or management.
Charitable and Philanthropic Uses
DIFC Foundations are also well-suited for charitable and philanthropic activities. You can structure them to support different causes while complying with UAE laws applicable to charitable activities.
A foundation set up for philanthropy can:
- Hold and manage charitable endowments
- Provide a structured framework for ongoing philanthropic work
- Separate the management of charitable assets from personal or family assets
- Offer tax-efficient donations to international donors
It’s important to note that foundations engaged in charitable activities must comply with all applicable UAE laws. These laws also include those that are related to anti-money laundering and countering the financing of terrorism.
DIFC Foundation Set Up Process
Establishing a DIFC Foundation is a structured process that requires careful planning and execution. Here is a detailed breakdown of each step:
1. Preparation of Documents
This first step is very crucial and involves gathering Know Your Customer (KYC) information for all key parties involved in the foundation:
- Founder(s): Detailed personal information, proof of identity, proof of address, and documentation of source of funds
- Council Members: Similar KYC information as the founder, plus professional qualifications and background checks
- Guardian (if applicable): KYC information, qualifications, and any relevant experience in overseeing similar structures
Additionally, you’ll need to prepare:
- A detailed description of the foundation’s purpose and objectives
- An outline of the proposed asset structure
- Any relevant corporate documents if the founder is a corporate entity
2. Drafting Legal Documents
This step involves creating two key documents:
a) Foundation Charter:
- Name of the Foundation (must end with ‘Foundation’)
- Name and address of the Founder(s)
- Objects of the Foundation
- Description of the initial assets
- Details of the Council establishment
- Name of the Qualified Person who shall become a Beneficiary (if applicable)
- Registered Agent details (if any)
- Registered office address in the DIFC
- Term of the Foundation or details of any dissolution event
b) Foundation By-laws:
- Procedures for appointing and removing Council Members
- Decision-making processes for the Council
- Details on the appointment and role of the Guardian (if any)
- Rules for distributing assets to beneficiaries
- Any reserved powers for the Founder
These documents should be tailored to the specific needs and objectives of the founder. Hiring someone with legal expertise is recommended to ensure compliance with DIFC regulations without straying from the founder’s intentions.
3. Securing a Registered Address
Every DIFC Foundation must have a registered office within the DIFC. You can:
- Lease an office space directly in the DIFC
- Share office space with an affiliated entity already established in the DIFC
- Appoint a Registered Agent who provides a registered address service
This step majorly depends on whether the foundation requires a physical presence and staff in the DIFC.
4. Submission to DIFC Registrar
Once all the documents are ready, you can submit the application to the DIFC Registrar of Companies. The submission documents typically include:
- Completed application form
- Foundation Charter and By-laws
- KYC documents for all relevant parties
- Proof of payment of the registration fee (starts from AED 735 for the first year and may go up to AED 1800 in the following years)
5. Review and Final Approval
The DIFC Registrar comprehensively reviews the application. The Registrar may request additional information or clarifications during this stage. Prompt and detailed responses can help speed up the process.
Upon satisfactory completion of the review process, the DIFC Registrar of Companies issues final approval.
6. Post-Formation Steps
After the official formation of a DIFC Foundation, several additional steps may be necessary, such as:
- Opening bank accounts
- Applying for visas (if applicable)
- Setting up accounting and other corporate processes to ensure ongoing compliance with DIFC regulations
A Registered Agent can play an invaluable role throughout this process. As a “Qualified Person” licensed by the DIFC and registered with the DFSA, a Registered Agent can:
- Guide you through the entire setup process
- Provide a registered address service
- Assist with ongoing administration and compliance
- Act as a liaison with DIFC authorities
- Provide nominee Council Members or Guardians if required
Avyanco can assist you through each step to make the entire process smoother for you. Our expert advisors can help you customise the foundation structure to ensure it serves the intended purpose while staying in compliance with DIFC laws and regulations.
Operational Considerations
Once your DIFC Foundation is established, several operational aspects require ongoing attention. Just like any other legal entity, a DIFC Foundation is subject to the following operational requirements:
- Maintaining accurate financial records and minutes of Council meetings
- Annual return filing with the DIFC Registrar
- Ensuring ongoing compliance with AML regulations
- Notifying the DIFC Registrar of any significant changes to the Foundation’s structure or governance
If you carefully take care of these operational requirements, you can ensure the seamless operation of your DIFC Foundation. If you engage a Registered Agent, they also ensure full compliance with DIFC regulations so you can focus on achieving your wealth management and distribution objectives.
DIFC Foundations Benefits
DIFC Foundations offer numerous advantages:
Asset Protection
They offer a clear separation of foundation assets from the founder’s personal wealth. In this manner, no creditor or family member can assert a claim on the foundation’s assets.
Privacy and Confidentiality
Foundations offer limited public disclosure requirements to protect the privacy of founders and beneficiaries.
Flexibility
Foundations offer high flexibility with customizable governance structures and distribution mechanisms.
International Recognition
The DIFC’s reputation as a leading financial centre across the globe provides more credibility to its legal structures.
Legal Certainty
The application of common law principles and the presence of the DIFC Courts provide a reliable legal framework.
Comparison with Other Jurisdictions
While many jurisdictions offer foundation structures, DIFC Foundations have several unique features:
Common Law Framework
Unlike many civil law jurisdictions, the DIFC operates under common law principles. This provides a sense of familiarity for international clients.
Strong Courts System
The DIFC Courts offer a sophisticated dispute resolution mechanism.
Flexibility
DIFC Foundations offer greater flexibility in terms of governance and asset management compared to some other jurisdictions.
Geographic Advantage
The DIFC’s location makes it an ideal hub for managing assets across Europe, Asia, and Africa.
Case Studies and Practical Examples
While respecting confidentiality, here are some anonymized examples of how DIFC Foundations have been used:
- Family Business Succession: A family-owned conglomerate used a DIFC Foundation to hold controlling shares of various group companies. This enabled them to make a smooth transition across generations while maintaining the founder’s vision.
- Global Philanthropy: An international businessman established a DIFC Foundation to manage his worldwide charitable activities. This provided him with various benefits due to the DIFC’s tax-efficient structure and robust governance framework.
- Asset Protection: A high-net-worth individual facing potential litigation in their home country transferred significant assets to a DIFC Foundation, protecting them from potential claims.
Avyanco Business Consultancy LLC – Our DIFC Foundation Services
DIFC Foundations continue to gain popularity for wealth distribution and succession planning. To take advantage of this structure, Avyanco Business Consultancy is here to help you out. We offer a suite of business setup services in Dubai, UAE to assist you with setting up and managing your DIFC Foundation.
Our services related to foundations include:
- Strategic Planning
- Foundation Setup
- Customised Legal Drafting
- Ongoing Administration
- Compliance Support
- Council Member and Guardian Services
Our DIFC Foundation experts have a deep understanding of the DIFC legal framework and years of experience in wealth structuring. Hence, Avyanco is ideally suited to guide clients who are looking to protect family assets, plan for succession, or structure philanthropic activities.
Our team is ready to provide the expertise and support you need to achieve your goals. Connect with us today at: Phone: +971 4240 5000 or WhatsApp: +971 50 398 9000 Email: info@avyanco.com
