Can Foundations and Trust Structures own Real Property in Dubai?
Rea Estate & Construction / UAE
The United Arab Emirates (“UAE”) real estate market, and especially Dubai has long been the hotspot of investment opportunity, attracting investors from all around the globe with its dynamic growth and lucrative nature.
Law Update: Issue 370 - From Africa to Asia: Legal Narratives of Change and Continuity
Mohammed KawasmiPartner,Real Estate & Construction
Izabella SzadkowskaPartner,Corporate Structuring
Ena TahricTrainee Solicitor,Real Estate & Construction
The United Arab Emirates (“UAE”) real estate market, and especially Dubai has long been the hotspot of investment opportunity, attracting investors from all around the globe with its dynamic growth and lucrative nature. As the market evolves, so does the legal framework. Foundations and trusts are becoming increasingly significant in the sphere of real estate ownership, offering more structuring options. They act like vehicles that can be used for holding real property in Dubai, often seen in structuring family assets, real estate funds and large investment companies. Also, there continues to be an appetite for real estate ownership through a company.
What is available and how would authorities approach those different solutions as ownership structures for Dubai real property? We share some key considerations next page.
A foundation is a separate legal entity. While it cannot engage in commercial activities, it can hold assets. It is created by a founder who transfers assets to the foundation and sets out its objectives and governance in a charter and by-laws. The founder is not the owner but rather the initiator of the foundation. A foundation can have beneficiaries or be established for charitable or non-charitable purposes. It is governed by a council and may have a guardian to oversee its operation. Foundations are typically used to assist the multi-generational family with asset protection, high net worth individuals and families with geographically diverse assets, individuals or families that possess philanthropic goals or companies or family offices wishing to restructure.
Foundations that can hold real property in Dubai are available in the Dubai International Financial Centre (“DIFC”) and the Abu Dhabi Global Market (“ADGM”). Each free zone has its own regulations and requirements for establishing and operating foundations, so legal advice is recommended before choosing a jurisdiction.
A foundation is an attractive vehicle to own the real estate through as details of the founder(s), council members or the guardian remain confidential (i.e. those are not referenced under the public register of the DIFC or the ADGM). Also, if a claim is made against the founder(s), no court order enforcement or execution could take place against the assets of the foundation as the assets of the foundation are separate from the assets owned by the founder.
Interestingly, under the UAE Corporate Tax Law No. 47 of 2022, which imposes a corporate tax rate of 0% up to AED 375,000 and 9% above that on taxable entities in the UAE, foundations can benefit from a less tax burdensome treatment. Specifically, family foundations that meet certain conditions (e.g. having only family members as beneficiaries and not engaging in commercial activities) can be considered “tax transparent”. As such, some foundations can benefit from a tax-free status, as far as the corporate income tax is concerned.
Due to numerous advantages, a DIFC or an ADGM foundation seems like an excellent vehicle for Dubai real estate ownership.
Unlike a foundation, a trust is not a legal entity but a legal relationship between a settlor, a trustee, and a beneficiary. The trustee holds formal ownership and controls assets, while the beneficiary is the beneficial owner of the trust assets and entitled to benefits. A trust is established by a settlor who transfers assets to the trustee under a written trust document. A trust can be created for family or philanthropic purposes.
Trust structures are also available in the DIFC and ADGM, as well as in some other offshore jurisdictions. For example, DIFC laws allow trust structures to be the basis for company and asset holding arrangements similar to those available in other common law jurisdictions such as the UK, Cayman, BVI and Jersey.
The key advantage of the trust structure is the confidentiality of the settlor and the beneficiaries and their entitlements under the structure. While the details of the legal title owner (the trustee) are registered with authorities, the trust arrangement is recorded under private documents.
Despite their numerous advantages, trust arrangements are not recognized by Gulf Cooperation Council (“GCC”) legal systems for direct legal ownership of assets. It follows, parties to a trust arrangement may face certain practical challenges in holding real property in Dubai.
Finally, real property in Dubai can be held by an ADGM SPV or a DIFC prescribed company (“DIFC PC”).
ADGM SPVs are entities formed for structuring reasons. They shouldn’t conduct actual business operations, cannot have employees and can only be formed if the incorporating parties can prove “nexus” to the UAE – economic substance and link to the jurisdiction. They can be formed rather swiftly, would use a registered address in ADGM of an ADGM-licensed corporate service provider (“CSP”), and would need to appoint the CSP. The initial and annual license fee for an ADGM SPV is only USD 1,900 per year.
Recognizing the business community and family enterprises’ need for a flexible and cost-efficient entity type, on 15th July this year the DIFC introduced a revamped Prescribed Company (“PC”) regime under amended PC Regulations 2024 (“PC Regulations”). Under the PC Regulations, any party who intends to hold title to, or control, one or more GCC registrable assets, i.e. assets or property interests that must be registered with a GCC authority to establish legal ownership, secure rights, or claims against it, and to provide public notice (e.g. a share certificate, commercial license, title deed, etc.) of such interests can form a PC.
Specifically, the PC can be formed to own real estate assets in Dubai, even before the party acquires that real estate. The DIFC grant a six-month grace period from the PC formation till the shareholder(s) of the PC present to the DIFC a document indicating that the PC has acquired the asset. The PC can be formed promptly, would use a registered address in the DIFC of a DIFC-licensed CSP. A PC shouldn’t conduct actual business operations, and won’t have employees. The initial and annual license fee for the PC is only USD 1,100 per year.
The Dubai Land Department (“DLD”) has approved the use of foundations for holding real property and entered into a Memorandum of Understanding (“MoU”) with the DIFC, the framework of which allows DIFC-based entities, including foundations, to purchase and register properties with the DLD. This MoU simplifies the land ownership registration process and supports institutional investment in Dubai's real estate sector.
Further, trust vehicles underpinned by trust structures, ADGM SPVs and DIFC PCs can hold real property in Dubai, either directly or indirectly.
Since foundations have their own legal personality, they can own assets legally and beneficially, while trusts are legal relationships where the trustee is the formal owner of the assets. Although foundations are an established feature of the European civil law systems, and trusts are established mechanisms in common law jurisdictions, they are alien to the GCC legal systems. It follows, authorities who administer license and asset registrations across the GCC are rarely familiar with those solutions.
This is where an ADGM SPV or the DIFC PC come in. These are companies limited by shares/ corporate forms that have shareholders, a board of directors, and a standard suite of corporate documents that could be presented to the DLD or other authorities in the UAE, and would be easily understood.
In line with UAE law developments concerning transparency and disclosure to authorities on respect of ultimate beneficial owners (“UBOs”), before the DLD approve acquisition of Dubai property by a vehicle, i.e. foundation, trust or a company, they’ll ask about the UBOs falling under the proposed future legal owner of the property.
Foundations are required to disclose the foundation’s founder's name and nationality. .
Since trusts are contractual agreements (rather than entities), they cannot hold real estate assets in Dubai themselves. However, they can do so through a corporate structure whereby one or two companies are formed to hold the real estate assets in Dubai, under the trust arrangement. This structure allows the trustee to hold shares in a company, which in turn owns the property, thus providing indirect means of property ownership through such company. The DLD requires disclosure of the UBOs of a trust before allowing for the ownership of property under the trust arrangement.
Finally, in respect of the ADGM SPVs and the DIFC PCs, details of their shareholders would need to be disclosed to the DLD, to satisfy the UBOs-related requirements.
Finally, should any changes take place to the founders of the foundation, trust arrangement or the shareholding of the ADGM SPV or the DIFC PC, those would be treated as an indirect change to the ownership of the respective vehicle. As a result, those indirect UBO changes will trigger DLD charges that apply to property transfers.
Foundations, trusts and companies such as the ADGM SPVs or DIFC PCs can be used to hold real property in Dubai. Those solutions offering advantages such as asset protection, making benefits arising out of the property available to numerous parties, assisting in succession planning solutions, while offering operational flexibility.
While each of those solutions is attractive, each differs. The foundation one would mean the founder does not own the asset but controls it (e.g. via the council membership or as a guardian) and can benefit from it (as a beneficiary). Under the trust structure, the trustee will hold the property, and the beneficiaries will derive commercial benefits. And under the company solution the shareholders will own the property and derive benefits from it.
As the recent introduction by the DIFC of the real estate – focused PCs regime suggests, Dubai’s regulatory landscape continues to evolve. Therefore, it is crucial for investors to consider the various solutions available, stay informed about the ongoing changes to the legal framework and above all seek professional advice to make sure the Dubai property ownership has been structured and implemented in the manner that addresses their needs, comprehensively. In the end, by leveraging the unique advantages offered by these solutions, investors can optimize their real estate investments and achieve their long-term goals, efficiently.
For further information,please contact Mohammed Kawasmi and Izabella Szadkowska.
Published in September 2024
