Foundations for the Future -
Structuring Your Family Business and Holding Real Estate
Real Estate & Construction and Hotels & Leisure
In advanced financial economies (particularly in the West), Foundations tend to be considered as a relatively new phenomenon - used either for running charities or as the ‘new kid on the block’ challenger to trusts for holding private wealth.
Law Update: Issue 369 - Real Estate & Construction and Hotels & Leisure
Richard CatlingPartner,Corporate Commercial
Stuart Pryke Senior Counsel (Consultant),Corporate Commercial
Lynsey GrossiSenior Associate,Real Estate
In advanced financial economies (particularly in the West), Foundations tend to be considered as a relatively new phenomenon - used either for running charities or as the ‘new kid on the block’ challenger to trusts for holding private wealth. In reality, the genesis of Foundations dates back many centuries and there is credible academic argument that modern Foundations could also have been substantially influenced by the early Islamic concept of a waqf.
The modern concept of a private Foundation could perhaps best be described as a private limited liability company, but without shareholders. In other words, it is a corporation with its own legal personality which needs to be registered (in most jurisdictions with the same regulatory body that registers companies) in order to exist.
Where a Foundation differs substantially from a company is that, instead of having shareholders and much like a trust, it can have beneficiaries, or it can be established for charitable objectives, (and in some jurisdictions – for non-charitable objectives too).
With the benefit of independent legal personality, Foundations are well suited to offer practical and flexible structures for a multitude of purposes including private wealth management and preservation, succession planning, tax planning, charitable objectives, asset protection, corporate structuring and creditor protection.
In the UAE at least, Foundations are not generally used as trading or commercial vehicles. However, it is not uncommon in the UAE for a Foundation to be established as a holding structure with an underlying company which is used for commercial purposes in line with the objectives of the Founder.
Foundations are generally created to carry out the objectives of the Founder (who may be an individual or corporate body). Upon establishment of the Foundation by registration, assets held by the Founder are transferred to the Foundation and the legal title to such assets along with it. Unique to Foundations is the fact that they are almost always established as a self-owned entity or ‘orphan structure’ and therefore have no shareholders or members. Importantly this allows the Foundation to hold assets exclusively in its own name - either on behalf of the Beneficiaries or for various purposes (often charitable), separating the assets placed in the Foundation from the Founder themselves and from the Founder’s estate upon their death.
Foundations are governed by their constitutional documents – namely their Charter and By-Laws. Whilst the Charter is publicly available, the By-Laws are strictly private. Legal rights can be drafted into the By-Laws to preserve oversight and control in favour of the Founder if so desired. Beyond this, Foundations are managed by a Council and may be supervised by a Guardian (if necessary or applicable).
Foundations are available in the following freezones of the United Arab Emirates (the “UAE”):
The Dubai International Financial Centre (the “DIFC”) pursuant to the Foundations Law DIFC Law No. 3 of 2018,
The Abu Dhabi Global Market (the “ADGM”) pursuant to the Foundations Regulations 2017; and
The RAK International Corporate Centre (the “RAK ICC”) pursuant to the RAK ICC Foundations Regulations 2019.
The legislative regimes of the above UAE freezones are, in broad terms, very similar. However, there are some differences between them and therefore legal advice is recommended in order to ensure that the Foundation is established in the UAE freezone which best suits the needs of the particular client.
Foundations are very flexible and can be used for a variety of purposes such as:
Family Succession Planning: Foundations are an excellent vehicle for intergenerational wealth planning (or ‘succession planning’ as it is often referred to). By placing property into a Foundation during a person’s life, it allows them to achieve much the same as can be done under a Will but with two distinct advantages. A Foundation can avoid issues with legal inheritance rights (often referred to as ‘forced heirship’) which may be much harder to achieve under a Will. It also allows the person setting up the Foundation (the ‘Founder’) to finesse the structure whilst they are still alive, so better ensuring that the Founder’s objectives are met after their death.
Business Growth: Because of the ability of Foundations to operate as a practical and robust family succession vehicle and because of the asset protection benefits, Foundations are excellent structures from which to foster family business growth and success. The fact that a well constituted Foundation can ensure that a business is successfully passed from one generation to the next, gives confidence to external parties dealing with the family, that the business will not only exist in the long run, but is more likely to prosper.
Holding Real Estate: Foundations can work very well for holding real estate (both commercial and residential). Not all emirates accept the use of Foundations for holding real estate, but in Abu Dhabi and Dubai in particular, the land registration authorities permit the use of Foundations for holding property. This can be particularly useful, in complex ownership situations involving multiple owners, with the inherent problem if one of the owners dies and their share then becomes vested in their heirs. It can also be useful where there is a desire for the property to be held for future generations beyond the original purchaser.
Holding of Investments: A Foundation offers a practical and suitable structure for the holding of investments, particularly where it concerns family interests. Investments can be held for individual family members in fixed shares, or they can be held in a discretionary portfolio controlled by the family member (or members) who contributed the assets to the Foundation. Depending on the nature of the investments and the specific circumstances of the family or business concerned, it is sometimes appropriate to hold the investments through a SPV which is directly owned by the Foundation.
Asset Protection: Where foundations hold assets - be it cash, investments, valuable objects or real estate (depending on the circumstances) for the benefit of designated beneficiaries (which can include the person contributing the assets to the Foundation), those beneficiaries have no right to these assets, unless this is specifically stated in the Foundation constitutional documents. Therefore, providing the constitutional documents are appropriately drafted, creditors of the Beneficiaries (be they creditors who are individuals, businesses or government bodies) are not able to gain access to the assets held by the Foundation to satisfy the Beneficiaries’ debts.
Charitable or Philanthropic Purposes: Foundations are an excellent vehicle through which to operate charities or carry out philanthropic or other ‘not for profit’ objectives. With appropriately drafted constitutional documents, they can provide a robust organisational regime suited to the task at hand; which can give assurance to stakeholders that the organisation will be properly run and that monies contributed to the Foundation will be protected and only applied to meet the stated objectives of the Foundation.
Non-charitable purposes and orphan bodies: Foundations can also be used to carry out non-charitable purposes. This means that the Foundation will have neither charitable objectives nor any beneficiaries. Such arrangements can be very useful in complex financial arrangements, when a robust well-governed structure is needed but there is also a need to avoid any economic interests in that structure. Examples are:- holding structures for the shares of corporate trustees or carrying out the function of a guardian or protector (a quasi-director type role) to trusts and foundations. They can also be used to provide the role of a corporate director to a company.
Foundations are created by the lodging of the appropriate constitutional documents and an application form with the registrar of companies in the relevant UAE freezone jurisdiction where the Foundation is being established. A Foundation is comprised of the following elements:
Founder: This is the person (or corporate entity) that actually establishes the Foundation and makes the initial contribution to the Foundation’s capital. Frequently, the Founder is the provider of the entire capital to the Foundation. The Founder can either have no rights of control over the Foundation once it is established or extensive rights, depending upon how the constitutional documents are drafted. The Founder can also be a beneficiary of the Foundation.
Council: The Council is very much akin to a board of directors of a company and is comprised of at least two members named by the Founder which can also include the Founder. Council members can be corporate entities or natural persons. The role of the Council is to act honestly and in good faith in the interests of the Foundation and to conduct the affairs of the Foundation in accordance with its constitutional documents (namely the Charter and By-Laws).
Guardian: The role of the Guardian (which can be a natural person or corporate entity) is somewhat akin to the role of a protector to a private trust. In broad terms the role is to supervise the Council and ensure that the affairs of the Foundation are conducted in accordance with the Foundation’s constitutional documents. Depending upon the UAE freezone in which the Foundation is established and the objectives of the Foundation, a Guardian may or may not be a compulsory requirement. A Guardian can be given limited powers over the operation of the Foundation or extensive powers. A Guardian can also be a Beneficiary of the Foundation but not a member of the Council.
Beneficiaries: Where Foundations which are established to economically benefit certain named persons (either at the time the Foundation is established or in the future) - such persons who benefit are known as ‘Beneficiaries’. In certain UAE freezones Beneficiaries are also known as ‘Qualified Recipients’. The Beneficiaries are appointed by the Founder. Beneficiaries may be specifically named in the Foundation’s constitutional documents or referenced by a class or description and can include corporate entities. Beneficiaries of Foundations have no rights to, or interest in, the property of the Foundation - except as may be specifically provided for in the Foundation constitutional documents.
Governing Documents: The constitutional documents of a Foundation consist of its Charter and By-Laws. Depending upon the UAE freezone jurisdiction in which the Foundation is established and the objectives behind the particular Foundation being established; the Charter is typically a relatively short public document which will name the Founder and the initial Council Members. The By-Laws are generally a more extensive private document, which sets out the details of how the Foundation is to be operated, the Foundation objectives, the Beneficiaries (if relevant) and the details of the rights and powers which the Founder and Guardian (if appointed) have over the functioning of the Foundation. Foundations which are established for purely charitable objectives may, however, benefit from having more detailed information in the Charter.
Registered Agent/Registered Office: All Foundations must maintain a registered office presence. Frequently this function is provided by a Registered Agent who is licensed by the regulator of the relevant UAE freezone in which the Foundation is established.
Independent Legal Personality: A ‘key’ distinction between a Foundation and trust is that, unlike a trust, a Foundation has a legal personality in its own right. With a trust, the assets are held legally by the trustees but the trust assets are held beneficially by the trust beneficiaries. In the case of a Foundation, the Foundation assets are held legally and beneficially by the Foundation itself and the Foundation Beneficiaries have no beneficial or other equitable rights in the Foundation assets. The Founder may give rights in the Foundation assets to the Foundation Beneficiaries – but those rights will be specifically limited to that which the Founder specifies in the constitutional documents of the Foundation.
Real Estate and other assets: Foundations are permitted to own an extremely wide variety of assets, including virtually all forms of equities and other financial instruments, as well as cash and other moveable assets. In addition, in most situations, Foundations can be used to hold UAE real estate in Abu Dhabi (including the ADGM), mainland Dubai (including the DIFC and other Dubai freezones and in the ICC in RAK).
Privacy: Unless the Founder wishes otherwise, the identity of the Beneficiaries (which can include the Founder) and the detail of any interests they may have in the Foundation Assets will be kept confidential. Likewise, the details of the operation of the Foundation can also be kept confidential.
Guardian: By providing for the role of a Guardian as an overseer, the Foundation structure can have independent appropriate checks and balances to ensure that it operates in accordance with its constitutional documents. As this role can continue after the death of the Founder, this can be particularly useful and a source of comfort to the Founder to know that the Foundation will be subject to independent oversight after they have passed on.
Operational Flexibility: There is no requirement for the Council of the Foundation to be a UAE resident or for the business of the Foundation be conducted in the UAE freezone jurisdiction in which it is established. Therefore, subject to tax considerations (usually concerning Beneficiaries resident in non-UAE jurisdictions), the Council of the Foundation can manage the Foundation’s business from anywhere in the world.
Continuance: Foundations established in jurisdictions outside of the UAE can be transferred so as to become Foundations established under the laws of the relevant UAE freezone. This is a process known as ‘continuance’ or ‘migration’. Likewise, a Foundation established under the laws of the relevant UAE freezones can be transferred (or continued) under the laws on a non-UAE jurisdiction.
Lifespan: A Foundation can be established for an unlimited period of time or for a fixed period, depending upon the particular needs and goals of the Founder.
Forced Heirship and Islamic Succession Laws (Sharia): Foundations established in the UAE freezones have the benefit of robust laws which prevent foreign laws of forced heirship being applied to them. In addition, property placed in Foundations established in UAE Freezones which might otherwise be subject to the laws of Sharia under the jurisdiction of the UAE mainland domestic Courts of the UAE emirates, can often be substantially mitigated against or even avoided entirely. Conversely, where there is a desire or need of the Founder for the Foundation to be compliant with Sharia law, this too can be accommodated.
The UAE has recently issued the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“Corporate Tax Law”), which imposes corporate tax on the taxable income of businesses. The Corporate Tax Law applies to taxable persons with respect to financial years commencing on or after 1 June 2023. Generally, corporate tax applies at the following rates:
0% on the taxable income not exceeding AED 375,000; and
9% on the taxable income exceeding AED 375,000.
It is established for the benefit of identified or identifiable natural persons, or for the benefit of a public benefit entity, or both.
From a UAE corporate tax perspective, given that a Foundation has a separate legal personality, a Foundation is treated as a taxable person in its own right. Therefore, a Foundation’s taxable income would ordinarily be subject to corporate tax in the UAE at the rates specified above.
However, a Foundation that is established as a “Family Foundation” potentially benefits from a different tax treatment.
Under the Corporate Tax Law, a Family Foundation is defined as any Foundation, trust or similar entity that meets all of the following conditions:
Its principal activity is to receive, hold, invest, disburse, or otherwise manage assets or funds associated with savings or investment.
It does not conduct any activity that would have constituted a business or business activity under the Corporate Tax Law had the activity been undertaken, or its assets been held, directly by its founder, settlor, or any of its beneficiaries.
The main or principal purpose of the Family Foundation is not the avoidance of corporate tax.
It meets any other conditions as may be prescribed by the Minister of Finance.
If the above is satisfied, the Family Foundation can apply to the Federal Tax Authority (“FTA”) to be considered as an "unincorporated partnership”. If the FTA approves the application, the Foundation will be treated as tax transparent. In other words, the Foundation will be “looked through” for corporate tax purposes and the tax treatment would be the same as the tax treatment which would be applied as if the individual beneficiaries own the investments directly.
When assessing whether a Family Foundation should apply to be treated as an “unincorporated partnership” for corporate tax purposes, several key considerations come into play including the tax residency of the Beneficiaries, the nature of the income, the jurisdiction in which the assets held by the Foundation are located, and the applicability of double tax treaties, if any. By carefully analysing these considerations, your family can make informed choices in ensuring that the overall structure of the Foundation is tax efficient and remains aligned with the objectives of your wealth and succession planning.
Foundations established in the UAE freezones are highly versatile legal structures which can be used for a wide variety of private family purposes, charitable purposes and commercial objectives. Appropriate legal advice is essential however, to ensure that the Foundation is established in the most appropriate UAE freezone and with the correct constitutional documents, so as to ensure that the Founder’s objectives are fully met.
For further information, please contact Richard Catling, Stuart Pryke and Lynsey Grossi.
Published in June - July 2024
