The UAE has introduced a number of regulations, measures and initiatives that have drawn global players to its shores and caught the eye of many others.
Izabella SzadkowskaPartner,Corporate Structuring
Dipali MaldonadoSenior Counsel,Private Client Services
The UAE, over the last couple of years or so, has introduced a number of regulations, measures and initiatives that have drawn global players to its shores and caught the eye of many others. In particular, the UAE has taken a progressive and proactive approach towards protecting family wealth.Here are just a snapshot of the reasons why many family offices, businesses and HNW investors are relocating to the UAE and making it home for both their families and employees:
During the Covid pandemic, the UAE’s quick response ensured the safety and well being of its inhabitants which in turn has boosted a strong and fast return to business as usual
Ease of visa issuance and the coveted 10 year Golden visa and Green visa
A plethora of structuring options: The UAE offers both civil law and common law solutions, a variety of types of vehicles, including holding companies, trusts, foundations and several family office options
Supportive environment for family businesses: In addition to UAE legislation that support family busiinesses, the Dubai International Financial Centre (“DIFC”), a financial free zone in Dubai, has recently launched a Family Business and Private Wealth Centre, to provide variety of benefits and support to family businesses and offices.
Flexible inheritance laws: Recent amendments to the UAE’s personal status law allows for expatriates to apply the laws of their home country in relation to inheritance of their UAE estate, so that the distribution of an individual’s estate will take place according to the laws of the country of which the individual is a citizen, instead of the application of UAE law (which codifies Islamic Sharia principles on inheritance).
A revolutionary new family court and law in the capital, Abu Dhabi, permits tourists and non-Muslims and Muslims from conntries that do not apply sharia law UAE residents to enter into civil marriage, apply for a no fault divorce and shared custody of children
100% foreign ownership permitted across numerous sectors and industries and an array of free zone jurisdictions
A very appealing tax regime with zero income, capital gain and inheritance tax and zero corporate tax in certain free zones
Excellent schools and healthcare
Strong real estate market with most areas available for foreign ownership
Well developed infrastructure
Geographical location of the UAE facilitates travel links and time zone
The pull to the UAE is in large part due to the government’s commitment to support family businesses by providing the necessary legislative, structural and regulatory tools to ensure the continued success of the private sector, which is also integral to the health of the wider UAE economy. Owners of family business in the UAE and the wider region face a unique set of challenges in ensuring that the concentration of private wealth is stewarded successfully, and the UAE provides a supportive environment for owners and their families to overcome such challenges.
Additionally and in particular with regards to India, India has become more open to the idea of family businesses repatriating their assets abroad, allowing many prominent Indian families to diversify the geographical base of their wealth. The recent changes to the overseas direct investment and foreign exchange controls regulations in India have made it easier for Indian family offices to set up holding company / fund structures overseas (the former regulations required such entities to be necessarily approved by a regulatory authority in the host country, and now this approval is needed only if requires under the laws of the host country) to make investments under the ODI automatic route, into entities engaged in “financial services” outside India. In view of these regulatory changes in India, as well as the reasons set out above in terms of initiatives introduced by the UAE Government, we have of late seen several Indian family offices and HNWI exploring and putting in place family office set ups in the UAE.
In this article, we focus on family offices and provide an overview of the UAE legal framework that enables the easy set up and operation of family offices and the reason why so many are now choosing the UAE over other more traditional offshore jurisdictions.
If you wish to set up a family office, you should, in particular consider:a. Abu Dhabi Global Market (“ADGM”); b. Dubai International Financial Centre (« DIFC»); c. Dubai World Trade Centre (“DWTC”)
ADGM is a financial free zone in Abu Dhabi. It was established in 2015, and quickly became one of the region’s most sophisticated jurisdictions. Entities incorporated or registered in ADGM operate under common law principles and can enjoy 100% foreign ownership. Although the regulatory regime is robust, it is flexible enough to adapt to accommodate recent developments in new industries. ADGM places neither constraints on capital and profit flows, nor controls on currency exchange. While the share capital of ADGM companies is by default denominated in USD dollars, companies have the flexibility to re-denominate the share capital into another currency. Although there are no ADGM regulations specific to Single Family Offices (“SFOs”), the ADGM Commercial Licensing Regulations permit their establishment. Alongside special purpose vehicles (“SPVs”) and foundations, the SFO is one of the many family wealth solutions and structures that ADGM offers. The careful consideration and combination of these options can help a family to protect its wealth in a long-term and tax-efficient manner.
Family OfficesAn ADGM SFO would take the form of a private company limited by shares. Hence, the liability of the shareholders is generally limited only up to the SFO’s share capital.The SFO can provide services such as wealth management, asset management, concierge work, manage the day to day accounting and legal affairs, corporate governance support, and administrative services. The SFOs are, however, not permitted to offer any of these services to any third party other than the family’s own members, entities, businesses, trusts or foundations.
Special Purpose Vehicles (SPV)An SPV is a form of private company limited by shares. It is a passive company mainly set up for the purpose of holding assets (e.g. shares, properties, IP, etc.) and investing on behalf of the shareholders. This is as opposed to “operational” entities that undertake commercial operations and business activities. The SPV cannot have employees and does not need to have a physical office space. SPVs are generally required to appoint a company service provider (“CSP”) to submit the incorporation application, maintain the company’s filings, and provide a registered office (i.e. “virtual”) address.
An SFO can use different SPVs to hold the different assets that the principal family owns, in a manner that limits the risks that one asset can pose to other parts of the SFO’s portfolio.
Proprietary Investment Vehicles A proprietary investment vehicle would also be a private company limited by shares (“LTD”). It is an operational company mainly set up for the purpose of holding and making investments on behalf of the shareholders, and not third parties. The LTD can have employees (and the accompanying residence visas) and needs to have a physical office space. There is no requirement to appoint a CSP.
An SFO can own shares in an LTD that earns operational income and which would in turn distribute dividends to the SFO.
Restricted Scope Companies (“RSCs”)Notably, ADGM allows for the establishment of RSCs. The main benefits of RSCs is that they provide a higher level of privacy and confidentiality than a regular ADGM entity. For example, while on the ADGM Public Register one can view the shareholders and directors of a regular SPV or LTD, these details are kept confidential for RSCs. In addition, RSCs are not required to file their annual accounts (or audited accounts) to the ADGM Registration Authority and have generally fewer compliance obligations.
An SFO itself can take the form of an RSC or alternatively have an RSC as a subsidiary.
FoundationsA Foundation is an entity which a founder(s) can endow with assets, such that the assets and any income generated from them are designated to certain beneficiaries. A Foundation has its own legal personality, separate from its founder(s) and beneficiaries. It can also have a charitable or non-charitable purpose.
A Foundation needs to have a “charter” which sets out the name, objects, description and duration of the foundation. It also needs to have “by laws” which outline the Foundation’s corporate governance mechanism and how it operates and makes decisions. Generally, the Foundation needs to have council members (who would be the governing body for the Foundation, similar to a board of directors), a guardian (to monitor that the council members are acting in line with the Foundation’s goals and for the benefit of the beneficiaries), and a designee (to avoid a scenario of the Foundation having no beneficiaries). While the applicant would disclose to ADGM the relevant parties in a Foundation, this information is not disclosed on the Public Register.
A Foundation is similar to an SPV in that a Foundation cannot have employees, does not need to have a physical office space but is generally required to appoint a CSP.The principal family can use a Foundation to channel its charitable activities, or to allocate assets for the benefit of certain (e.g. young) beneficiaries. If appointed as a council member, the SFO can monitor and oversee this as well.
General Overview: DIFC, a financial free zone district in Dubai with an independent regulatory and legal system, was established in 2004 and has been a leading international financial hub in the Middle East, Africa and South Asia (MEASA) region. Incorporated entities in the DIFC enjoy 100% ownership as well as a world-class regulatory environment that allows for a range of options for structuring legal entities. Furthermore, there are no restrictions or constraints on capital or profit flows, and DIFC entities benefit from no currency exchange controls in the US-dollar denominated jurisdiction.
In 2008, the DIFC adopted a regulatory framework which provides infrastructure solutions for families and family-owned businesses operating in the region. The regulations permit the establishment of Single Family Offices (“SFO”) within the DIFC, with the objective of achieving efficient management of family-run institutions, their private wealth, as well as their succession and tax planning.
Family Offices:An SFO in the DIFC can take several legal forms, including as a private company limited by shares or, as a limited liability partnership.
Under the DIFC SFO Regulations, the SFO is restricted to providing services to a single family only. A family constitutes a single family either where it comprises one individual or a group of individuals all of whom are the bloodline descendants of a common ancestor or their spouses. There are no minimum share capital requirements, however a single family must have minimum investable/liquid assets of US$10 million (realisable within 180 days). To operate within the DIFC, each SFO must designate an Authorised Representative who must be a resident of the UAE. SFO, as an activity within the DIFC, is considered a a Designated Non-Financial Business or Profession (“DNFBP”) which in turn is governed by the Dubai Financial Services Authority (“DFSA”), in addition to the DIFC Authority and DIFC Registrar of Companies.
Holding Company / Proprietary Investment Vehicles:Other than an SFO, family businesses can opt to form a straight-forward holding company or a foundation (similar to the ADGM foundation described above) in the DIFC. As an activity, a holding company engages in holding the securities companies and enterprises for the purpose of owning a controlling interest or influencing the management decisions of these firms.
General Overview: The DWTC, an economic free-zone, offers affordable and flexible company set-up packages. Company set-up and licensing packages in the DWTC start from AED 25,050 (USD 6,900), and the incorporation process takes approximately one month. Furthermore, there are no minimum share capital requirements, low minimum liquid assets nor are there any foreign ownership restrictions for non-UAE/GCC nationals. In order to set-up in the DWTC, the board of directors must comprise of a minimum of one (1) director and up to a maximum of five (5) directors. Further, the company must have a company secretary and a general manager, but the offices of director, secretary and the general manager may be held by the same individual.
Family Offices:DWTC regulations enable companies to partake in family wealth management activities through the incorporation of either a Single Family Office (“SFO”) or a Multi Family Office (“MFO”). These licenses can be obtained to conduct business activities which fall under management of professional services or provision of administrational, compliance, secretarial and/ or concierge services. Examples of professional services which could be conducted with such a license include, but are not limited to wealth and asset management, succession planning, legal services, consulting, and ESG and CSR management.
The main difference between an SFO and an MFO is that an SFO is set-up by family members for the purpose of providing services to that same, single family member, whereas an MFO is set-up by consultants for the provision of integrated and highly customised services to a limited number of clients – participating as families or family businesses In terms of eligibility, for both SFO and MFO license, the applicant family needs to be able to show proof of a minimum of AED 500,000 liquid assets (on account for 12 months).
In addition, family businesses or offices can opt to form a straight-forward holding company or proprietary investment vehicle in the DWTC. This can be suitable to segregate and arrange asset classes, or hold assets under different entities depending on the geographical location of those assets. Having those assets under different entities allows the family office to keep some under their ownership only, and introduce third party investors to some of the other wealth pillars.
The UAE has long been a business hub and global destination for investment, thanks largely to the many family businesses that are the backbone of the country's economy.Interestingly, 21 family businesses from the UAE featured in the Forbes list of the Top 100 Family Businesses In The Middle East 2020. As recently as on 19 September, the UAE Government launched the Thabat Venture Builder, a programme that aims to double family owned businesses’ contribution to GDP to $320 billion by 2032.
We have seen an increasing number of our clients, both local and international, wanting to implement proper solutions for family assets and private wealth, Al Tamimi and Company has a dedicated Private Client and Family Business Practice that delivers specialized advice and solutions to families in business to defend family assets from risks and pave a way to succession and stewardship.
Our expert lawyers remain on hand to advise on and implement the tailored solutions that enhance and preserve private wealth, family ties and business holdings within the region.
For further information, please contact Izabella Szadkowska or Dipali Maldonado.
Published in November 2022