Asset Protection in the UAE – Domiciliation of a Family Office in the Dubai International Financial Centre (DIFC)

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Offering political and economical stability, double taxation treaties with more than 60 jurisdictions worldwide besides an environment that is free of income and corporate taxes (exceptions are few), the United Arab Emirates (UAE) exhibit some generally desirable strong points for the set-up of estate and succession planning solutions.

However, especially to non-muslim foreigners, the local („onshore“) juridical system can constitute significant challenges inherent in the application on Sharia law and its specifics, especially with respect to inheritance provisions.

The DIFC`s Value Proposition

The Emirate of Dubai has addressed these shortcomings by launching its Dubai International Financial Centre (DIFC), a freezone environment with a state-of-the-art autonomous juridical system based on English common law. Launched in 2004, the DIFC freezone offers a modern regulatory framework and top-notch infrastructure, having since attracted a variety of international banks, brokers and other intermediaries of the financial services industry to its ecosystem.

Meanwhile, the DIFC has evolved dramatically in terms of resident companies as well as its reputation. Only recently it was awarded 10th. position within the world`s best financial centres („The Banker“ – 2017 IFC rankings), clearly outpacing its rivals for the title of the region`s premier financial hub.

From Trust to Single Family Office

A first step towards servicing family offices was taken in passing the so-called „Trust Law“ in 2005, enabling – within the DIFC – „a trust to be created that provides for the vesting of beneficial ownership rights in land or shares to a defined group, being the beneficiaries, while separating the rights of control, stewardship and legal ownership.“

In 2008, the regulator extended the DIFC`s rule-set to include the Single Family Office regulations with the objective to allow for Single Family Offices efficiently manage their family-run institutions, private wealth, as well as succession and tax planning from within the centre.

As per the framework`s definition, the DIFC Single Family Office is as a corporation or partnership that is established within the DIFC, offering services exclusively to a single family.

Being on the one hand restricted from offering wealth advisory, asset management or fiduciary services to other than the family`s natural or legal persons, the Single Family office in turn enjoys a host of privileges with respect to the initial as well as ongoing reporting and accountability burdens imposed by the regulator.

Adaptable Architecture

A DIFC-domiciled SFO can be established in several legal forms, inter alia a company limited by shares or a limited liability partnership. As per the regulations, the inward-oriented SFO is restricted to provide services exclusively to

  • family members of a single family (individuals),
  • family fiduciary structures,
  • family entities, as well as
  • family businesses.
The family must prove a minimum of 10m USD in liquid/investable assets and furnish evidence about the family relation of the individuals. Likewise, family fiduciary structures are to be linked to the family on the vesting as well as the beneficiary side, while family businesses by definition are entities or businesses under the family`s control.

Although the DIFC initially was completely shielded from the onshore (UAE) economy, latest policy amendments passed in May 2017 now allow DIFC-based entities to hold properties and conduct business onshore (proper licensing provided), therefore making the freezone essentially semi-permeable.

Building Blocks: Flexibility is Key

By solely requiring that there be an existing link between the family office and the natural persons constituting the family or their respective family fiduciary structures, entities or businesses, the Single Family Office may or may not be the legal owner of the assets under management. It can be structured as a holding company or simply as a service provider, offering services exlusively to the family.

Intermediate holding companies („Intermediate SPVs“), often established to partition holding structures along business lines, are other means of adequately adapting the overall structure to the legal and operational requirements of the family`s estate. They are inexpensive to set up and run, being exempt from the requirement of an own physical address (leasing space) provided that their respective holding company already resides within the precinct.

Insofar, the regulatory framework offers a tremendous level of flexibility in relation to the structuring of the family`s worldwide assets and the desired control, interconnecting or shielding between the same.

In Control: Succession Planning

Independently of the Single Family Office regulations, the DIFC`s financial centre has been complemented by a Wills and Probate Registry. Coherently, the DIFC procedure for registering and executing wills is based upon common law principles, granting the testator(s) considerable freedom to dispose of their estate, rather than subjecting them to specific legal rules regarding distribution or a forced heirship regime.

In the event of succession and pursuant to a will filed with the DIFC Wills and Probate Registry, the DIFC Court will issue grants and court orders to be directly enforceable within the DIFC as well as the Emirate of Dubai, without the need to approach the Dubai Courts.

Summary

To families looking beyond the commonly known domiciliation options, the DIFC offers a range of robust and elaborate building blocks. Since its inception, the DIFC has greatly evolved, now representing a top-notch jurisdiction in its own right, while providing for flexible, scalable as well as highly adaptable family office services and holding structures.

Moreover, the presence of excellent service providers in DIFC provides for the option of externalising services in the spheres of asset management and private banking, fiduciary and specialised legal, as well as accounting and auditing, to name but a few.

Last but not least and in contrast to less prominent jurisdictions, the Dubai option offers families the opportunity to directly tap into private debt or equity markets, should their operations so require.

This article was first published in the Autumn 2017 issue of the Family Office Magazine.

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The author advises institutional investors about property transactions and handles property portfolios in Dubai since the year 2007. Should you have comments or inquiries, please contact the author on author@property-blog-dubai.com.