Why are DIFC foundations appealing to Chinese families?

The Dubai International Financial Centre (DIFC) foundation is gaining increasing popularity as a wealth management and succession planning tool, particularly for affluent families across the globe. In this article, Leevyn Isabel, Commercial Director – Middle East at Ocorian explores the features of a DIFC foundation and examine why it might be particularly appealing to Chinese families residing in the UAE.

What is a DIFC foundation?

A foundation is an independent legal entity, distinct from a trust, which is typically more popular in common law jurisdictions. In the UAE, foundations are present in three free zones: DIFC, ADGM, and RAKICC. In a DIFC foundation, the founder(s) and/or contributor(s) transfer(s) assets to the foundation, which then holds those assets separately from the founder(s)/ contributor(s) personal wealth. A DIFC foundation is managed by a council in accordance with its charter, aiming to support a specific purpose or benefit designated beneficiaries, typically family members.

What are the advantages of a DIFC Foundation?

There are several key benefits that make DIFC foundations attractive tools for personal wealth management:

1. Asset protection: Assets held by the foundation are not considered personal assets of the founder, offering protection from creditors and other claims.

2. Privacy: Beneficiaries of a DIFC foundation are not publicly disclosed, providing a level of confidentiality for family wealth management.

3. Flexibility: DIFC foundations allow for tailored structures to meet specific family needs, accommodating international assets and changing circumstances.

4. Effective succession planning: The foundation ensures that assets are distributed according to the founder’s wishes, bypassing potential complications from inheritance laws.

5. Improved family governance: A DIFC foundation provides a framework for professional management of family wealth, much like a single-family office.

6. Philanthropic giving: The foundation structure can be used to support charitable causes aligned with the founder’s values.

7. Legacy creation: A DIFC foundation can perpetuate the founder’s goals beyond their lifetime.

emphasises

There are several factors might make a DIFC foundation particularly appealing to Chinese families:

• Growing Chinese community in the UAE: The UAE is home to a large and growing Chinese community, with an estimated 400,000 residents and 6,000 businesses as of 2023. This established community provides a sense of belonging and support for Chinese families considering a DIFC foundation.

• Strong emphasis on family harmony and legacy: Chinese culture emphasizes family harmony (“he”) and filial piety (“xiao”). A DIFC foundation resonates with these values, offering a structured way to maintain family unity, ensure care for elders, and pass on wealth to future generations.

• Collective responsibility and success: The concept of collective responsibility is deeply ingrained in Chinese family values, with a strong focus on education and professional achievement as measures of family success. The DIFC foundation aligns with this concept, allowing the family to manage wealth collectively and invest in future opportunities, such as supporting children’s education or business ventures.

• Addressing succession planning challenges: Traditional inheritance structures can pose challenges for internationally mobile families, with children potentially residing in different countries and holding diverse career aspirations. A DIFC foundation provides a solution, enabling structured asset management and distribution regardless of the beneficiaries’ location or career paths, ensuring that the family wealth is preserved and utilized according to the founder’s vision.

What are some key considerations for Chinese families?

Tax implications

While the UAE offers a generally favourable tax environment, understanding the tax implications of a DIFC foundation for beneficiaries is essential. The tax residency status of beneficiaries plays a crucial role, and non-UAE residents may have tax obligations in their home countries. It is vital to conduct a comprehensive analysis of potential tax liabilities to ensure a tax-efficient structure.

Professional guidance

Given the complexities involved, seeking professional guidance from experienced legal and financial advisors is crucial for Chinese families considering a DIFC foundation. Experts can provide tailored advice on structuring the foundation, navigating legal and tax considerations, and ensuring alignment with the family’s specific goals and values.

How can Ocorian help Chinese families in setting up a DIFC foundation?

The DIFC foundation presents a compelling solution for wealth and succession planning, offering a flexible and robust structure that resonates with traditional Chinese family values.

As the Chinese community continues to grow and prosper in the UAE, the DIFC foundation can play an increasingly important role in securing family legacies and supporting future generations.

Navigating the complex tax landscape for UAE foundations requires a deep understanding of transparency rules, beneficiary tax implications, VAT liabilities, and the evolving substance requirements.

Ocorian's UAE domestic and global teams are committed to strategically assessing existing structures, aligning with international tax standards, fortifying economic substance, and enhancing corporate governance best practices.

For more information contact our private client team today.