UAE: Is structure commoditisation hindering development?
With the number of foundations registered in the UAE surpassing 650, the structure is increasingly being used as an ‘off the shelf product', rather than a bespoke wealth solution, explains Nina Auchoybur, as she takes a step back to highlight the key considerations before choosing a foundation.
UAE foundations have soared in popularity since legislation was first introduced in the Abu Dhabi Global Market (ADGM) in 2017, and later in the Dubai International Financial Centre (DIFC) and Ras Al Khaimah International Corporate Centre (RAKICC). Where private clients had to previously rely on costly corporate vehicles or trusts for their wealth and succession planning, foundations now provide a more straightforward and accessible solution.
The ease and relative low cost of establishment has led to the democratisation of the foundation vehicle, enabling a broader segment of the population to utilise it to structure and protect their assets. This has however resulted in a 'commoditisation' of foundations in UAE; from a bespoke structure catering to the wishes of the founder and needs of the family to an 'off-the-shelf' product, with little to no consideration of the client's specific needs or wishes.
Service providers acting as registered agents for the foundations are also being used simply as address providers, rather than a specialist support function providing guidance, administration, accounting, secretary, and councillor services. This is largely because many clients and advisors in the region are unfamiliar with the concept of a foundation and are therefore unaware of the operational and administrative requirements needed to maximise a foundation's effectiveness.
In order to get the best from your foundation, it is first important to consider:
Cost: Amendments to the foundation's structure (including bylaws and the charter) once it has been established because of the absence of, or wrong advice, can be costly (legal fees, regulatory audit and tax consequences) and difficult. It can be particularly problematic if the founder has passed away and has not properly documented their intentions. There are a number of essential questions which should be answered before establishing a foundation, along with a subsequent periodic review:
What are the consequences of the founder having reserved rights?
What should be the rights and powers of the beneficiaries?
Should the foundation be made Shariah compliant?
What are the duties and rights of the guardian and council members?
Should the death of a founder be a trigger event for distribution?
What are the current and future tax implications?
Professional indemnity insurance: Corporate service providers can make mistakes and those deemed negligent by the courts can be ordered to pay out financial damages and related legal costs. A service provider offering a 'commoditised' foundation is more likely to have the compensation in their service agreement capped to their fee levels and/or with a smaller compensation limit under their indemnity insurance policy. It may however go out of business if it cannot settle the financial damages and the client will have no other recourse to recover the lost assets.
International expertise: With the first UAE foundation regime established in 2017, many service providers are relatively inexperienced in establishing and administrating UAE foundations. Therefore, it is often advantageous to appoint an international corporate service provider. They have expertise and robust governance practices honed across multiple jurisdictions and regulatory frameworks, and involving traditional structures such as private family trusts, more complex arrangements like private trust companies, as well as newer offerings such as foundations, family investment companies and limited partnerships. The foundation council should also have chartered and certified accountants, chartered secretaries, lawyers and/or chartered tax advisors among its members. Having a service provider sit as a council member adds valuable expertise concerning the vehicle's long-term administration, too.
Business continuity: A foundation is, by essence, a legacy tool and a service provider with limited resources will have difficulty maintaining multi-generational client relationships, which are essential to ensuring the legacy continues in perpetuity. Smaller, more niche service providers entertain key personnel risk which can significantly impact the foundation's operations.
Scale and scope of services: A UAE foundation is a great tool for wealth structuring, but it is also not the only tool available. A service provider capable of offering different solutions such as family trusts, private trust companies and funds, across multiple jurisdictions and suited to the increasingly globalised nature of families, enables you to find the best solution for your specific needs. The international presence and depth of expertise of the service provider are also key assets that can be leveraged when succession planning. They can support the holding and administration of a wide range of investments including family businesses interests, real estate, private equity, and luxury assets amongst others.
Ultimately, quality comes at a price. However, private clients who want to make watertight succession planning arrangements that are well governed, establish a lasting legacy, and avoid costly mismanagement fees later down the line, should engage with a suitable service provider accordingly.