Wealth structuring options increase for families in the Middle East
Two significant new pieces of legislation introduced by GCC countries in the last 12 months have increased the options available to families dealing with the effective management and transition of substantial wealth.
Bahrain’s new trust law, which came into effect in November 2016, provides a comprehensive framework for the creation and administration of trusts in the kingdom, and for the first time formally recognises trusts governed by the laws of other jurisdictions.
Meanwhile, the Abu Dhabi Global Market (ADGM) free zone has enacted the UAE’s first foundations regulations, offering an alternative wealth planning tool for individuals and families. The regulations are designed to assist individuals and investors with wealth management, succession planning and asset protection within the region and internationally.
Alastair Glover, a Private Wealth Partner in the Dubai office of Trowers & Hamlins, says: "Trusts are already available in both the Dubai International Financial Centre (DIFC) and ADGM which has essentially adopted English trust law. However, uptake of trusts in the DIFC and ADGM has been relatively limited and there is a perception in the market that foundations will hold greater appeal for regional clients as they are more similar in form to a company. The introduction of foundations is unique in the region, and this development certainly presents an interesting alternative to the trust for any family reviewing their succession planning options."
The foundation enjoys a separate legal personality to the founder, who establishes the foundation. It can therefore enter into contracts and hold assets in its own name. Importantly, the foundation’s liability is limited, unlike that of trustees. Unlike a company, there are no shareholders. Instead, the foundation must have a living founder or guardian to enforce its terms. "Foundations are hybrid vehicles which share similarities to companies and common law trusts," says Glover, "with the main advantage being that, unlike a trust, they have their own legal personality and can include the founder and other family members on the foundation council, which is similar to the board of a company. In this way the family can retain control of their assets without the need to transfer them to unknown third-party trustees in another jurisdiction, which will appeal to some GCC families."
ADGM’s latest innovation is a sign of increasing competition between Gulf jurisdictions to cater to the needs of the region’s high net worth individuals. In 2015, the DIFC set the ball rolling with a new wills and probate registry that made it the first jurisdiction in the region where a non- Muslim could register a will under common law principles of freedom of testamentary disposition.
Abu Dhabi subsequently announced in May 2017 that it would introduce its own registry of wills and probate, giving non-Muslim expatriates greater freedom to pass their local assets to their chosen beneficiaries when they die, rather than the default rules based on Shariah fixed share principles. The ADGM Foundations Regulations are the latest innovation in the Emirates wealth planning arena and it is likely that the DIFC will shortly follow suit having released a consultation on a foundations law of its own on 10 October 2017.
For now, the majority of high net worth families in the Middle East tend to look outside the region for wealth structuring solutions, frequently choosing well-established jurisdictions such as Switzerland, the Caribbean and the Channel Islands, but these changes present viable alternatives closer to home.
"The uptake will increase," says Glover. "There’s a lot of interest in how these jurisdictions can help clients moving forward, and they will have their attractions, particularly where they can be utilised to hold local assets. A lot of people have moved holding companies into the DIFC and ADGM, and there is a new level of sophistication in the legal tools that are available, which simply did not exist before. There were previously only limited options for wealth structuring in the region from a governance perspective, and now families can access more sophisticated laws that are more in line with the established offshore jurisdictions."
More robust and sophisticated structures also appeal to entrepreneurs in the GCC, many of whom are building significant businesses and are understandably keen to protect their interests both from an asset protection and succession perspective.
Youssef Boulos is a partner in Trowers & Hamlins’ international Corporate Team, based in Abu Dhabi, and says: "One of the fundamental advantages historically of structuring via the traditional jurisdictions like the British Virgin Islands, Jersey and Guernsey was the confidentiality element. But with the advent of so many transparency initiatives among regulators globally, that benefit is going, so some Middle Eastern families are thinking they may as well keep their wealth locally."
Those looking to keep money in the region and make use of the new legislation will need to give careful thought to issues that might arise around restrictions on the ownership of local assets, for example, where different approaches have been adopted by Bahrain and ADGM.
Boulos adds: " When setting up structures, people need to think carefully about what their medium to long term objective is - whether that is about effectively distributing wealth to the next generation, passive protection of assets, or educating the next generation. Is the focus purely economic – looking at maximising income and yield – or is it about bringing in some independent oversight of the assets, with third parties on the board?"
He concludes: "Developing a proper wealth management strategy is all about balancing all of these key medium and long-term drivers, and then deciding what is the best fit for that based on all the different regimes and structures that are available around the world."
The arrival of new legislation in the GCC can only enhance the options available to high net worth individuals living and working in the region.
Bahrain’s new trust law – key features
Modern regime: The predecessor law in relation to financial trusts was extremely limited in scope. The new trust law provides a framework for family succession structures under a more flexible regime.
Waiver of foreign ownership restrictions: Trustees of Bahraini trusts are not subject to foreign ownership restrictions that might otherwise apply. Currently, Bahrain is the only GCC country to include the waiver of foreign ownership restrictions for trusts.
Purpose trusts: An example of the flexibility of the new trusts is the inclusion of rules for non-charitable purpose trusts, which gives families much more flexibility in structuring.
ADGM Foundations – key features:
Structure: The ADGM foundation is a hybrid of a trust and a company. It can be used for similar purposes as a trust – including wealth management, planning and preservation – but it is a separate legal entity with limited liability. The similarity to a company (but without shareholders) provides more control over the foundation when compared to a trust.
Governance: The council carries out the executive functions of the foundation, acting like a board of a company. Oversight of the council rests with the founder or the guardian, who effectively supervises the council.
Client confidentiality: The regulations aim to achieve a balance between client confidentiality and the transparency of ownership. The foundation’s charter contains limited publicly available information, which is held by the ADGM Registrar, while the by-laws remain confidential.
International: Foreign foundations can be migrated to the ADGM from other jurisdictions and vice versa and can, subject to the relevant law outside ADGM, hold overseas assets.
Similar jurisdictions: The most comparable jurisdictions to the ADGM’s foundations regime are Jersey and Guernsey.