United Arab Emirates: Foundations in the UAE—navigating ADGM, DIFC, and RAK ICC Foundations

Abstract

INTRODUCTION

The United Arab Emirates (UAE) has emerged in the past decade to become a significant player in the global and regional wealth management industry.¹ One factor that has contributed to this growth has been the creation of a sophisticated regulatory environment with local estate planning vehicles—and among these, the introduction of a regulatory framework for foundations in the Abu Dhabi Global Market (ADGM), the Dubai International Financial Centre (DIFC), and the Ras Al Khaimah International Corporate Centre (RAK ICC) have proven to be particularly successful.

ADGM FOUNDATIONS REGULATIONS 2017

The ADGM is an international financial centre and free zone located in the UAE’s capital, Abu Dhabi. The ADGM Foundations Regulations 2017 were the first foundation regime introduced in the UAE and the second in the Arabian Gulf, following shortly after the promulgation of Qatar Financial Centre’s Foundation Regulations of 2016.

An ADGM Foundation is conceived to operate as a legal entity with a separate legal personality.² Assets that are validly transferred to an ADGM Foundation become the property of the Foundation, with the Foundation owning both legal and beneficial property rights therein.³ The ADGM Foundations Regulations do not restrict the classes of assets that can be held by an ADGM Foundation.⁴

In order to establish and register an ADGM Foundation, the founder (or founders) must submit all required application documents to the ADGM Registrar, including a written Foundation Charter.⁵ An ADGM Foundation’s constituent documents also include private by-laws to regulate internal governance matters.⁶

A founder or another party designated in the Charter or by-laws can retain extensive rights over an ADGM Foundation, including but not limited to the power to amend, revoke, or vary the foundation’s constituent documents, including appointing and removing persons in managerial positions, to change the objects and dissolve the foundation, to direct and approve investment activities, and to add or exclude beneficiaries and/or amend their respective rights and entitlements or restrictions.⁷

The founder must appoint at least two persons to form the Foundation Council; these can be either natural or legal persons and can include the founder itself.⁸ The duties of a Councillor include acting honestly, in good faith, and in the best interests of the foundation; exercising independent judgment, reasonable care, skill, and diligence; and not to exercise any of its powers in relation to any matter in which they have, or may have, a direct or indirect interest that conflicts, or could conflict, with the foundation’s best interests.⁹ Similarly, Councillors should not accept a benefit from third parties conferred by reason of their status or their actions or omissions as Councillors.¹⁰

The appointment of a Guardian—a supervisory function that oversees the Foundation Council and bears similarities to the role of a Protector in a trust—is optional during the founder’s lifetime.¹¹ However, after the founder’s death, appointing a Guardian becomes mandatory.¹²

An ADGM Foundation may, but is not required to, designate beneficiaries who may benefit from the foundation.¹³ Alternatively, an ADGM Foundation can be established to carry out a specific purpose; however, ADGM Foundations cannot pursue charitable objects and cannot conduct commercial activities.¹⁴

ADGM Foundations benefit from a robust regulatory framework to shield the foundation from creditor or beneficiary claims, including claims stemming from foreign forced heirship regimes.¹⁵ More specifically, transfers of property to an ADGM Foundation or distributions to a beneficiary are not set aside or rendered void or voidable as a result of foreign laws that prohibit or fail to recognize the concept of a foundation, or due to foreign laws that attempt to enforce rights, claims, or interests based on personal relationships with the transferor or forced heirship rights.¹⁶ On the other hand, ADGM Courts may declare that a transfer of property to an ADGM Foundation is void if the court determines that when the property was transferred to the foundation, the founder or transferor was insolvent or intended to defraud any of its creditors.¹⁷ In such a case, the transfer of property may be deemed void, but only to the extent of the creditor’s claim, with the burden of proof resting with the creditor.¹⁸

The ADGM regime also provides for a sophisticated inbound and outbound continuation regime, allowing foundations to incorporate into (or out) of the ADGM.¹⁹

DIFC FOUNDATIONS LAW 2018

The DIFC is a leading financial free zone located in Dubai, with its own foundation regime established pursuant to the DIFC Foundations Law of 2018.²⁰

A DIFC Foundation shares many common features with an ADGM Foundation, including separate legal personality,²¹ a similar governance framework (consisting of a Foundation Charter and by-laws),²² administered through a Foundation Council comprising at least two members,²³ extensive reserved powers for the founder,²⁴ and an inbound and outbound migration regime allowing foreign foundations (as well as DIFC companies) to convert into or out of a DIFC Foundation.²⁵

A DIFC Foundation can be established for exclusively charitable objects,²⁶ as well as for objects that are not exclusively charitable or to provide benefits to persons identified by name, category, or class,²⁷ these latter being referred to as qualified recipients.²⁸ If a DIFC Foundation has a charitable object or a specified non-charitable object, then the appointment of a Guardian is mandatory in relation to that object (even in cases where the founder is still alive).²⁹

Importantly, DIFC Foundations can be structured to issue securities, including depository receipts, whereby the ownership of the underlying assets remains vested with the DIFC Foundation while the economic benefits accrue to the noteholders.³⁰

The DIFC Foundations Law establishes a strong jurisdictional framework to protect the Foundation from claims based on foreign laws. The DIFC Foundations Law specifies that DIFC law—rather than the laws of a foreign jurisdiction—shall govern questions concerning the capacity of the founder or transferor, the validity of dispositions of or by the foundation, the administration of the foundation (including the powers, obligations, liabilities, and rights of its councillors and officers), and the existence and extent of powers conferred or retained by the Charter and by-laws.³¹ Similarly, foreign laws that do not recognize foundations or that seek to challenge transactions because of foreign forced heirship claims are not, of themselves, a sufficient basis to void or set aside transfers or rights that are otherwise valid under the laws of the DIFC.³² Foreign judgments purporting to give effect to foreign forced heirship or analogous principles will not be recognized or enforced insofar as these are inconsistent with DIFC laws.³³ There are, however, limitations to this robust firewall framework. The DIFC Foundations Law does not validate transfers of property that the founder did not own at the time of contribution, testamentary dispositions that are invalid under the law of the testator’s domicile, or dispositions of real estate that are invalid under the laws where the property is situated.³⁴

DIFC Foundations are protected by robust creditor protection provisions that seek to safeguard the Foundation’s property from ungrounded claims of creditors. As such, notwithstanding the subsequent bankruptcy or insolvency of the founder or contributor, transfers to a DIFC Foundation are insulated from creditor challenge in the DIFC except if a DIFC Court determines that the transfer to the foundation was, at the time of transfer, intended to defraud a creditor and that at the time such transfer took place, the transfer of the property rendered the founder/contributor insolvent or without property from which it could have otherwise satisfied that specific creditor’s claim.³⁵ If such a determination is made, then the Foundation shall be liable to satisfy such creditor’s claim, but only to the extent of the interest the founder/contributor had in the property prior to the transfer as well as any subsequent accumulation to the transferred property.³⁶

DIFC Courts can set aside transfers or dispositions of property to a DIFC Foundation on account of mistakes of fact, mistakes of law, or mistakes as to the effect of, any consequences of, or the advantages to be gained by a transfer or disposition of property to a DIFC Foundation.³⁷ In this respect, the DIFC Foundations Law has incorporated elements of the statutory framework to set aside transactions for mistake and inadequate deliberation, as enacted in Jersey after the Pitt v Holt judgment.³⁸

Building on the sophistication of the DIFC’s dispute resolution infrastructure, a founder can elect in the Charter or by-laws for arbitration to be the sole dispute resolution mechanism (with such a choice having the effect of treating the potential parties to a dispute relating to the DIFC Foundation as if they had entered into an arbitration agreement).³⁹

RAK ICC FOUNDATIONS REGULATIONS 2019

RAK ICC is an international corporate registry located in the UAE’s northernmost emirate, Ras Al Khaimah. The RAK ICC Foundations Regulations of 2019 introduced the RAK ICC Foundation, a vehicle that bears many similarities to the ADGM and DIFC Foundation.

Like its counterparts in its southerly emirates, a RAK ICC Foundation is a legal entity with legal personality separate from its founder,⁴⁰ with the legal capacity to hold property in its own right,⁴¹ and with a governing framework comprising a Foundation Council with at least two councillors.⁴² Similar to the DIFC regime, if a RAK ICC Foundation has a charitable object or specified non-charitable object, the appointment of a guardian is mandatory.⁴³ The RAK ICC Foundations Regulations have also adopted extensive firewall and asset-protection provisions to insulate foundations from creditor claims and actions rooted in foreign forced heirship laws.⁴⁴ The RAK ICC regime is, in this respect, closely aligned with the DIFC regime. A RAK ICC Foundation is subject to the jurisdiction of ADGM or DIFC courts, as determined by the founder’s election in the Charter,⁴⁵ and such choice also impacts the laws under which to assess the validity, interpretation, or effect of the Charter and by-laws, the administration of the foundation, and the existence and extent of functions in respect of a foundation.⁴⁶

COMMON THEMES AND PRACTICAL CONSIDERATIONS

The foundation regimes of the ADGM, DIFC, and RAK ICC, while built on similar core principles, each offer unique legislative advantages and operate within distinct business environments. While practitioners must carefully weigh these jurisdictional distinctions, all three foundation regimes share fundamental structural elements and face similar practical and legal considerations in the UAE context.

The governance framework across all three jurisdictions exhibits key structural similarities. At the core, each foundation regime requires a Foundation Council comprising at least two members to manage its affairs, with no strict residency or licensing requirements for councillors. Founders in all three jurisdictions can maintain substantial control over their foundations through extensive reserved powers. Additionally, all three regulatory frameworks establish the position of guardian to provide oversight of the Council’s activities, although the requirement for a guardian becomes mandatory under different circumstances across the jurisdictions. Similarly, the regimes demonstrate flexibility through their continuance provisions, allowing foreign foundations to qualify as local foundations and enabling conversion from corporate entities to foundations in both RAK ICC and the DIFC.

UAE foundations play a key role in providing local families with a familiar framework for holding regional assets.⁴⁷ This is particularly significant for real estate holdings, as the respective regulatory authorities have entered into agreements with the Abu Dhabi and Dubai real estate authorities to explicitly recognize foundations as legitimate property-holding structures within the framework of local real estate regulations.⁴⁸ Ultimately, the registration of real estate property remains subject to final approval from the relevant real estate authorities, and professional guidance is essential, particularly when considering the acquisition of properties that are situated in land that is not designated for foreign ownership.⁴⁹

The interaction of the ADGM, DIFC, and RAK ICC foundation regimes with Sharia law presents unique considerations. Broadly, Sharia succession distribution rules apply to property owned by the deceased at the date of death (or to dispositions made in the imminence of death), but not to fully executed lifetime gifts. Article 361 of the UAE Law of Personal Status contains a general anti-avoidance rule whereby “every fraud to the provisions governing inheritance by way of sale, donation, testament or other dispositions [shall be considered void]”. The interaction between these two principles has been the matter of debate. When the Court of Appeal of the DIFC was consulted to issue an advisory judgment on whether the transfer of property by a Muslim to a DIFC Foundation would attract the operation of Article 361 of the UAE Law of Personal Status, the court declined to answer as it felt such an assessment was outside the scope of its jurisdiction.⁵⁰ Given the novelty of these foundation regimes, future court decisions and regulatory guidance will likely provide greater clarity on the applicability of Sharia restrictions in cases of non-testamentary foundations established by UAE nationals. From a different perspective, the inherent flexibility in a foundation’s constituent documents will certainly allow Muslim founders to structure foundations that explicitly incorporate key Sharia principles, such as restrictions on investments in prohibited industries—for example, alcohol or gambling—or to provide for Sharia-based distribution principles.⁵¹

Finally, tax considerations have assumed increased importance for UAE foundations, notwithstanding the fact that the UAE retains a competitive tax landscape and does not currently impose personal income taxation. Under the recently enacted UAE corporate tax law, foundations are treated as taxable persons; yet, they may be eligible for corporate tax exemption to the extent they qualify as Family Foundations.⁵² In such cases, UAE foundations would be treated as fiscally transparent unincorporated partnerships, with taxation then determined at the partner level.⁵³

CONCLUSION

Foundations in the ADGM, DIFC, and RAK ICC have evolved into sophisticated vehicles for estate planning and wealth preservation, serving both local and international families. The choice between these jurisdictions should be guided by specific family needs and objectives, including administrative costs, privacy requirements, governance structure, and the foundation's ultimate intended purpose.

Author Biography

Jacopo Crivellaro is counsel in Baker McKenzie’s International Tax & Global Wealth Management practice, based in the Dubai International Financial Centre (UAE). He is qualified as a solicitor in England & Wales and as an attorney-at-law in New York. Email: [email protected]

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