Families are increasingly becoming more complex, internationally mobile and aware of the transition of wealth between generations. Therefore, owing to its flexibility, a UAE foundation provides a dynamic option that can accommodate a family's evolving priorities.
First introduced in the UAE in 2017, foundations have grown to become an integral part of the UAE's wealth management offering and there are now more than 170 foundations registered in the UAE. They are present in three of the UAE's free zones (Dubai International Financial Centre, Abu Dhabi Global Market and Ras Al Khaimah International Corporate Centre).
A UAE foundation's appeal lies in its flexibility. It is a highly flexible vehicle that can be adapted for a variety of purposes. It provides both expats and UAE nationals with a local solution to manage their wealth, protect their assets and make succession planning arrangements. You may refer to our article Seven benefits of UAE foundations for more details.
However, a common misconception is that UAE foundations are used solely for facilitating succession planning, normally entailing a sensitive, almost philosophical, discussion around death and legacy. Their utility actually extends well beyond this.
So, what are the other key use-cases of UAE foundations, apart from facilitating succession planning?
UAE foundations are used as cost-effective investment holding vehicles, especially where the investors cannot or do not want (for practical and legitimate reasons) to appear as direct shareholders. The purpose of said foundation would be to solely hold the investment, to distribute the proceeds, and to close down at the end of the investment term. The investment can be held via a special purpose vehicle, itself held by the foundation, for more protection.
UAE foundations can be set up for the sole benefit of approved
charitable causes or charitable organisations. These causes or
organisations must be specified in the main foundation
A foundation structure provides effective governance and regulatory oversight to facilitate collection or pooling of donations/grants and the prudent deployment of funds.
In same line as a charitable cause, a foundation can evolve alongside the founder's vision and ethical wishes and can be used to support issues close to their heart through regular donations.
Employee share scheme
A UAE foundation can be used to hold a proportion of the actual shares of a given company in order to "back" the issuance of the phantom shares within an employment share scheme. The share scheme will normally give the employee the right to receive a cash payment at a future date, usually linked to an exit or a distribution of the company (the employer), as a beneficiary of the foundation, along with traditional good leaver/bad leaver provisions. The value of the payment is tied to the value of the company's shares. However, this right does not give any equity ownership to the employee (i.e. the company does not issue any shares to the employee). The benefit of the employee is secured within the foundation.
Given the current economic conditions, businesses may not be able to afford to pay market salaries to attract and retain top talent. A share scheme is an alternative form of compensation for employees, which could assist a company to stand out amongst its peers.
A foundation, itself an orphan structure with no shareholder, can act as shareholder for a special purpose vehicle set up for a specific transaction such as structured finance or a securitisation. This provides promoters the flexibility of structuring certain transactions, without involving the main income generating businesses and protecting their interest.
Family-run businesses typically have one family member driving the enterprise from the helm, with a number of other family members also holding important positions and having a say on business operations. In order to take these family enterprises to the next level in terms of growth, it is often necessary to switch from single family member leadership to a more structured, professionalised leadership.
One simple way for the family to hand over management but retain control of their business is through the use of a foundation. Transferring ownership of their business to a foundation and appointing professional managers limits the key people risk brought about by sudden incapacitating illness or death of critical family members. While handing over the executive powers to professional leaders, the family can retain control over the ownership though a properly constituted foundation.
A foundation can hold a range of assets in its own name and on behalf of beneficiaries. It can be used for holding structures for underlying businesses and financial investments, and can hold other assets such as property, art and other high value possessions. Because the foundation's assets do not belong to the founder, they are not readily accessible to creditors, governments or other family members, provided certain conditions are met. Notably, UAE foundations are the only asset protection/succession planning structures permitted to own real estate properties in the UAE.
Foundations for the future
The UAE's foundation regimes have proven to be a popular offering for families within the Gulf Cooperation Council (GCC), enabling the preservation of family legacy and ensuring the smooth transition of successful businesses from the founding generation to the next. At Ocorian, we expect this growth to continue and are well placed to assist clients with the structuring of their foundation vehicle.
Greater flexibility, greater control
Be it for succession and legacy planning, as philanthropic entities, or for more specific purposes, Ocorian provide full foundation and administration services to create bespoke solutions to meet their clients' specific structuring needs, enabling them to pass on the benefits of their assets in full accordance with their wishes.
Supporting your wealth plans
Regardless of the complexity of a foundation's structure, we enable our clients to pass on the benefits of their assets in full accordance with their wishes to ensure their legacy is preserved in accordance with all legal and regulatory requirements.
Originally Published by MEA Finance, February 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.