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DIFC Trust and Foundations Legislation

Trusts are vehicles which may be utilised for wealth management, succession planning, asset protection and investment purposes. The settlor may vest certain trust assets in the trustees of a trust who will in turn administer those trust assets for the benefit of the beneficiaries of the trust. In terms of DIFC law, the trust does not have legal personality and therefore the legal ownership of the trust assets will lie with the trustees, whilst the beneficial ownership thereof will remain with the beneficiaries. The trust will be governed in terms of the trust deed of trust instrument, which sets out the powers of the trustees, the duration of the trust, and the nominated beneficiaries etc.

In 2005, the Dubai International Financial Centre (“DIFC”) Authority promulgated the first DIFC Trust Law which provided for the establishment of a trust in terms of which certain assets would be held for the benefit of a defined group, namely the beneficiaries of the trust.

In March 2018, the DIFC Authority issued two new laws, namely the DIFC Trust Law No. 4 of 2018 (the “New Trust Law”) and the DIFC Foundations Law No.3 of 2018 (the “New Foundations Law”).

The New Trust Law

The New Trust Law repeals the previous Trust law from 2005 and expands upon it by introducing mechanisms for enhanced trust administration, increased flexibility for settlors, beneficiaries and trustees alike.

The New Trust Law further includes several important practical amendments, the most noteworthy of which are:

  • Inclusion of provisions for the appointment of custodian and advisory trustees;
  • Inclusion of provisions for dispute resolution by means of arbitration;
  • Inclusion of provisions for relief in situations where the protector or settlor becomes incapacitated;
  • Increased performance of charitable and non-charitable trusts.

The purpose of these changes is to promote succession planning and creditor protection.

The New Trust Law applies to trusts created in the DIFC, to the exclusion of those established in terms of the DIFC Investment Trust Law No. 5 of 2006, and all foreign trusts to the extent of their transactions taking place in the DIFC, with the distinction that any such transactions taking place prior to the enactment of the New Trust Law will be decided in accordance with the applicable previous legislation.

The New Foundations Law

The New Foundations Law has similarly provided a completely new structure for the establishment of foundations in the UAE.

Foundations have similar features to both companies and trusts. It is similar to a company in that it has a separate legal personality, however, it does not have shareholders nor does it issue shares.

Foundations are created when one or more “founders” bestow assets in the foundation. The Foundation, unlike a trust in the DIFC, has a separate legal personality and therefore ownership of those assets will vest directly in the foundation under its own name. The foundation has no members or shareholders; however, the Council of the foundation is appointed to administer the foundation’s assets for the benefit of the beneficiaries and in accordance with the provisions of the foundation’s charter and by-laws.

The duties of the Council are to act within the scope of the powers conferred upon it in terms of the foundation charter and by-laws, to act in good faith and in the best interests of the foundation and its beneficiaries and to exercise the requisite skill, due care and diligence when administering the affairs of the foundation.

The constitutional documentation of a foundation comprises the foundation charter and the by-laws. The foundation charter must include details of the name, purpose and objectives of the trust, initial capital or assets, duration and a declaration by the founder requesting the Council to act in accordance with the terms of the charter. Although not compulsory, the foundation charter may be accompanied by by-laws. The by-laws will generally set out, for example, the functions of the Council, procedure for appointment or removal of members of the Council, the Council’s powers of delegation, procedures for dissolution of the foundation etc.

In accordance with the New Foundations Law, a foundation’s objectives must be certain, reasonable and possible and must not be illegal or contrary to public policy or morals. A foundation may be established for a number of purposes, examples of which are, succession planning, investment, wealth management, tax planning, charitable pursuits, protection of assets etc.

Based on the objectives of establishment, foundations can be categorised as follows:

  • A foundation established to benefit persons by name, category or class.
  • Charitable foundations;
  • Non-Charitable foundations; or
  • A combination of the above.

Furthermore, DIFC foundations are required to have a physical presence or substance within the DIFC. This may be achieved either through a registered agent like HHS Lawyers in Dubai.

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