What is the foundation?
The foundation first appeared in Liechtenstein law (Stiftung) back in 1926. This is a legal entity created by the founder. The founder determines the purpose of the foundation and gives it assets. They become independent of the founder, and the legal entity acquires its own legal personality. Assets of the foundation are considered separate from private assets of the founder.
One of the most common types of the foundation in Liechtenstein is the family foundation. It uses its own assets for the benefit of members of one or more families. Later, the foundation appeared in the law of Austria, Sweden, the Netherlands, as well as in common law countries — Canada and USA.
In 2017, the foundation appeared in the UAE: in Abu Dhabi in the Abu Dhabi Global Market free zone, then in 2018, in Dubai in Dubai International Financial Centre, and in 2019, in Ras Al Khaimah in RAK International Corporate Centre.
How is the foundation organized?
The foundation is a hybrid form of organization. They resemble both an ordinary company and a trust — they combine mechanisms of both structures. The foundation is created for the purpose determined by the Founder, but at the same time retains the corporate level of independent legal personality.
After creation, assets of the founder are transferred and the legal ownership passes to the foundation. The uniqueness of foundations lies in the fact that they have no shareholders or members. At the same time, the foundation owns assets on its own behalf but in the interests of beneficiaries.
Foundations are not used as trade or commercial structures. However, very often the foundation owns companies that are used to reach the founder’s trading and investment objectives.
Activities of foundations are regulated by the charter and bylaws. The charter is publicly available, while bylaws are strictly confidential. If required, the Charter may include powers to maintain supervision and control in favor of the Founder. In addition, foundations are managed by the Board and may be controlled by the Guardian.
Differences between the foundation and the trust
The foundation is an alternative to trusts for financial planning and structuring. Foundations often play a similar role to trusts, especially when it comes to the custody and protection of assets and inheritance planning. However, they have completely different legal structures.
The most important aspect is that the foundation is an independent legal entity that owns assets independently. The foundation satisfies the needs of its founder in asset protection, but at the same time retains corporate legal personality. The ownership of assets is not transferred to the trustee. Instead, the foundation is managed in accordance with the rules set out in the charter and bylaws. Their compliance is monitored by the Board chosen by the founder.
Advantages of the foundation
Due to the advantage of the independent legal personality, foundations can offer practical and flexible structures for a variety of purposes, including:
- management and preservation of private wealth;
- planning of not just inheritance, but the succession of generations;
- tax planning;
- charitable institutions;
- asset protection;
- corporate structuring;
- protection from creditors.
Foundations provide for a mechanism of consolidating family holdings of various assets into a single supreme holding structure. The use of the foundation to keep family assets, be it business interests, real estate, financial investments or any other assets, allows legalizing very clear instructions on the transfer of assets upon inheritance.
The transfer of ownership of all assets consolidated within the foundation structure upon inheritance is economically beneficial compared to the complex process of separate and individual transfer of a wide range of assets. Clear wishes and plans set out in the charter and bylaws of the foundation makes the inheritance procedure much less complicated and helps to avoid various common problems that arise after the death of an older family member.
Creation of the foundation provides for a much higher degree of confidence and comfort that the assets will be distributed in accordance with the wishes of the founder, and the life of the foundation will continue indefinitely, even after their death.
Types of foundations in the UAE
In the Emirates, there are three options for creating foundations in the Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC) free zones or the RAK International Corporate Centre (RAC ICC) offshore zone.
The regulation of these options is similar, it is based on common law. Abu Dhabi Global Market directly applies the law of England and Wales. In Dubai International Financial Centre, the same law is codified. In RAK International Corporate Centre, you can choose between the legal regime and ADGM or DIFC courts.
Disclosure of information
RAC ICC as an offshore requires minimal disclosure of information, ADGM discloses only basic information, and DIFC – maximum possible information.
Opening of bank accounts
From a practical point of view, ADGM and DIFC are of greater interest, since it is almost impossible to open a RAC ICC foundation account with Emirati banks.
Registration of foundations
Foundations in the Emirates are created and managed quickly and simply. However, it should be admitted that preliminary compliance upon creation of foundations in DIFC can take quite a long time. Requirements for current reporting are simple.
Foundations can be used for various purposes. For example:
- wealth management and preservation,
- family succession planning,
- tax planning,
- asset protection,
- corporate structuring,
- for the public interest.
The foundation in the UAE is created by the founder and regulated by the constituent documents: Charter and Bylaws.
The Charter contains the main provisions that regulate the organization, assets and objectives of the foundation.
The foundation is manages by the Board similar to a company’s board of directors. The founder may be one of the Board members. The role and responsibilities of the Board are set out in bylaws. The foundation may have a wide range of objects (both purely private, non-charitable and philanthropic) and designated beneficiaries. The founder may be one of the beneficiaries.
As in European structures, in the UAE, assets transferred to the foundation by the founder become the exclusive property of the foundation. Such assets cease to be the property of the Founder and are no longer subject to infringement by third parties (e.g. creditors, former spouses) or heirs.
Ordinary ownership of assets and ownership through the foundation
In conclusion, here are some considerations about disadvantages associated with owning assets on your own behalf and advantages of inheritance through the foundation.
Problems related to asset ownership in one’s own name
1.No asset protection
Personal assets are readily available to creditors, government and/or other family members who may have claims.
2. No confidentiality
Names of family members directly appear as owners in all official documents (e.g. certificates of ownership, licenses, etc.) and in registers of registrars of companies, land cadastres, etc.
3. Problems related to registration of inheritance after the death of a family member. For example:
- Lengthy and complex inheritance procedures in courts.
- Unfavorable distribution among direct heirs, e.g. spouses, daughters, etc.
- Disputes between heirs (children, brothers, sisters and other relatives).
- Reduction in the value of assets accumulated over years.
- Freezing of personal and business bank accounts of the family.
4. No tax planning
When moving to another country, any family member can be taxed on wealth around the world (including assets located in the UAE). Any subsequent transfer of UAE assets after family members move to another country may result in inheritance tax and/or wealth transfer tax.
Solutions offered by the foundation
1.Protection of family assets and heirloom
Foundation assets are unavailable to creditors, government authorities and/or other family members.
Beneficiaries of the foundation are individuals, so the family fortune of the founder can be managed more discreetly. It provides for a number of advantages:
- Minimizes the risk of claims/lawsuits from third parties against the founder and their family in order to extort monetary benefits/settlement.
- Increases the bargaining power when concluding business transactions and acquiring assets.
- Reduces the risk of becoming a target for unconscientious persons.
- Helps to avoid uncomfortable discussions of prenuptial agreements for the founder or heirs.
- Facilitates inheritance planning between generations and tasks of protecting assets and funds, especially if the family is international, highly mobile and has assets in different jurisdictions.
3. Family management
Foundations provide for an effective corporate management system similar to a company or an office of one family. It allows to professionally manage wealth in the interests of the founder and their family.
4. Efficient succession planning
Foundations allow the founder to state their wishes regarding what should happen after their death, and to ensure that the assets (and/or benefits from them) will be distributed in accordance with their wishes.
5. Inheritance creation
With the help of the foundation not only simple inheritance of assets is achieved. Objectives and vision of the founder enshrined in the Charter and bylaws can continually remain in the future generations of their family.
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