Amidst the evolving landscape of estate and asset dynamics in the United Arab Emirates (UAE), the establishment of foundations has emerged as a highly successful and preferred avenue. Recognized as a civil law system concept, foundations are gaining popularity among wealthy individuals, families, and businesses, whether they are local residents or expatriates.

Since their introduction to the UAE in 2017, foundations are becoming the preferred choice for managing assets and their distribution due to the various benefits they offer. They have evolved into an indispensable component of the country's wealth management framework, currently spanning three of the UAE's prominent free zones: Dubai International Financial Centre (DIFC), Abu Dhabi Global Market (ADGM), and Ras Al Khaimah International Corporate Centre (RAKICC).

This article will begin by providing a comprehensive overview of the foundation regime in the UAE. It aims to describe the advantages of establishing a foundation, including a discussion on its composition. Lastly, the article will highlight the key distinctions in the process of setting up a foundation within ADGM, DIFC, and RAK ICC jurisdictions.

Overview of the Foundation

First, a foundation stands as an independent legal entity, established through the founder’s unilateral declaration of will. Operating autonomously, it possesses a distinct legal personality separate from the founder, which will be further discussed below. This legal autonomy shields assets from external claims, including bankruptcies and creditors.

The foundation's administration is carried out by council members, chosen by the founder of the foundation itself. The role of these members is to oversee property management and execute the foundation's objectives.

Guided by a foundation council, assets selected by the founder adhere to the foundation's Charter and By-laws, dedicated to benefiting specific beneficiaries or supporting particular causes.

Distinct from a trust which lacks a legal personality and does not conduct transactions in its own name, a foundation doesn't require a fixed or specified limited period for its establishment. Unlike a company as well, it does not issue shares. Therefore, there are no shareholders in the foundation; only council members and beneficiaries as outlined below. Furthermore, in contrast to a trust's triangular relationship between settlor, trustee, and beneficiaries, both trust and foundation aim to safeguard wealth and ensure the continuity of legacy for future generations.

Additionally, a foundation serves multiple purposes, including management and preservation of private wealth, planning for succession, strategic tax planning, charitable institutions, safeguarding assets, structuring corporate entities, and protection against creditors.

All the aforementioned aspects are specified in the foundation's constitution, comprising both its Charter, which establishes the foundation, and the By-Laws, which elaborate on the internal governance framework of the foundation and any additional power granted to the founder and members of the council.

Benefits of establishing a foundation and its composition

As previously mentioned, the foundation is established by the founder, who could be either a natural person or a legal entity. Ordinarily, upon the establishment of the foundation, the said founder loses any rights towards the foundation or its property, unless it is stated otherwise in the By-Laws.

The foundation must have a council, comprised of at least two (2) members that administrates the affairs of the foundation in accordance with the foundation's Charter and By-Laws. The founder may be appointed as a member of the council.

A crucial point to highlight is that the appointment process is only completed when the designated members explicitly declare and confirm their consent to the relevant authority. For instance, the DIFC mandates an official document from each member, confirming their agreement to the appointment.

In addition, a guardian, either an individual or a legal entity shall be appointed by the founder. The guardian's role is to oversee the council and take necessary measures to ensure that the council fulfills its functions in a proper manner. However, the appointment of the guardian is not always mandatory. According to DIFC Foundations Law Nº 3 of 2018, if a foundation has a charitable object or a specified non-charitable object, the foundation must have a guardian in relation to that object. The founder is not eligible to serve as the guardian, and the appointment of a person as a member of a council is void and will have no effect if that person is also a guardian of the foundation. Powers may be reserved to the guardian in the By-Laws to approve or reject actions taken by the council.

In contribution to the objectives of the foundation, the founder determines the beneficiaries, also called “qualified recipients”, that have no right to or interest in the property of the foundation other than a right to payment of amounts which arises by virtue of the terms of the By-Laws.

On the other hand, there are several advantages when it comes to establishing a foundation:

1- Separate legal entity as previously stated. However, it is restricted from engaging in any business activities beyond fulfilling its designated purpose.

2- Wealth fortress and protection from personal liabilities and external claims from third parties attempting to extort monetary benefits or settlements from the founder and its family.

3- Continuity: Notably, foundations in the UAE extend beyond the founder's lifetime, perpetuating their impact indefinitely.

4- The qualified recipients remain confidential, enabling a more discreet management of the founder's family wealth.

5- The qualified recipients may be individuals, corporate entities, a further foundation or remain unspecified at the time of establishment.

6- Foundations originating from abroad can be transferred to the regulatory frameworks of ADGM, DIFC, or RAK ICC.

Key differences between ADGM, DIFC and RAK ICC when setting up the Foundation

As previously stated, individuals have the flexibility to establish a foundation within one (1) of the following free zones in the UAE: DIFC, ADGM, and RAK ICC.

1- Setting up in DIFC

The framework for Foundation Regime in DIFC is regulated by Foundation Law Nº 3 of 2018. This legislation comprehensively defines various aspects of foundations, spanning from their inherent nature to the details of their establishment and administration of the foundation. Notably, the DIFC regime stands as the exclusive platform allowing a corporation's transformation into a foundation, a process facilitated through the DIFC portal.

In fact, when submitting a foundation application via the DIFC portal, a series of queries related to its internal management and any existing company formation are addressed. In accordance with the provisions set forth in the Foundation Law, a private company, as governed by the DIFC Companies Law No. 5 of 2018, may seek a certificate of continuance under this legislation, contingent upon unanimous shareholder approval, as stated in article 66 of the aforementioned law.

Distinguishing itself, the DIFC Foundation holds the unique capability of having either a charitable or non-charitable object. Interestingly, while DIFC Foundations are permitted to be exclusively philanthropic, ADGM does not share this allowance. In instances where a foundation is established for charitable purposes, a guardian is mandated, as also stipulated in article 23 of DIFC Foundation Law Nº 3 of 2018.

In terms of dispute resolution, the DIFC system incorporates arbitration as a primary alternative. Notably, a DIFC Foundation is gifted with the authority to issue depository certificates (commonly known as securities), which signify the value of the assets held and the contributor's corresponding entitlement.

Last but not least, when it comes to financial considerations, the DIFC Foundation Law explicitly outlines the fees associated with the registration and annual renewal of foundations. Until this day, the application for the Registration of Foundation and its Annual Renewal Fee amounts to USD 200. Furthermore, the notification processes to relevant authorities vary depending on the nature of the notification.

2- ADGM Foundation Framework

Foundations in ADGM are governed by Foundation Law 2017, that has been subject to amendments ever since. ADGM, being the first free zone to tackle the foundation regime, guarantees the confidentiality of council members' identities, unlike the DIFC where this information is publicly accessible upon payment of an access fee. ADGM ensures the privacy of council members unless specifically requested by the Registrar.

Distinctively, the ADGM Foundation regime stands out by not imposing an annual duty for the continuous filing or auditing of accounts. While other regimes require the maintenance of account records, ADGM Foundation is exempted from filing these records annually unless explicitly requested.

It's noteworthy that establishing an ADGM Foundation for purely philanthropic or benevolent purposes requires a more customized structuring. Unlike certain regimes, philanthropy alone may not suffice as a foundation's primary objective in ADGM, necessitating additional considerations in the foundation's design and mission.

A notable distinction worth highlighting is the rapidity of the establishment of a foundation in ADGM, where it might take up to maximum five (5) working days to set the foundation up once requested documents are submitted. In contrast, DIFC follows a more delicate process, where an initial approval has to be granted first upon the submission of the application via the online portal prior to the submission of other documents including but not limited to the registered agent, data protection compliance and management details. Therefore, ADGM foundations are fast and simple to apply for!

In terms of fees, the cost for both registration and annual renewal in the year 2022 is USD 200. This financial requirement is specified under the ADGM Foundation regime, demonstrating a transparent framework for individuals considering foundation establishment within the ADGM jurisdiction.

3- RAK ICC FOUNDATION

Both ADGM and DIFC adhere to English Common Law, whereas RAK ICC adopts the British Virgin Island model. Notably, RAK ICC distinguishes itself by not maintaining a publicly accessible database of foundation information. The confidentiality of foundation details is safeguarded by UAE privacy regulations, and disclosure only occurs when compelled by competent authorities.

A distinctive requirement in RAKICC is the mandatory appointment of a registered agent, in contrast to DIFC and ADGM where this is an optional provision. This underscores the varied regulatory frameworks across the jurisdictions.

Lastly, the fees associated with RAK ICC in 2022 include a registration cost of AED 750 and an annual renewal fee of AED 750, approximately equivalent to USD 200. These costs serve as key components in understanding the economic aspects of establishing and maintaining a foundation within the RAK ICC jurisdiction.