Succession Planning in the UAE for Family Businesses

Succession Planning in the UAE for Family Businesses

Succession Planning in the UAE

Succession Planning in the UAE – Family Businesses (“FBS”) are significant contributors to United Arab Emirates’s Gross Domestic Product (GDP), wealth creation and economic stability. However, research demonstrates that the survival rate of FBS over the generations is low. Several factors contribute to the low survival rate, from increased competition to lack of capital, with one of the key reasons being lack of succession planning.

It is typical for high net worth individuals to delay succession planning indefinitely as they believe there is no threat to their health and safety. In context of the impact of COVID-19, FBS in UAE are now concerned as health of family patriarchs is at risk. FBS increasingly recognise the importance of succession planning to safeguard family interests and to ensure preservation of wealth.

Succession planning is a mechanism through which the family patriarch sets out terms under which the business will be transferred to the future owners. It also includes a corporate governance framework setting out the roles and responsibilities of each family member and the rights and obligations of the management and board of directors. This briefing deals with the succession planning strategies which FBS may adopt within the legal and regulatory framework in UAE.

Trusts

As trust is a common law concept, UAE does not recognize the concept of trusts except in Dubai International Financial Centre (“DIFC”) and Abu Dhabi Global Market (“ADGM”). A trust is governed by a trust deed and is created by a settlor who transfers property to a trustee who then holds legal ownership of the assets for the benefit of beneficiaries. While the beneficiaries do not have legal ownership of assets, they receive income from trust property or can receive the property itself.

Trusts are a solid asset holding structure where the assets remain within the family. For example, a settlor under a trust deed assigns an asset to his wife for life and on her death to their children. The wife cannot then sell the trust property to a non-family member, which is a possibility if the transfer is a gift.

The legal framework of trusts in DIFC is governed by DIFC Trust Law No.4 of 2018 (“DIFC Trust Law”) and is governed by Trusts (Special Provisions) Regulations 2016 in ADGM. DIFC Trust Law sets out that a valid DIFC trust is not voidable in the event that it conflicts with foreign law. There is a notion that “foreign law” in this context also refers to Sharia law. However, it cannot be stated with certainty that distribution of assets under a DIFC trust made for succession planning will not be voidable if it contradicts Sharia principles until this concept is further tested by the courts.

Family Offices

Family office is a privately held company for management of wealth, asset and legal affairs of families. There are two types of family offices: single-family offices (SFO) and multi-family offices (MFO).  SFO is relevant when the assets of one single family are in question whereas MFO is used to pool the assets of multiple families.

DIFC, ADGM and Dubai Multi Commodities Centre (“DMCC”) have provisions for SFO. The applicable regulations are DIFC Single Family Office Regulations 2011, DMCC Company regulations 2003 and ADGM Companies Regulations of 2015 regarding restricted scope of companies.

A key requirement of SFO is that it must be wholly owned by the same family. Generally, a family is considered as a single family when all of its members are bloodline descendants of a common ancestor or their spouses, widows and widowers. Minors, step children and adopted children are also recognised in the single family under most regulations.

The jurisdictions differ with respect to the minimum share capital and investible funds requirement. ADGM does not have a minimum share capital or investible funds requirement.  DIFC requires a minimum of USD 50,000 as share capital and minimum of USD 10 million as investable assets. DMCC requires a minimum of AED 50,000 as share capital or AED 10,000 per shareholder and a minimum of USD 1 million as investible or liquid asset.

Foundations

FBS are typically run by one or two family members who run the business and some who play a passive role resulting in members having varied assumptions about their role in the business. The rights and obligations of members of the FBS therefore often remain undefined leading to disputes relating to succession, management and ownership. In order for the FBS to grow, it is recommended that the management powers are moved from family members to professional leadership.

Under a foundation, a founder will pass on its assets to a foundation which will hold those the assets in its name separate from the founder’s personal wealth. Foundations are managed by a foundation council and may be supervised by a guardian. Foundations have its own legal personality and can hold assets in its own right, unlike trusts.  The founder may retain control under the by-laws by nominating himself as one of the council members or a beneficiary which is an advantage of a foundation in comparison to trusts.

In the UAE, FBS have options of setting up foundations in ADGM under ADGM Foundation Regulations 2017, in DIFC under Foundations Law No.3 of 2018 and in Ras Al Khaimah under RAK ICC Foundations Regulations 2019.

Family Business Law

Despite the fact that UAE business market is widely dominated by FBS, there had, until recently, been no legal framework governing FBS. His Highness Sheikh Mohammed Bin Rashid Al Maktoum issued Law No. 9 of 2020 regulating family-owned businesses in Dubai (“Family Business Law”) to bridge this lacuna.

The provisions of the Family Business Law applies at the request of the family members, who are joined by a common property and applies to movable or immovable property, shares in commercial companies, civil companies and assets of sole proprietorship except public joint stock companies.

The Family Business Law regulates the articles of the family ownership contract with respect to disposition of shares, formation of board of directors, appointment of a manager to manage the family property and functions and obligations thereof. The family ownership contract specifies the share of each partner in the family property and is initially valid for a period of 15 years which can be further renewed for a similar term subject to the agreement of all the concerned members. A well drafted family ownership contract should ideally address both business and family interests.

Succession planning is a continuous process, and it is recommended to start early with an agile approach as there is no one-size-fits-all model which caters to all families. FBS are increasingly using specialist advisors such as legal and financial advisors to facilitate succession planning. Decisions should be taken in context of the wishes of the family patriarch, nature of assets and the business requirements to ensure long term sustainability of the FBS.

https://www.galadarilaw.com/

succession planning in the UAE

Abdullah Z. Galadari

Galadari Law
succession planning in the UAE

Manish Narayan

Galadari Law
Is Switzerland Introducing a Trust Law?

Is Switzerland Introducing a Trust Law?

On a governmental level, the introduction of a Swiss law on trusts is currently being reviewed as Switzerland does not provide for a suitable instrument to be used for estate planning or asset protection purposes.

Arguments for the introduction of a Swiss Trust Law

It is argued that an introduction would have various advantages, for example citizens would be offered an instrument that is subject to the domestic legal system being more accessible and easier to understand, and providing clarity, leading to greater transparency and legal certainty. In addition, new areas of activity would be created for Swiss professionals to advise on trusts, to set up trusts and to manage trusts and their assets.

Is a Swiss Trust a suitable instrument?

Many scholars and practitioners take the view, that a common-law trust is not a suitable instrument and that therefore it would be more advisable to review the existing instruments, such as the Swiss family foundation or the fiducie (Treuhand), and to amend them accordingly.

One of the main concerns is that ownership cannot be split into legal and beneficial ownership. To be the owner, a trustee must have all property rights in the assets while the beneficiaries have personal rights against the trustee only. Thus, the common law trust concept would need to be amended in order to fit into the Swiss legal system.

What would be the tax implications?

So far, most foreign trusts are treated tax transparent for Swiss tax purposes based on an economic assumption that the settlor has not given the assets fully away if he is either a beneficiary or retained certain rights such as amending the trust deed, appointing and/or removing a trustee or changing the beneficiaries. In this case, the funds and the income therefrom are still allocated to a Swiss resident settlor with the respective tax consequences.

This transparent tax treatment can be advantageous as no transfer tax is levied when settling the trust.

With the introduction of Swiss trust law it is not clear yet whether such transparent treatment would remain. There is currently an expert group analysing if a Swiss trust could become subject tax in Switzerland. If this was the case, it is likely that no Swiss trust law will be introduced.

Outlook

If and when a trust law will be introduced is not clear yet. However, it will take at least another 3 to 4 years for an implementation. As the already existing family foundation could be a suitable civil law instrument, it would be feasible to analyse the existing obstacles for the use of Swiss family foundations and to amend these provisions at the same time. https://blumgrob.ch/

RFF Lawyers is a tax law “boutique” firm in Portugal, specialized in tax and business law, both for corporate and institutional entities and individual clients. Rogério and his team at RFF Lawyers seek to foster lasting relationships - of confidence and trust - and to provide the proper legal solutions meeting the specific needs of each client, whether individual or corporate. 

Rogério Fernandes Ferreira

Rogério Fernandes Ferreira

RFF Lawyers

rfflawyers.com

Dr. Natalie Peter works as an attorney-of-law in Zurich and is heading the private client practice of Blum & Grob Attorneys-at-law.

succession planning in the UAE

Natalie Peter

Blum Grob
Acquiring a Vacation Home in the US

Acquiring a Vacation Home in the US

If you are acquiring a vacation home in the USA, you can avoid common pitfalls and take full advantage of opportunities by using appropriate structures to preserve your assets and do so on a tax-effective basis.

Vacation home in USA

My client, David, recently told me that as a so-called “snowbird” going to Florida each winter, he wanted to acquire a vacation property there. I advised him that a Canadian resident who dies owning property with a U.S. situs in law, such as the Florida Property which is real estate located in the United States, may be subject to U.S. estate tax at an escalating scale up to a maximum rate of 40%.

Accordingly, unless proper tax planning is undertaken by a Canadian resident investing in U.S. situs property, there can be an onerous tax burden on death or from making a gift.

Canadian Discretionary Family Trust

Instead, I suggested he consider establishing a Canadian Discretionary Family Trust instead of a US Family Trust to hold the American vacation property.  Thus, on the death of either David or his spouse, there will be no exposure to U.S. estate tax.  In addition, if the Trust sells the property for a capital gain, the Trust is viewed as a flow-through vehicle for U.S. tax purposes, and so the long-term capital gains rate of about 23% would apply to the individual Canadian beneficiaries.  Because the top rate in Ontario for capital gains is about 26.5% and a foreign tax credit will be available to offset Canadian tax, only 3.5% tax would be payable in Canada.

succession planning in the UAE

Lorne Saltman

Gardiner Roberts LLP
+1-41-6625-1832
www.grllp.com
[email protected]

The Trust as a Family Holding Structure 

The Trust as a Family Holding Structure 

A Trust can provide a very good solution for the long term holding and preservation of family wealth. Trusts have been used for generations for the holding and preservation of family wealth.

A trust can arise in several ways, but the most usual in the context of family wealth is either by virtue of the lifetime act of an individual, or by virtue of provisions left by an individual under his will, and so coming into effect upon his death. 

General introduction of the Trust as Family Holding Structure

It can sometimes be difficult to explain what a trust is, but at risk of oversimplification, a trust can be described as being the situation which arises where an owner of property causes that property, either by lifetime transfer, or by virtue of provisions under his will, to be transferred to persons, known as trustees, to hold for the benefit of other persons, known as beneficiaries.

The trustees generally hold the legal title to the trust property, but the beneficial entitlement, or the beneficial interest, lies with the beneficiaries.  The beneficiaries are entitled to require the trustees to perform their trusteeship according to the governing instrument, usually either an inter vivos trust deed or a will.

They need not themselves have been a party to the establishment of the trust. Trustee, on the other hand, hold a position of considerable responsibility. Two of the traditional tenets of trusteeship are that a trustee may not profit from his trusteeship unless authorised to do so, because all profits belong to the beneficiaries, and a trustee may not delegate his responsibilities as trustee to someone else, again unless specifically authorised to do so.

Thankfully, modern trust instruments are invariably drafted to include the capacity for trustees to be paid for acting as trustees, and for appropriate levels of delegation to be done to enable trustees to function efficiently in the modern world.

The identity of the beneficiaries of the trust, and their respective interests, can be fixed at the outset, or alternatively they can be determined as an identifiable group such as the descendants of a person, with the question of allocation of assets or benefits amongst those beneficiaries being left to the trustees, although generally with some background guidance provided by the settlor or testator in a letter of wishes.

Such latter type of trusts are generally described as discretionary trusts, as opposed to the former type of trusts which are described as fixed interest trusts.  Where a settlor or testator is concerned with long term holding and preservation of family wealth, it is inevitably a discretionary trust which is used because it provides the opportunity to cater for future events and circumstances as they arise and develop and avoids the requirement of having to decide in advance on how family wealth should proceed down the generations.

Planning for family wealth preservation down the generations, and particularly where it is inevitably going to be a multi jurisdictional matter, is always going to throw up particular problems which have to be dealt with in their particular circumstances.  Trusts can provide solutions under several different headings.

Choice of trustees

It is self evident that the choice of a trustee to handle substantial family wealth, and particularly so where this involves an operational business, is an important aspect.  It is invariably going to involve a professional trustee, often a financial institution. Reputation and competence are paramount.

An individual considering the selection of a trustee will generally wish to become familiar with the candidate under consideration. This can be an extremely valuable process in terms of ensuring that the trustee has a good background knowledge of the family and of the assets to be placed in trust.  It also enables the introduction of the existing family advisers to the trustee to allow for a smooth transition to the trusteeship once it has been established.

Settlor control

Successful individuals with wealth created by themselves often find it difficult to consider transferring that wealth to trustees and ceding control over it, all the more so where the wealth continues to be represented by a successful group of operating companies. At its most extreme, this can lead to the realisation that it may not be appropriate for such an individual to consider making a lifetime trust, but rather should be covered in terms of a will to become operative on death following which the individual’s capacity to control is inevitably curtailed.

Alternatively, a measure of control can be retained by the individual through retaining a direct shareholding in one or more group companies giving either positive control, or maybe some specific negative sanction. This can also be achieved through the mechanism of the terms of the trust itself by requiring the trustees in certain circumstances to seek the consent of the settlor for certain specified transactions.

However, it is important that any settlor control retained in respect of trustees’ actions or decisions should be limited to particular aspects only, because too much retained control can result in claims that there is no real trust at all. Such claims may arise in the areas of taxation, or creditors or succession, and possibly frustrate the overall intention behind the making of the trust in the first place. https://www.linkedin.com/in/john-hickson-1b855b79/?originalSubdomain=ie

Various aspects of the Trust as a Family Holding Structure

Various aspects of the Trust as a Family Holding Structure

Various aspects of the Trust as a Family Holding Structure

A trust can provide a very good solution for the long term holding and preservation of family wealth. Trusts have been used for generations for the holding and preservation of family wealth.  A Trust can arise in several ways, but the most usual in the context of family wealth is either by virtue of the lifetime act of an individual, or by virtue of provisions left by an individual under his will, and so coming into effect upon his death. 

Family office

Trustees in many cases effectively function as a family office, looking after the family’s wealth, and being involved in many aspects of the lives of the family members. A professional trustee will very likely have its own internal capacity to provide many additional levels of service beyond pure trusteeship as such.  Alternatively, trustees may choose to use outside service providers for different aspects, or they may seek to establish a family office company which they hold as part of the trust assets. Such a family office company can be self standing with its own management and employees, remunerated by fees charged to the various entities to which it provides its services. 

The advantage of the trust structure is that there is a trustee who is ultimately responsible for all aspects encompassed by the trust, and subject to the trustee operating properly in accordance with the governing trust instrument, decisions ultimately lie with the trustee which can help to minimise disputes and disagreements.  It does not mean that disputes and disagreements at family level will not arise, but a third party decision maker can often take the heat out of disputes and disagreements.

Privacy

Wealth is a privilege for those lucky enough to enjoy it, but it also brings burdens of varying degree and in various contexts.  While professional trustees in most places have to be regulated for prudential purposes, it is generally the case that details of particular trusts, their assets and beneficiaries remain matters that are private unlike, for example, in the case of companies where annual filings, including accounts, have become the norm. 

A particularly important point in this context is that where assets are put into trust during an individual’s lifetime, they will not need to go through the probate process at his death.  The probate procedure in most places involves an element of public information, generally including the terms of the will, and the value of assets covered by the grant of representation to the estate.  Using a trust may be able to assist in maintaining personal, commercial and financial security for a family and its businesses and other assets.

Claims by creditors and others

A trust may be of assistance against claims made against an individual by creditors and others, certainly against speculative claims which are essentially founded only in their nuisance value against a wealthy individual. This can include matrimonial and heirship claims, but as these are generally referable to statutory entitlements, the statute will generally override the ability, whether wholly or partly, to defeat such claims by putting assets in trust.  Cross border claims can bring their own issues in the sense of whether the courts of a country will strike down a trust which was legitimately created under its law, by reference to a matrimonial or heirship claim under the law of another country. 

While the position of the settlor of a trust is sometimes exposed in this manner, the position of the beneficiaries should generally be better.  As a beneficiary of a discretionary trust does not have any actual immediate interest in any trust assets, those assets cannot be actioned in respect of the beneficiary’s liabilities.  The most that might occur would be for a court to make an assumption in matrimonial proceedings, for example, that a beneficiary had a reasonable expectation of receiving benefits from the trust, and hence the assets might be notionally brought into account in the division of the individual’s own assets as between that beneficiary and the spouse of that beneficiary.

Beneficiaries

A trust exists for the benefit of the beneficiaries, but this does not mean that it must be divided up amongst the family members in the short term.  The maintenance of family wealth is generally a long term aspiration for the benefit of the current and also future generations of the family concerned.  This can enable the trustees to consider a policy suited to the nature of the trust assets, and the divergent competencies and characteristics of the beneficiaries from time to time. This is easier to deal with where the trust assets are comprised of portfolio type investments. 

The trustees in such circumstances have to manage a large pot of value and consider the manner in which it should be used to provide benefits to the beneficiaries.  It is obviously much more difficult to manage where the principal asset comprises an operating group of companies.  There will be tensions at beneficiary level between beneficiaries who might wish to manage some of the businesses and reap rewards in terms of ownership, and beneficiaries who feel they should be able to receive value from the trust, whether to establish alternative businesses or to engage in laudable, but less remunerative activities such as the arts of philanthropy. 

This is where competent professional trustees will need to draw on their experience, and to use their skills to reconcile such tensions.

Philanthropy

A trust can cater for a family’s philanthropic aspirations by including charities as potential beneficiaries. 

Settlor guidance on the nature of those aspirations will assist trustees in this context, or guidance from time to time from representatives of the main family branches.  Where the circumstances warrant it, the trustees may see fit to establish a separate charitable fund as a carve out from the main trust fund to facilitate separate management in order to focus on the specific charitable areas which they desire to benefit.

Conflicts of interest

Much of a trustee’s job is determining and balancing the conflicting interests of beneficiaries. Inevitably, on occasions, some beneficiaries will consider themselves losers in such conflicts, but provided the trustees have acted in accordance with the governing trust instrument and have properly considered all relevant matters, and not any that are not relevant, they should not be exposed to any sanction in respect of their decisions.

The position is very different where trustees may find themselves exposed to a personal conflict of interest with regard to their position as trustee.  Trustees must act for the benefit of the beneficiaries, and except for matters specifically permitted under the governing trust instrument, such as entitlement to remuneration for their trustee services, must endeavour to ensure that conflicts of interest do not arise. 

If a conflict of interest should arise, any loss to the trust fund occurring in consequence may be considered to be due to a breach of trust, in respect of which the trustee will be required to make good the loss to the trust fund. On the other hand, if a benefit should occur to the trust fund in course of a trustee conflict of interest, the trustee has no inherent entitlement to any additional remuneration as a result.

Trustee charges

As a relic of former times, trustees are generally not permitted to profit from their trusteeship unless appropriately authorised to do so by their trust instrument. Professional trustees are obviously not going to act without being able to charge their normal fees and so trust instruments invariably contain authorisation for trustee to be paid their normal level of fees.

Trustee Indemnity

Trustees have a general indemnity under law in respect of expenses incurred in the exercise of their trusts and powers, and they are entitled to pay or discharge such expenses out of the trust assets.  This will invariably be extended by more specific terms in trust instruments clarifying that trustee liability will be confined to loss caused by trustee’s wilful misconduct or wilful breach of trust.  This is necessary to enable trustees to act honestly and properly in circumstances which may result in certain beneficiaries feeling aggrieved.  Trustees indemnity clauses which seek to exculpate trustees for loss to the trust fund due to their negligence are generally unlikely to be upheld. https://www.linkedin.com/in/john-hickson-1b855b79/?originalSubdomain=ie