UAE: How did family businesses come about and how are they structured?
Family businesses play a huge role in the Gulf region – but how do they operate?
Dubai: Family-owned businesses are often recognised as prominent participants in not only the GCC, but also in the wider global economy. But how did they come about playing an influential role, operate in the UAE and what makes them different from conventional businesses structures?
Family businesses, and their role in the Gulf
Family businesses have a long history in the Gulf and are considered key to nearly every economy in the region, with research showing that they account for a large chunk of the GCC’s non-oil gross domestic product growth.
The UAE has taken several steps to support the family-owned businesses in the region and last year, the UAE Cabinet, had approved a draft law to allow family businesses to list on the country’s financial markets.
Dubai is home to a number of wealthy family-owned businesses and offices and analysis of family business wealth highlights their contribution to Dubai’s economic growth, with their holdings ranging across multiple sectors from retail and leisure to financial services.
Prominent family businesses in the UAE
There are numerous family owned businesses in the UAE, and it represents a large part of UAE business community. As per multiple reports, family-owned businesses contribute 60 per cent of the country’s GDP and 80 per cent of the nation’s workforce.
According to Forbes Middle East, Saudi Arabia topped the list with 36 family businesses, with 21 UAE families ranked among the Arab world's 100 most powerful family businesses – second highest in the region after Saudi Arabia.
The UAE is followed by Kuwait (10), Oman (6), Bahrain (5), Qatar (5), Jordan (4), Morocco (4), Algeria (3), Egypt (3) and Lebanon (3).
Around 87 per cent of the region's family businesses are diversified while the rest are into one or two sectors including real estate, jewellery, FMCG (fast-moving consumer goods), industrial, food and beverages and retail. The top 10 families employ 600,000 people with a net worth of more than $31 billion (Dh114 billion).
The list also includes Al Habtoor Group, Al Naboodah Holding, Khalifa Juma Al Naboodah Group, Ali & Sons Holding, Albwardy Investment, Ghassan Aboud Group, Abu Ghazaleh Investments, Al Nowais Investments, Al Shirawi Group's holding company - Oasis Investment Company, Al Fahim Group, Chalhoub Group, Al Tayer Group and Gulf Marketing Group.
Brief historical context: How did family businesses first come about?
The earliest example of a family business, globally, may be farming – in which members of the same family worked together, thus intertwining both the personal life and work life of the members. This also makes it very much possible that a family-owned business may be the oldest form of business organisation in history.
It was in the nineteenth century that the modern concept and understanding of family offices was developed. In 1838, the family of JP Morgan founded the House of Morgan, which managed the family’s assets. Over four decades later, the famous Rockefeller family also founded their family office.
Do they only include high net worth families?
In essence, a family office is a privately held entity that owns several family businesses and handles wealth and investment management for a high net worth (or ultra-high net worth) family with the aim to successfully grow and transfer the family wealth down to the generations.
Family offices may also be involved in providing back office or support functions (such as accounting or payroll services) to family-owned entities and managing legal and financial affairs for such entities.
The tax and succession planning is another important aspect that family offices undertake for the wealthy family members.
Family businesses influence most GCC economies
It is an established fact that many business conglomerates in the GCC region are family-owned. Such businesses are major employers and play a significant role in the development of national economies.
A study by an international trust and corporate management company Intertrust Group found that family offices are the fastest-growing structuring vehicle among the rich Middle Eastern families, largely because of investment decisions influenced by global trends.
How family businesses operate in the UAE?
The UAE has legal and regulatory frameworks in place when it comes to setting up family offices. Each of Abu Dhabi Global Market (ADGM), Dubai International Financial Centre (DIFC) and Dubai Multi Commodities Centre (DMCC) have their own piece of regulations on setting up family offices in respective free zones.
The definition of family members (norms on who are and aren’t considered immediate family), minimum paid-up capital requirements, and compliance and reporting requirements, amongst others, vary in each of these three free zones.
However, all three of the zones do not tax any corporate income or capital gains of the family offices. They also allow the family offices in their free zones to provide asset and wealth management services, day-to-day accounting and management of legal affairs, and administrative services to the family-owned business falling under the umbrella of a family office.
(To start any business in any country you need to invest your money first. This money that shareholders invest in order to start or expand the business is called share capital. In the UAE, each registration authority determines the minimum amount of required share capital independently. The maximum amount of share capital is usually not set, as such you are allowed to decide on your own, how big the share capital of your company will be.)
What Dubai regulations cater to family businesses?
The Government of Dubai promulgated the Family Business Law last year which allows families in the Emirate to enter a family ownership contract. This contract can be entered into by the family members to structure the family’s assets. Family-owned assets such as shares (except those in listed companies) can be included in such a contract.
The share of each partner is determined in the contract, with the contractual duration not exceeding 15 years. The contract may be renewed for a further period. The contract may also include the formation of a board of directors to supervise the administration of the family businesses.
Under the new law, family members jointly owning assets can opt to enter into a legally binding and notarized family ownership contract, which will provide for the collective ownership and administration of family-owned property for the benefit of the family members and their successors.
The law will enable families to ensure continuity of ownership for the family in the event of a transfer of the assets, e.g. in the case of the demise of one of the family members, bankruptcy, etc.
Analysts at PricewaterhouseCoopers viewed that the introduction of the law represented an important step by Dubai, aimed at protecting family wealth and ensuring the continuity of family-owned businesses, which are a cornerstone of the local economy.