Dubai: Over the last few years, a rising trend within the entrepreneur ecosystem is an increase in the number of foundations in the UAE.
Several foundations have been established to help business start-ups succeed, providing essential financial, legal and organisational assistance to these businesses when it is needed most.
Foundations not only recognise the role entrepreneurs and their start-ups play in communities but they also drive its development. But what exactly is a Foundation and what does it comprise of?
The Foundation's founder has assets in the foundation, but owing to its separate legal status, will hold those in its own name and separately from the founder’s personal wealth.
Those assets are then managed by the Foundation council (equivalent to a board of directors for a company) in support of a cause or a purpose, or for the benefit of beneficiaries.
Foundations came into being in the Middle East region after the Abu Dhabi Global Market (ADGM) adopted the regime in 2017, followed by the same by Dubai International Financial Centre (DIFC) in 2018.
What does a Foundation comprise of? What is the Founder’s role?
The Foundation's founder, at the time of the entity’s establishment, decides who the council members are, with what powers and duties they must run the operations of the Foundation and what are their limitations.
The founder also decides whether or not to appoint a ‘guardian’ to supervise the operations of the Foundation, while also defining protocols of the replacement and succession of the council members as well.
At the time of establishment, the founder also decides who benefits from the foundation proceeds, in what percentages, and how to regulate succession in case one of the firm’s beneficiaries no longer exist.
Whereas, a trust is a legal relationship between the settlor (the person who creates the trust), the trustee (the person in charge of the trust) and the beneficiary (the person who receives benefits from the trust). Legal ownership of the trust sits with the trustees and beneficial ownership with the beneficiaries.
A Foundation shares similarity in functions and mechanisms with both a company and a trust. In other words, a Foundation has the character of a company with the attitude and behaviour of a trust. It is not a mix of, but rather it shares a lot of similarities.
Unlike trusts, the Foundation does not hold its assets on behalf of any other person. The Foundation owns its assets, thanks to its independent legal disposition.
This guarantees full control on the assets to the founder and the council members of the Foundation, unlike trusts, all the while keeping the separation between the person and his assets.
The Foundation as a corporate entity is compatible with all UAE laws and regulations and recognised by all its authorities to own assets in all asset classes like real estate, corporate shares, bank accounts, and portfolios.
Why is it important for entrepreneurs to structure their business through a Foundation?
Entrepreneurs, like any other business owners, are vulnerable to business risks, apart from the volatility of circumstances and societies where they live and do business.
Businesses and businessmen often prioritise risk assessment as they focus on the commercial side of their business and how to grow it. Knowing how to protect your business concept or any wealth you might have generated from it is a scope of study worth exploring in detail for entrepreneurs.
And vice-versa, those same entrepreneurs who succeed in their business jump from one idea to the other and from one enterprise to the next, which carries new challenges, new opportunities, and new risks.
They would be mistaken if they do not take the relevant measures to secure and protect their accumulated wealth as well as the other successful businesses when getting into a new phase or a new idea.
To leave a business or a financial legacy to the next generation, it is essential to first ensure financial security to save such a legacy. Maintaining such financial security on a long-term basis can be a real challenge as the risks are numerous and often not easy to predict.
That is why looking closely into structuring businesses and succession planning should always go hand in hand. With a proper corporate structure, and a relevant succession planning strategy, a lot of risks can be mitigated.
What kind of risks can a Foundation protect an entrepreneur from?
The Foundation as a corporate body, when used to structure your business model and operations and goes in line with the strategy of your succession planning, can avoid so many risks.
Like for example, domestic and foreign taxation, changes in corporate governance regulations, creditor hurdles, lack of eligibility of those you deputise, management disputes, freezing of assets, are a lot of the risks that entrepreneurs face through the regular course of life and daily business operations.
Foundation enables entrepreneurs and their families to consolidate and keep control over income-generating assets and investments and it works despite the nationality, country of residence, or religious faith.
What entrepreneur investments can be structured or consolidated through UAE Foundations?
Foundations can have their own self-operated bank account, and subsequently, it can cover bankable assets like cash, stocks, bonds, securities, and any other form of investment, saving, or current bank accounts or facilities that an entrepreneur can have.
With the rise of digital assets and specifically digital currencies like Bitcoins or Ethereum and digital assets like NFTs, more and more of such assets are getting recognition as an asset class.
Moreover, the marketplace portals to trade NFTs will soon be recognising and accepting Foundations to have its own digital wallet and be able to trade such assets, which will be beneficial for entrepreneurs looking to structure their businesses using a Foundation.
Foundations can own shares in other corporate structures like holding companies and licensed operating businesses. They also have the ability to own real estate, whether residential or commercial.
This can be used by the entrepreneurs themselves or for their investment purposes, by renting them and generating passive income, or just to buy and sell real estate properties whether inside or outside the country.
Foundations can also own cars, planes, boats, jewellery, and art. Foundations can also own intangible assets like intellectual property rights, goodwill, licensing rights, etc.
How easy is it for an entrepreneur open a bank account with a Foundation?
Foundation works like any other corporate structure that goes to a bank to open an account with it. Most holding structures face a reasonably higher due diligence process before the bank’s compliance department grants them the approval to open such a bank account.
All banks request a set of documents to satisfy their KYC ‘Know Your Client’ internal regulations as well as the minimum requirements imposed by the UAE central bank.
Understanding the notion behind such requests makes it very easy to handle such a process and to successfully achieve opening a bank account.
In short, considering the many risks that any financial institution carries when opening bank accounts, they must be provided with enough information and documents that allow them to perform their due diligence and to assess the risks they would be exposed to.
The basic documents that any bank will request to see for a Foundation will be the documents issued by the authority that register the Foundation.
This comprises mainly the bylaws and the charter of the Foundation, identification documents of those concerned at the Foundation, as well as the authorised signatory who will control the bank account and have a clear understanding of the main objectives of the bank account’s operations.
All such information should be easily provided to the bank by the entrepreneur. In brief, if there are no red flags on any of the persons in the foundation council, beneficiaries, or the authorised signatory, the opening of the bank account is going to be a very smooth transaction.
- Ahmed Elnaggar is the managing partner at Dubai-based legal service provider Elnaggar & Partners.