With global wealth on the rise, it is more important than ever for high-net-worth individuals (HNWIs) to implement structures to hold and manage their worldwide wealth so they can grow it, preserve it, protect it, and pass it on to their heirs in a tax-efficient manner according to their wishes.
The question HNWIs need to consider is where their structure should be located. Typically, HNWIs have used trusts and statutory foundations located in jurisdictions with flexible estate and succession planning laws, strong asset protection and privacy laws, and tax benefits to hold their wealth.
Finding jurisdictions that offer the foregoing has become increasingly challenging due to changes in the global regulatory environment. Many jurisdictions have been forced by the OECD, EU, and other authorities to change their laws to become more transparent and sign information sharing agreements—all in the name of combating aggressive tax planning, anti-money laundering, and tax evasion.
Due to its unique attributes, the United Arab Emirate (UAE) is well positioned to benefit from what has damaged other jurisdictions. In this article, I will explain why. However, I will first give you a brief explanation of the current regulatory environment impacting trust and foundation planning.
The Global Regulatory Environment
Most jurisdictions have implemented registers of beneficial owner (RBOs), which list the beneficial owners of companies and other entities, including, in some cases, trusts and foundations. Some countries have private RBOs that can only be accessed by a limited group of people, generally the government. Other jurisdictions have made their RBOs public so anyone can access this. This obviously drastically reduces privacy and puts HNWIs and their assets at risk.
In addition to RBOs, some jurisdictions have even gone so far as to implement trust registers that contain a list of all trusts formed in that jurisdiction. Trusts are traditionally private documents with their existence only known by limited number of people. Trust registers, like RBOs, also reduce privacy.
One of the most intrusive pieces of regulation, however, is the EU’s DAC6 initiative requiring all EU advisors to automatically report clients engaged in certain tax-planning strategies—even if their motivations are legitimate. Again, a privacy killer.
Signatories to the OECD’s Multilateral Instrument (MLI) are now subject to a “principal purpose test” that disallows tax benefits where the one of the principal purposes of the transaction was obtaining a tax benefit.
Economic substance rules (ESR) have now been implemented in most low- and no-tax jurisdictions, including those traditionally used for trust and foundation planning. Essentially, a company’s core income generating activities must take place within the jurisdiction of incorporation, or the company can face other punitive measures. Complying with ESR generally requires local staff, premises, and management.
Why the UAE Is Emerging as Powerhouse
The UAE has several free zones offering trusts and foundations, namely the Dubai International Financial Center (DIFC), Abu Dhabi Global Market (ADGM), and Ras Al Khaimah International Corporate Center (RAKICC). Note that not all of these free zones offer both trusts and foundations.
The UAE’s free zones have some of the most modern trust and foundation laws in world, maybe because they have only been implemented in the past few years. In drafting their trust and foundation laws, the free zones surveyed the existing laws of leading jurisdictions and selected the most beneficial and advantageous aspects to incorporate in their own laws.
Like most trust and foundation planning jurisdictions, the UAE’s free zones offer flexible estate planning, succession planning, and wealth protection laws. But unlike most they still offer privacy and unparalleled tax benefits.
RBOs in the UAE’s free zones are private, as opposed to public, greatly enhancing privacy for HNWIs who wish to conduct their financial affairs outside the view of the public. There are no trust registers in the UAE’s free zones, which means trust documents are private.
Another privacy enhancer is that since the UAE is not in the EU, it is not subject to DAC6. What you discuss with your advisors is between you and them, not you, them, and the government.
In addition to offering zero income tax like most trust and foundation planning jurisdictions, the UAE also boasts a robust tax treaty network. In fact, it has more tax treaties than Switzerland.
But what really sets the UAE apart, is that it is not merely a financial center—it’s an international business hub. It has a diverse and stable economy, a stable currency, and a progressive government committed to attracting business and wealth.
Its banking system is world-class—most international private banks have a presence there. Premium airlines fly there several times a day from all over the world. The UAE has modern infrastructure and is technologically advanced. It’s home to a wealth of top-flight professionals and has an ample qualified workforce. Moreover, the UAE’s zero income tax rate on personal income and robust expat community makes it an attractive destination for talent that might need to be relocated, which can be easily achieved through its residency visa program.
These are all great, non-tax, business reasons to structure transactions in the UAE, which is important to not run afoul of the MLI’s principal purpose test.
Finally, complying with ESR can be challenging in many jurisdictions traditionally used for trust and foundation planning due to their limited infrastructure, office space, and workforce. Additionally, the geographic location of many traditional jurisdictions creates operational difficulties. For example, it is often challenging to travel to them for board meetings. In practice, the only way to comply is to hire local service providers to provide office space, staff, and directors, which many people don’t want to do. Often HNWIs wish to relocate staff to manage their affairs. Convincing staff to move to a remote island is challenging and it’s often difficult to obtain residency permits—many jurisdictions want to keep jobs for the locals and force people to use service providers.
These factors that damage traditional jurisdictions benefit the UAE. The UAE has a modern infrastructure, ample office space, and a large professional workforce. HNWIs who wish relocate staff there likely won’t have an issue convincing staff to relocate, since the UAE is a desirable place to live and it’s easy to obtain residency permits. The UAE is also geographically convenient and easy to travel to, which is important for any business that needs to comply with ESR.
The UAE is a relatively new player in the trust and foundation planning game, and its benefits are largely unknown, but overlooking it would be a mistake.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Jimmy Sexton, LL.M., is the founder and CEO of Esquire Group and the chairman of the International Business Structuring Association (Middle East Chapter). He can be contacted at [email protected].