DIFC Foundations Law

Introduction

The DIFC Foundations Law No. 3 of 2018 (hereafter called the Foundations Law) was introduced on 7th May 2018. The Foundations Law is a practical combination of the best of the different legislation, specifically based on the settled standard of Common and Civil Law legislations in respect of foundations in the form of one unique law.

Definitions

DIFC Foundations Law: The DIFC Foundations Law is referred to as the DIFC Law No. 3 of 2018.
DIFC Foundation: DIFC foundation refers to the entity whose governing law is DIFC Foundation law.
DIFC Trust: DIFC Trust is referred to as a legal entity whose governing law is DIFC Trust law.
DIFC Courts: The DIFC Courts are referred to as The Courts of the DIFC.

Salient Features of DIFC Foundations

Powers of DIFC Courts: The DIFC Courts have the power to set aside transactions for the mistake, along the lines of the jurisprudence that developed in England following the decision.
Arbitration: The capacity to compulsorily settle intra-Foundation disputes by arbitration.
Redomiciliation of Foundations: Under Foundations Law the re-domiciliation of foundations is possible.
Recognition of Foreign Foundations: The DIFC Foundations Law recognizes the Foreign Foundations.
Conversion of DIFC Private Companies to DIFC Foundations: Under Article 66 of Foundations Law, the DIFC private company can be converted to DIFC Foundations which is available to any company whose local law permits its domiciliation to the DIFC as a beginning footstep since the DIFC Companies Law No. 2 of 2009 sanctioned the conversion from any other form of legal entity to DIFC Foundations for the depositary certificate.

The Concept of the Foundation

A foundation is a legal entity recognized by law having its own personality and can be the owner of the property. Article 12 of Foundations Law deals with the main requirements of the DIFC Foundation necessary for the creation of a foundation:

Capital
Object

Foundations Versus Trusts

As compared to the foundation, trust is not an entity but a relationship, the location of the trust assets is irrelevant while in Foundations. The rights of parties inter se are determined by the local law governed by the courts of competent jurisdiction.

Recognition of Foreign Foundations

Article 65 of the Foundations Law permits a foreign foundation, which wishes to operate in the DIFC without applying to be domiciled, to do so by applying for registration. A recognized foreign foundation may not carry out any commercial activities, except those necessary for, and ancillary or incidental to, its objects.

Operation of Foreign Foundations

Under this provision, the operation of foreign foundations can operate in the favorable and stable business environment of the DIFC, should for instance their home jurisdiction not permit a domiciliation to the DIFC.

Conversion of a DIFC Company into a DIFC Foundation

Articles 66 to 69 of the Foundations Law provide the possibility for a DIFC company to be “continued” as a DIFC Foundation. The procedure is similar to that applicable to a foreign foundation seeking to be re-domiciled in the DIFC under articles 57 to 61 of the Foundations Law. The procedure is not available under most foundations’ legislation.

Depositary Certificates

Article 30 of the DIFC Foundations Law allows for the issuance of depositary certificates “representing specific rights to payment quantified by reference to specific parts of the property owned by the Foundation or relating to other rights or interests, whether present or future, to which the Foundation is or might be entitled.”

Full Ownership and Economic Benefits

The Foundation retains full ownership of the relevant assets (such as shares in an underlying company) but all the economic benefits (such as dividend payments) are passed on to the certificate holders.

Conclusion

UAE Foundations’ features share characteristics with trusts and limited companies. As compared to trust, the UAE foundation is through an independent legal personality and has the right to own assets and properties. Under the law, UAE foundations should not be involved in commercial business activities or have owners or shareholders who are independent personalities. UAE Foundations are established for charitable purposes, non-charitable objectives or to gain benefits to their beneficiaries. The bylaws and charter of the Foundations were drafted to make a constitution of a foundation. The Charter of a Foundation is a public document that outlines the objectives and duration along with governing provisions and modes of operation.

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