24 Jul 2018

Focus on Foundations

Authored by: Ahmad Sergieh

On 14 March 2018, DIFC Law No. 3 /2018 known as the DIFC Foundations Law was enacted, introducing the concept of the foundation into DIFC law. The DIFC has confirmed that this law is ‘in line with the previous recommendations of its Wealth Management Working Group (which Hadef & Partners was part of)’ and is ‘the product of global benchmarking and extensive consultation with industry professionals and family business networks both regionally and globally.’

What is a Foundation?

Foundations can be used for a number of purposes, including but not limited to, private wealth management and preservation, succession planning, tax planning, charitable institutions, financial planning, asset protection, corporate structuring and creditor protection.

Unlike trusts, they are incorporated as legal entities with their own distinct legal personality. Foundations can hold assets in their own name on behalf of beneficiaries. A Foundation’s property is not held by it on trust for any other person. In addition, a Foundation does not have shareholders and has independence as it is self-owned.

The persons named in relation to a Foundation have such rights (if any) in respect of the Foundation as specified in its by-laws. The rights of a person in respect of a particular Foundation may be assigned to another person only if the by-laws of that Foundation allow this. The beneficiaries of a Foundation cannot compel a distribution since they have no interest in its assets or income. The objects of a Foundation cannot be amended unless there is an express power to do so in the charter of the Foundation, or (under limited circumstances) by order of the court. In addition, a Foundation cannot carry out commercial activities, other than those which are necessary, ancillary or incidental to its purposes.

What are the key elements of The Foundation Governing Law?

DIFC Foundations are governed exclusively by the laws of the DIFC, with limited exceptions allowed where the original endowed property is outside the DIFC and the founder or contributor does not have power to dispose of it according to the law of the place where the property is situated. There are four types of categories of Foundation based on their objects, with different governance requirements applying to each. The categories are as follows:

  1. those which benefit persons identified/classified by name,
  2. class or category;
  3. those which are exclusively charitable;
  4. those which are not charitable; and
  5. those which are a combination of two or more of the above.

Governance Controls

A key feature of a Foundation (compared to a common law trust) is the ability of the person who contributes property to the Foundation (known as the Founder) to retain a high degree of control. The Founder can amend, revoke or vary the terms of the charter, by-laws or objects of the Foundation or terminate the Foundation during their lifetime. The Foundation will also have a Foundation Council. The duties of these Councils include the following:

  1. to act within powers conferred by the Foundation’s constitutional documents;
  2. to act honestly and in good faith in the best interests of the Foundation; and
  3. to exercise the care, diligence and skill that reasonably prudent persons would exercise in comparable circumstances.

The Founder (or a body corporate) may be appointed as the Guardian to the Foundation. The Guardian must take reasonable steps to ensure that the Council carries out its functions and may require the Council to account for how it has administered the Foundation’s property or acted to further its objects. It is possible to grant the Guardian the power to approve or disapprove of the actions of the Council. The by-laws may also provide for the Guardian to sanction or authorise any action taken or to be taken by the Council which the by-laws would not otherwise permit, provided such acts are in the best interests of the Foundation and the Council is acting in good faith.

Constitutional Documents

A Foundation’s constitutional documents include a charter which must include details of the name, objects, initial capital, duration (if limited in time) and a declaration by the Founder requesting the Council to comply with the terms of the Charter. A Foundation may also have by-laws, although these are not mandatory. The by-laws prescribe the functions of the Council, detail the procedure for appointment, resignation and removal of the Council and Guardian (if any), the remuneration of the Council and Guardian (if applicable), how the decisions of the Council are to be made, functions of the Council which can be delegated (if any) and specify what should happen to the property of the Foundation if it is wound up or dissolved.

Disclosure of Information

In order to ensure the protection of information relating to beneficial ownership of private Foundations, while reducing money laundering risks, relevant information on a Foundation is provided only to the DIFC Registrar of Companies or to a registered agent who is able, on the request of the Registrar, to provide it. Such information is not placed on any public register and is not accessible to the public. The Registrar will only release such information to another body for limited, legitimate purposes.

Provision of Depository Receipts

The Foundations Law includes provisions to allow a Foundation to issue securities, such as depository receipts or certificates, representing the value of the contributed assets to the contributor. This is provided for through the issue of certificates in exchange for the contribution of assets into the Foundation by the contributor. The certificates represent the economic entitlement to the assets only.

Essentially, these certificates serve as contracts issued by the Foundation to the contributor, representing the value of the underlying assets that the contributor owns. This effectively results in a separation of the ownership of the relevant assets from their economic value. The rights conferred on certificate holders are determined by the provisions under which the certificates are issued.

Accounting Requirements

Company accounts, reporting and audit requirements are substantially in the same form as applicable under the DIFC Companies Law as it applies to private companies. Foundations are subject to the requirements to prepare annual accounts in accordance with accepted international financial reporting standards prescribed or approved by the Registrar; to have these accounts approved by its Council within six months of the end of the Foundation’s financial year; to file a copy of the accounts with the Registrar or the registered agent, as applicable; and to keep accounting records an audit of accounts is not required.

Presence in the DIFC

All DIFC Foundations must have a physical presence in the DIFC, either through a registered agent, or directly. It is at the Founder’s discretion whether to appoint a registered agent.

In Brief:

  1. A Foundation can be used in place of a trust for succession planning and offers many advantages over a trust. The use of a Foundation is similar to the situation with private trust companies, but it removes the need for an intermediate company.
  2. Foundations are fast and simple to set up. The management and on-going reporting requirements of a Foundation are relatively straightforward, whereas trusts are complex, time-consuming and costly to set up.
  3. A Foundation’s by-laws can provide for the distribution of its property to qualified recipients. Qualified recipients can include a person holding an entitlement specified in the Foundation by-laws to a fixed share in the property and distributable income of the Foundation. It can also include persons who are prospective recipients after a future event happens. In this way, a Foundation can provide for both current and future recipients.
  4. A qualified recipient has no right to a Foundation’s property except for payment of amounts which arise by virtue of the terms of its by-laws.
  5. A Foundation requires no owner so provision does not need to be made for the transmission of a Foundation in succession planning.
  6. The by-laws can prescribe the manner in which Foundation property may be distributed, accumulated or applied. This may be provided for in any manner which the Founder sees fit, offering a substantial degree of flexibility and control to them.
  7. The by-laws may provide for the addition or removal of a person or class of persons as recipients or for the exclusion from the category of recipient of a person or class of persons, either revocably or irrevocably.
  8. The Founder can retain control over the Foundation during their lifetime by appointing themselves as the Guardian. The Guardian may require the Council to account for the way in which it has administered the Foundation’s property and acted to further the Foundation’s objects. The by-laws may also give a Guardian power to approve or disapprove any specified actions of the Council.
  9. A Foundation Council acts in an equivalent manner to a company board of directors and the by-laws can set out detailed rules governing the manner in which the Council members can be appointed and removed as well as how Council decisions are to be made and, if any decision requires the approval of the Guardian or any other person(s). This enables the Founder to have full control over the Council during their lifetime and pass control of the Foundation to the Council after their death.
  10. The flexibility of a Foundation also provides a Founder with the option to structure assets for succession planning purposes, in a Sharia compliant manner to the extent required.


(Recently published in Emirates Law)


This article, together with any commentary, does not constitute legal advice. It is provided solely for information purposes on a complimentary basis, without consideration of any specific objectives, circumstances or facts. It reflects then current views of the writer which may modify in time and based on differing objectives, circumstances or facts. A writer's view may differ from views of colleagues and/or the firm. You should seek legal advice on each specific matter. Access to this article does not form an attorney-client relationship.