22 Feb 2021

UAE Onshore Trust Law – a vehicle for protecting and controlling family assets and corporate structuring

Authored by: Ahmed Hadeed

In Brief:

The UAE onshore trust:

  • provides characteristics to assure the unity and continuity of family businesses;
  • enables corporate solutions that overcome legal limitations of existing corporate vehicles; and
  • provides an effective method for creating investment vehicles.  

Onshore UAE enterprises, especially family businesses, should consider the advantages of this new vehicle.

UAE Trust Law

The UAE recently promulgated a law regulating trusts; Federal Decree Law no. 19 of 2020 Concerning Trust (Trust Law). The Trust Law regulates trust formation, purpose, operation and dissolution. The law also defines the rights and obligations of the settlor or grantor, beneficiary, trust protector and trustee.

The Trust is defined as an allocation of property in accordance with a trust instrument to be administered for the benefit of a beneficiary or for the purpose of achieving a charitable or private purpose.

The Trust is governed by a trust instrument (deed). This instrument is dictated by the settlor and sets out the terms and conditions of the Trust.

Trust parties

Settlor is the person who creates the trust and allocates the trust assets.

Trustee is the person who administers the trust, in accordance with the terms of the trust instrument, for the benefit of a beneficiary or beneficiaries.

Beneficiary is the person who holds a personal right in the trust.

Protector is the person who protects the rights of the beneficiary and assures the proper performance of the terms of the trust instrument in order to achieve the trust purpose.  

UAE trust vs. English trust

It is worth noting two fundamental differences between a UAE onshore trust and a common law trust e.g. an English law trust.

  1. A UAE onshore trust has a separate legal personality, while an English law trust is not a separate entity.

  2. Under English law, the legal interest in the trust property is held by the trustee, while the UAE Trust Law provides that the trust itself, as a separate legal person, holds the trust property. 

A powerful tool for protecting and controlling family assets

Until recently the only onshore vehicle available to control family assets, following the passing of the head of the family, was a commercial company, and, in particular, a limited liability company.

The commercial company is not designed for this purpose. A company is defined under the UAE Companies Law as a commercial enterprise established by one person or more where the founders, who become shareholders in the company, contribute work, funds or property and share in the proceeds of the enterprise. The shareholders control everything in relation to the company. They have inalienable rights to vary the articles of association and dissolve the company.

No matter what terms are included in the articles of association of a company to preserve the unity and continuity of a family business, the patriarch cannot prevent the heirs from varying the terms or ending the life of the enterprise. 

The Trust Law addresses this problem. Now, the patriarch, as a settlor, can create a trust and transfer the family assets to this trust. The trust will be governed by the trust instrument which is drawn up by the settlor. The heirs become beneficiaries under the trust. The beneficiaries cannot vary the terms of the trust instrument nor dissolve the trust, other than in exceptional circumstances and with the approval of the competent court.

Investment vehicle - trust vs. limited liability company

A trust structure can overcome some of the limitations inherent in a limited liability company.

Management and operation

The beneficiaries of a trust have limited rights in relation to the operation of the trust, in contrast with the shareholders of a limited liability company who are granted exclusive statutory rights to operate the company.

The beneficiaries cannot remove the trustee, whereas the shareholders can control and remove the management of the company.

Winding-up

The beneficiaries cannot dissolve the trust, whereas the shareholders can liquidate and dissolve the company whenever they wish, even before the expiry of its term.

Dividends

The trustee can be granted the right to determine the extent of the distributed proceeds and the discretion to decide the amount of proceeds to be received by each beneficiary. Whereas, the distribution of dividends of a company is determined by the shareholders and each shareholder receives the share allocated under the articles of association of the company.

Debts

The creditors of a beneficiary cannot attach and seize the beneficial interest of the beneficiary of a trust. The rights of creditors are limited to seizing the proceeds of the trust allocated to the beneficiary. Whereas the creditors of a shareholder may seize and sell the shares held by such shareholder in a company in order to discharge debts.     

An effective way to create an investment fund

Investment funds are heavily regulated by the UAE Securities and Commodities Authority (SCA). Under SCA regulations, establishing an investment fund is often time consuming and requires considerable financial and technical resources.

The Trust Law allows the creation of an investment fund by simply registering a trust instrument and transferring assets to the trust. The investment fund can then receive contributions by the investors.   

Conclusion

The UAE trust is a vehicle for controlling and protecting family businesses which should be considered. The Trust Law provides new investment tools which address certain limitations of existing investment vehicles. The Trust Law introduces relatively simple and less expensive methods for creating investment vehicles.   

Should you require further information about the opportunities provided by the UAE Trust Law, please feel free to contact Ahmed Hadeed, Partner.