This issue of A wealth of advice has been carefully prepared to give you a holistic overview and practical insight into the recent regional reforms, as it highlights issues directly relevant to the private client and wealth management industry across the world.
A flurry of change and reform in the Middle East
In the Middle East change happens overnight and reforms are swiftly introduced, so sharing updates and insights can be somewhat challenging to say the least!
The introduction of positive liberalising reforms relating to investment rules during the pandemic, has been a vital component of ensuring that the economy remains buoyant and trade continues to flourish.
Following Resolution No 57 of 2020 issued in relation to Economic Substance Regulations the first reporting deadline for companies to be compliant passed on 31 January 2021. This saw many professional advisers caught up a in a frenzy of submissions to meet this date. However, what happens next in terms of non-compliance and rectification will be a completely different conversation. Companies are adopting best practice working policies based upon the guidelines and practices followed in other IFCs; to date there is no clear-cut specific model. There is much ongoing debate about the definition of "adequate number" of board meetings and the physical presence in the UAE of board members when taking "strategic decisions", but even these are not entirely clear given the lockdown.
Meanwhile the Government of the UAE took a bold and unprecedented decision when they announced the abolishment of the mandatory 51% Emirati ownership in onshore limited liability companies in 122 economic activities across 13 sectors effective as of 1 December 2020; the precise extent of such exemptions and the fine print of this legislation are both eagerly awaited.
The real estate sector in the UAE also witnessed a boom in sales figures, perhaps fuelled by the UAE citizenship and additional long term and entrepreneurial categories of UAE residency visas that were announced. Some may say that the Abraham Accords signed between the UAE, USA and Israel on 13 August 2020 was yet another catalyst that helped boost the economic morale of the Middle East. It certainly saw an immediate reciprocity of trade enquiries between the two nations and freezones such as the DMCC, DAFZA, DWC and DIFC who all proceeded to launch special licencing offers in a bid to attract new investors.
There were two other significant pieces of legislation introduced that directly impact the preservation and protection of family owned wealth; Law 9 of 2020 that regulates Family Property Ownership and the Federal Trust Law (Law 19 of 2020). The former allows any family in the Emirate of Dubai to formally record the manner in which the wealth (moveable and immoveable but excluding certain types of shares) owned by Dubai based families (regardless of religion or nationality) is to be owned, managed and divided using a legal and notarized Family Property Contract. The Federal Trust Law is the first of its kind to be introduced in the UAE in this shape and form and contains a specific mention of creating private trusts for the purposes of creating a pension scheme for employees of family run businesses to benefit from in a more formal and organised manner similar to other western EOSP's.
Keeping up with the global IFC community
Another significant announcement was that of the introduction of the Ultimate Beneficial Ownership ("UBO") Register pursuant to Cabinet Resolution No 58 of 2020, which meant that details of all persons, directly or indirectly, owning a controlling and or equitable stake of 25% or more in a corporate entity, require full disclosure. Directors and Shareholders/Partners Registers are also required to be disclosed. This was a much awaited announcement as the transparent registers reflect the fact that the UAE is indeed on par with the regulations of the global banking industry and other IFCs, as a whole.
UAE financial freezones matching the pace
Following the introduction of the first UAE Foundation in the ADGM some 4 years ago, the current numbers reflect the growing popularity of the 3 Foundation regimes in the UAE.
Snapshot of UAE Foundations created between 2017 – 2021
As at 20 February 2021ADGM had 85, DIFC had 95 and RAKICC had 39. Although the vast majority of these Foundations were created to form an integral piece in a larger succession plan, what is interesting is the versatility of the Foundation structure, as an effective asset protection mechanism. Foundations are not just being used to preserve wealth, but also form an integral part of multifarious structures to segregate and /or protect the ownership of other asset classes, be they regional, global, moveable, immoveable, ancestral or digital.
A segregation of assets within portfolios is made even easier with the use of specific corporate entities; the ADGM has the Special Purpose Vehicle (SPV), whilst the DIFC uses the Prescribed Company (PresCo) and RAKICC, although the newest entrant to the market, offers a similar option with its RAKICC Company. As at February 2021, the DIFC had established 657 PresCos and the ADGM had 1959 SPVs! All of these entities, if used in conjunction with a Foundation, can work well to segregate either current or future ownership, classes of assets, or the actual entitlement to certain assets, whilst preserving and protecting the entire portfolio for a select group. Some are even being used as precursor to a proposed IPO, or to create a corpus which can be leveraged or exploited for a specific purpose!
In fact a glaringly obvious effect of the pandemic, has been the increase in awareness of the necessity to protect and preserve assets and ancestral wealth from the perils of unknown, life-changing disastrous events. People either buckle when faced with adversity, or they rise to the challenge.
The ADGM has been quick to create solutions to help bullish investors hedge their exposure with their new and unique Angel Investor Platform, that encourages collective entrepreneurial investments in a variety of sectors and industries.
The DIFC has long been a champion of the DFSA regulated Single Family Office that offers the assurance of the DFSA's regulatory involvement, whereas the ADGM offers a more streamlined Family Office setup without the regulatory requirements.
The ADGM also offers investors the option to invest in smaller ratios which focus on the SME segment via its PFP (Private Financing Platform), in addition to the traditional VC Funding options better suited to larger players and investment opportunities. Hub 71 was created in 2019 by the Abu Dhabi government and was the first tech ecosystem created to boost start-ups in the UAE. The DIFC saw a similar window of opportunity in the pandemic and created the DIFC Innovation Hub, the largest innovation ecosystem in the UAE that helped regional start-ups utilise much of the DIFC office space at cost effective prices to such an extent, that its popularity has now resulted in a long waiting list with companies eager to grab a spot and start work!
A word of caution - Council Members
In the June 2019 edition of A Wealth of Advice, I commented on the regulations relating to the appointment of Council Members of Foundations in the ADGM and DIFC and the fact that there was no specific qualifying criteria that was stipulated in either regime.
However as time passes and an increasing number of Foundations are created, it is clear that the regulators in ADGM, DIFC and RAKICC are beginning to look carefully at the question of who can be a Council Member, and what licensing requirements are needed as a result. This is an area in which I expect to see further evolution, particularly with the continued expansion of options available to clients looking to establish Foundations.
Emerging trends and opportunities
I am not alone when I say that the pandemic has enabled the advisory community to accelerate conversations with clients and address deeply personal and private subjects, that were previously considered taboo. Whilst critical decisions were previously debated and deliberated upon at length, the recent need to create liquidity, whilst ringfencing certain assets, has shortened the timespan of such precursory engagements with some clients taking a giant leap of faith and plunging in head first at the deep end!
What we have also seen is the active involvement of the younger generations within families as they engage positively and become an integral part of discussions and decision making, often adding different perspectives and insights. They are often the ones driving discussions around introducing a family constitution, or a family code of governance; such engagement of all generations of the family is essential to ensure that the code or constitution properly reflects the family's needs and future objectives, rather than being simply an exercise to be ticked off and then put away in a drawer somewhere.
Other clients have expressed a preference of creating a specially designated corpus of funds to enable the younger generation to invest in sectors such as medical research and development, healthcare, education and technology in an attempt to diversify existing portfolios.
I recently joined a global ESG impact investing interactive webinar and what was evidently clear was that ESG investments are a mainstream topic of conversation. Although the conversation is still relatively new in the Middle East, it fits well with the region's cultural beliefs including that of giving back to the community. I am excited to see how quickly this conversation gathers momentum and where it goes next!
The pace of recent change has highlighted the importance placed on protecting and preserving family assets, and the desire to continue to develop solutions and remove obstacles which can hinder this. Given the collective experience and wisdom of the larger advisory community coupled with the dynamic attitude to growth, knowledge and development of the Middle Eastern community, anything is possible as we continue to keep up with the pace and compete with the rest!