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With the increase in global wealth, it is more important than ever for high net worth individuals (HNWI) to put in place structures to own and manage their global wealth so that 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 ask themselves is where their structure should be located. Typically, HNWIs have used statutory trusts and foundations located in jurisdictions with flexible estate and estate planning laws, strong asset protection and confidentiality laws, and tax benefits to conserve their wealth.
Finding jurisdictions that offer the above has become increasingly difficult due to changes in the global regulatory environment. Many jurisdictions have been forced by the OECD, the EU and other authorities to change their laws to become more transparent and sign information sharing agreements, all in the name of fighting aggressive tax planning, the fight against money laundering and tax evasion.
Due to its unique attributes, the United Arab Emirates (UAE) is in a good position to take advantage of what has damaged other jurisdictions. In this article, I’ll tell you why. However, I will first give you a brief explanation of the current regulatory environment that affects the planning of trusts and foundations.
The global regulatory environment
Most jurisdictions have implemented registers of beneficial owners (RBO), 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 viewed by a limited group of people, usually the government. Other jurisdictions have made their RBOs public so that anyone can access them. 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 records which contain a list of all trusts formed in that jurisdiction. Trusts are traditionally private documents whose existence is only known to a limited number of people. Trusted registries, like RBOs, also reduce confidentiality.
One of the most intrusive regulations, however, is the DAC6 initiative requiring all EU advisers to automatically declare clients engaged in certain tax planning strategies–even if their motives are legitimate. Again, a privacy killer.
OECD signatories Multilateral Instrument (MLI) are now subject to a “principal object test” which rejects tax benefits where one of the primary objects of the transaction was to obtain a tax benefit.
Economic Substance Rules (ESR) have now been implemented in most low tax or zero tax jurisdictions, including those traditionally used for planning trusts and foundations. Essentially, the main income-generating activities of a business must take place in the jurisdiction of incorporation, or the business may face other punitive measures. Adhering to the ESR generally requires local staff, premises and management.
Why the UAE is becoming a power
The UAE has several free zones offering trusts and foundations, namely the Dubai International Financial Center (DIFC), the Abu Dhabi Global Market (ADGM) and the 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 the world, perhaps because they have only been implemented in recent years. When drafting their trust and foundation laws, free zones reviewed the existing laws of major jurisdictions and selected the most beneficial and beneficial aspects to incorporate into their own laws.
Like most trust and foundation planning jurisdictions, free zones in the UAE offer flexible laws on estate planning, estate planning, and estate protection. But unlike most, they still offer unprecedented privacy and tax benefits.
RBOs in UAE Free Zones are private, as opposed to the public, greatly improving the privacy of HNWIs who wish to conduct their financial affairs out of the public eye. There are no trust records in UAE free zones, which means trust documents are private.
Another factor for improving privacy is that since the UAE is not part of the EU, it is not subject to DAC6. What you discuss with your advisers 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 has a strong network of tax treaties. In fact, it has more tax treaties than Switzerland.
But what really sets the UAE apart is that it’s not just a financial hub, 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 of the 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 is home to a multitude of high-level professionals and has an abundant skilled workforce. Additionally, the UAE’s zero personal income tax rate and strong expat community make it an attractive destination for talent who might need to be relocated, which can be easily achieved through its residency visa program.
These are all excellent non-tax business reasons for structuring transactions in the UAE, which is important so as not to go against the MLI primary purpose test.
Finally, meeting the ESR can be difficult in many jurisdictions traditionally used for trust and foundation planning due to their limited infrastructure, office space, and workforce. In addition, the geographic location of many traditional jurisdictions creates operational difficulties. For example, it is often difficult to travel to their homes for board meetings. In practice, the only way to comply is to hire local service providers to provide office space, staff, and managers, 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 difficult, and often difficult to obtain residence permits.
These factors which harm traditional jurisdictions benefit the UAE. The UAE has a modern infrastructure, large office space and a large professional workforce. HNWIs wishing to move staff there are likely to have no problem convincing staff to relocate, as the UAE is a great place to live and it is easy to get residence permits. The UAE is also geographically convenient and easy to get to, which is important for any business that needs to comply with ESR.
Conclusion
The UAE is a relatively new player in the trust and foundation planning game, and its benefits are largely unknown, but to overlook it would be a mistake.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Author Info
Jimmy Sexton, LL.M., is the Founder and CEO of the Esquire Group and the President of the International Business Structuring Association (Middle East Chapter). He can be contacted at [email protected].
Bloomberg Tax Insights articles are written by seasoned practitioners, academics, and policy experts who discuss current tax developments and issues. To contribute, please contact us at [email protected].
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