How Do Foundations Differ from Trusts in the UAE?

Foundations and Trusts are established to provide financial support for intended organizations and individuals through the management of assets and family wealth. Though both these are legal entities, they differ from each other in structure, asset control, and liability.

Structure

The primary difference between a foundation and trust lies in its structure. A foundation is not legally allowed to undertake commercial activities for generating profits and is managed and controlled by a Member council like a Board of Directors. It is usually funded by a single family or individual to protect family wealth and make further investments. The founder registers the foundation’s charter at the public registry which can sue or be sued, can enter into contracts and agreements, can open bank accounts, and engage in commercial activities. It is governed by by-Laws, similar to an AOA. UAE law offers a modern and flexible legal framework as DIFC foundation law, for establishing private, charitable, and corporate foundations.

Trusts are established to relate three entities including the settlor that creates the trust, the trustee who is in charge of the trust, and the beneficiary that gets benefits from the trust. The legal ownership of the trust remains with the trustee that holds and manages assets on behalf of one or more beneficiaries. Trusts are usually private arrangements and are not governed by public disclosure requirements but by a trust agreement, defining the responsibilities and rights of the trustee and beneficiaries. The two main types of trusts in the UAE are charitable trusts and discretionary trusts.

Assets and Wealth Control

The level of control over assets and wealth differs between trusts and foundations. In general, foundations have more control over family assets and can undertake specific programs or initiatives as documented in the charter and by-Laws as per the objectives of the Founder in generating returns from investments.

Trusts have limited control over family assets and can use the assets only for beneficial owners. Trusts are typically established for specific organizations and individuals wherein trustees are made responsible for managing the assets.

Liability

Foundations are established with limited liability where the personal assets of the beneficiaries and members of the council are protected. The founder has no legal claim to assets.

The trustee is fully responsible for the liabilities of the trust unless a protector is accepting the liability.

The Takeaway

Both UAE nationals and expatriates establish Foundations and Trusts to help them manage their assets. Both are useful vehicles for managing and protecting family wealth and enjoying tax exemptions. DIFC doesn’t impose any withholding tax on dividends, interest, or royalties paid to UAE non-residents. Incomes generated within the DIFC are also tax-exempt. While setting up a Foundation or Trust, hiring the services of a law firm is usually recommended.