The Foundations Regime in ADGM: An Advanced Solution for Wealth Planning and Succession in the UAE

Introduction and Historical Context

Wealth planning and family succession structuring in the Gulf region have undergone a profound structural transformation over the last decade. Historically, High Net Worth Individuals (HNWIs) and corporate groups in the United Arab Emirates (UAE) and the wider Middle East relied on complex offshore structures located in jurisdictions such as the Cayman Islands, Jersey, or Guernsey, or on Anglo-Saxon trusts to safeguard their global assets. This reliance was driven by the necessity to avoid the automatic application of Sharia-based forced heirship laws over local assets upon the death of the patriarch or senior family member, which frequently triggered costly and protracted inheritance disputes.

To bridge the gap between the civil law system prevalent in the onshore UAE and the international common law standards preferred by global investors, the Abu Dhabi Global Market (ADGM) introduced a revolutionary regulatory framework with the enactment of the ADGM Foundations Regulations 2017 on October 29, 2017. This regime allowed, for the first time, the establishment of private interest foundations with their own separate legal personality within a financial free zone operating under independent Common Law courts, radically transforming wealth management in the region.

The Legal Nature of the ADGM Foundation

One of the most critical decisions in wealth structuring is selecting the appropriate vehicle. In this regard, the ADGM foundation presents itself as a highly sophisticated hybrid instrument. It combines the governance and control elements of a corporate company with the asset protection and purpose benefits of an Anglo-Saxon trust.

Unlike a trust, which lacks separate legal personality and is essentially a fiduciary relationship where the trustee holds legal title to the assets, an ADGM foundation is an incorporated legal entity with its own distinct legal personality, separate from its founder, councillors, and beneficiaries. This means the foundation can hold assets directly in its own name, enter into contracts, sue, and be sued.

The ADGM regime has been designed to offer high flexibility, allowing high-net-worth individuals, families, and corporate communities to locally access a highly sought-after product from a world-class international financial centre. The features of the regime were benchmarked globally to strike an appropriate balance between regulatory obligations, confidentiality, governance, and internal control. The ADGM Foundations Regime provides an alternative to trusts for financial planning and structuring.

Asset Consolidation and Operational Efficiency

The dispersion of family assets across multiple jurisdictions and under different forms of ownership often generates tax inefficiencies, high administrative costs, and significant operational risks. The ADGM foundation addresses this challenge directly by acting as a top-tier holding entity.

Centralizing assets under a single structure simplifies administrative management and mitigates the costs associated with the individual transfer of holdings across various jurisdictions. By consolidating shares of operating companies, investment portfolios, bank accounts, and real estate under a single ADGM foundation, the family simplifies day-to-day administration and drastically reduces future transaction costs.

Structured Governance and Perpetual Succession Planning

The true value of a foundation lies in its ability to guarantee the continuity of family wealth across generations. The governance structure of an ADGM foundation comprises:

1. The Founder: The individual who contributes the initial assets and defines the foundation's purpose.
2. The Foundation Council: The body responsible for administering the assets and fulfilling the foundation's objectives, equivalent to a company's board of directors.
3. The Guardian or Protector: An optional but highly recommended figure who supervises the council and ensures that its actions align with the founder's wishes.
4. The Beneficiaries: The individuals or entities designated to benefit from the foundation.

The precise drafting of the Foundations Charter and internal By-Laws mitigates the risks of succession disputes by clearly defining asset distribution and ensuring the entity's operational continuity indefinitely.

Comparative Analysis of Wealth Planning Instruments

To better understand the role of the foundation, it is useful to analyze its differences from other common instruments available in the UAE financial centres:

The New Fiscal and Substance Landscape in the UAE

The introduction of Corporate Tax in the UAE through Federal Decree-Law No. 47 of 2022, effective from June 1, 2023, has redefined the operational and fiscal framework for all entities incorporated in the country, including ADGM foundations.

Under this new regime, foundations do not enjoy an automatic exemption from the 9% corporate tax. However, the legislation provides a highly beneficial tax transparency mechanism for family wealth structures. A family foundation can formally apply to the Federal Tax Authority (FTA) to be treated as a tax-transparent entity (Unincorporated Partnership) under the 'Family Foundation' category as provided under Article 17 of the Corporate Tax Law.

To qualify for this treatment and avoid direct 9% taxation on its passive income, the foundation must strictly meet the following requirements:

• It must not engage in active commercial trading activities directly.
• Its primary purpose must be limited to holding, preserving, and managing private or investment assets for the benefit of specific natural persons.
• The foundation's assets must not originate from unauthorized commercial activities.

Historically, under the Economic Substance Regulations (ESR) applicable to financial years ending on or before December 31, 2022, holding equity shares qualified as a 'Holding Company Business', which was a Relevant Activity subject to simplified substance requirements. Currently, with the entry into force of Corporate Tax and the subsequent non-applicability of ESR for financial years ending after 2022 (pursuant to Cabinet Decision 98/2024), the UAE government has integrated and simplified the fiscal framework. To qualify for the tax transparency regime under Article 17, the key requirement is the strict absence of active commercial trading and the limitation to passive holding of family wealth, meaning that active economic substance requirements are not mandated for this purpose.

Key Cautions and Practical Implementation Challenges

Despite the immense advantages offered by ADGM foundations, founders and their legal advisors must navigate certain practical aspects with caution to avoid severe contingencies:

• Transfer of Local Real Estate: It should not be assumed that the transfer of real estate located outside the ADGM free zones (i.e., in onshore UAE) to the foundation is an automatic process. Such transfers require prior approval and registration with the relevant land departments, such as the Dubai Land Department (DLD) or the Abu Dhabi Municipality. It should be noted that this ease of transfer is currently limited to Dubai and Abu Dhabi due to specific Memoranda of Understanding (MoUs) signed with ADGM, whereas in other emirates the process may not be available or is subject to severe restrictions. Furthermore, the process involves strict documentary requirements and the payment of applicable transfer fees.
• Non-Automaticity of Tax Exemption: As previously mentioned, the corporate tax exemption for family foundations is not automatic; it must be formally requested from the FTA, strictly complying with the requirements of not conducting commercial activities. Any incidental, unauthorized commercial activity could disqualify the foundation and expose it to the general tax rate.

Conclusion and Future Outlook

The foundations regime in ADGM represents a milestone in the sophistication of the UAE's financial ecosystem. By providing a vehicle with its own legal personality under a Common Law framework, the UAE has successfully repatriated and retained the wealth of the region's most influential families, while offering an attractive platform for international investors.

As the global tax landscape evolves, particularly with the implementation of the OECD Pillar 2 rules for multinational corporations, the flexibility and robustness of ADGM foundations will continue to be tested. However, for family estate planning and asset protection, the local foundation has firmly established itself as the reference vehicle for wealth structuring in the Middle East.

Legal Disclaimer

The information contained in this article is for general informational purposes only and does not constitute legal, tax, or financial advice. Laws and regulations in the UAE, including Corporate Tax and free zone regulations, are subject to change. It is strongly recommended to consult with qualified legal and tax advisors before establishing any wealth structure or foundation.