Regional recovery

Monday, 01 July 2013
Mark Biddlecombe explains that there are opportunities for expert fiduciary services in Dubai, but that knowledge of the region, and an ability to be flexible are the order of the day

The global economic woes may have bitten in the Middle East, but Dubai has been resilient, bouncing back bigger and better than before. There are reminders of how the emirate overstretched itself – the Burj Khalifa, for instance – but there are also signs that recovery is well under way. Dubai 3.0 is the next big development, and will double the size of the city. It is designed to set Dubai up as the only contender to host the World Expo in 2020. Boasting a park bigger than London’s Hyde Park, Dubai 3.0 shows that wealth remains in the region and that the appetite for expansion is great. What has changed, perhaps as a result of the lean years, is that there are more investors and developers: the wealth is no longer held exclusively by the ruling family, as in the early 2000s.

Dubai has gone through a sobering experience, but there is growing confidence in the region.

Current situation

Many rich individuals and families in the Middle East use BVI companies, held in their own name, in wealth structuring. However, many do not know that there is risk in this approach. Despite the sophistication of the market, many selling this type of structure as a catch-all for preservation and enhancement of wealth fail to point out the difficulties with probate if shares in such companies are in clients’ own names. There is an assumption that BVI shares (in an individual’s name with that person as the only shareholder) do not require probate. This is not the case – probate must be obtained in the BVI – but it has been sold to the emiratis so many times that they don’t believe there is a problem until it is time for probate. A financial mess is left for the next generation to try to clear up – often with expensive ramifications.

There is also concern that older generations have not planned adequately for succession. The issue of Shariah is well known and many families now see that simple structuring will neither address Shariah nor provide appropriately for future generations.

The heavy marketing of trusts in the region in the past five years may have contributed to cynicism about considering anything beyond the vanilla company. Trusts are not easy for this part of the world to accept; the structure and the way it works are alien in a region where a mixture of Shariah and civil law prevails. However, trust-like structures are available that remove this risk. The life trust is a simple version of a BVI Special Trusts Act trust; shares are held in a trust structure that ends on the death of the settlor. The shares are distributed automatically, according to the settlor’s original trust deeds, and there is no need for probate.

Foundations are easier for Middle Eastern clients to accept. Principals in the family can remain active in the management of the foundation and retain more control. As foundations are civil- law creatures, they are more easily understood. Guernsey introduced its foundations law this year and, as far as the Middle East is concerned, it appears to have ticked all the boxes.

Dubai has gone through a sobering experience, but there is growing confidence in the region

Succession planning

The other change in the Middle East that is creating optimism is that the second generation in family businesses are becoming more sophisticated and see the value of succession planning. Often educated overseas, the sons and daughters are finely tuned to entertain new concepts that avoid inheritance problems and can provide for the future. This generation more readily understand that their objectives go beyond wealth preservation for the lifetime of the principal. They are typically coming home, after a period abroad, to take over the family business; they are in their 30s and 40s with very different desires from their predecessors.

Take, for example, a family with two daughters and one son. They want to preserve and enhance their estate and ensure all three siblings inherit equally. A foundation addresses these concerns.

There is also a market for fiduciary professionals among non-resident Indians who immigrated to Dubai a generation ago, made their money and are now looking for succession planning. For such families, normally not Muslim, avoiding Shariah is key. With similar concerns over control, they may also prefer the foundation to the traditional trust.

The DIFC trust

In theory, Dubai has its own trust structure. The Dubai International Finance Centre (DIFC) trust is administered in the DIFC common-law jurisdiction and not subject to Shariah. It seems ideal. However, the structure is expensive and heavily regulated, and this may be why it has not been adopted by more Middle East-based families.

A DIFC trust looks like a trust from elsewhere (its features having been cherry-picked from other jurisdictions). Like the DIFC as a whole, it depends on the continued patronage of Dubai’s ruler, Sheikh Mohammed, and could just as easily be taken away. Without critical mass the region will lack strength and depth of trust professionals.

The future is bright in the region, but it will require a commitment of time and resources, as well as a grasp of the region’s idiosyncrasies and objectives, to reap the rewards. 

Author block
Mark Biddlecombe

Mark Biddlecombe is an in-house Lawyer with Nerine Group of Fiduciaries.

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