Dubai International Financial Centre (DIFC), the MEASA (Middle East, Africa and South Asia) region’s foremost global financial centre has recently passed the DIFC Family Arrangements Regulations. With this comes the announcement of the opening of its first Global Family Business and Private Wealth Centre, following a 30-day public consultation term. In addition to further distinguishing DIFC as a global hub for top financial institutions and businesses, the initiative of establishing the DIFC Family Wealth Centre and new regulations will offer a regulatory framework and epicentre for international and regional family-owned businesses, ultra-high-net-worth individuals, and private wealth.
Objectives and Benefits
- The program is in accordance with the goals of DIFC’s 2030 plan, which will allow the community to double both its size and its economic contribution to Dubai’s GDP.
- The plan additionally promotes steady economic expansion and further distinguishes Dubai serves as a crossroad for important financial institutions and companies worldwide.
- Businesses and advisers who satisfy the requirements of the DIFC will be able to obtain a full range of services from the new Center and be accredited.
- The initiative lays the groundwork for better succession planning as firms are transferred to new generations
DIFC Family Arrangement Regulations
The following are the main components of the proposed Family Arrangement Regulations:
- Taking into account the recently passed UAE Decree Law No (37) of 2022 (UAE Family Business Law), the recommendations of the DIFC Wealth Management Review, the establishment of the DIFC Family Wealth Centre, and the improved regulatory environment in DIFC, it aims to make comprehensive provisions for the engagement of family businesses with DIFC.
- Removing the requirement for a Family Office to register with the Dubai Financial Services Authority (DFSA) as a DNFBP (Designated Non-Financial Business or Profession) and replacing the Single-Family Office Regulations and DIFC’s Single Family Office regime with a new Family Office regime that can offer services to a family (unless providing such services to more than one family by way of business).
- To outline the arrangements that families can make in the DIFC for the better running of their companies, the preservation of their wealth, and the planning of their succession and legacy, including the ways in which registered persons in the DIFC, corporate service providers, and accredited advisers can offer services to families in or from the DIFC.
- In order to promote the anticipated benefits and incentives for family businesses in the UAE, in accordance with the UAE Family Business Law, certification and accreditation regimes for family enterprises and their advisers are being established in the DIFC.
In essence, the Family Companies Law was published by the UAE Government on October 3, 2022, with the intention of creating a thorough and understandable legal framework to control family business ownership and management in the UAE. Keeping a family business sustainable from one generation to the next is a significant task. Under the current legal framework of the UAE Companies Law, this law should help family businesses with succession planning.
Given their significant contribution to the country’s gross domestic product, family-owned enterprises are essential to the economic success and future growth of the UAE (GDP). Up to 90% of private companies in the United Arab Emirates, which account for roughly 70% of the GDP of the nation, are family businesses, according to the Ministry of Economy.
Furthermore, making sure that family companies survive and prosper from one generation to the next is a demanding task. Only 10 to 15% of family businesses survive into the third generation, according to a number of studies. The next generation of family members might not be as dedicated as the family business’s original creator. The legal framework must therefore give families the necessary resources and flexibility to ensure that succession is carried out smoothly and effectively in order to meet their goals, which may include minimizing, to the greatest extent possible, any disruption to the management and operation of the company.
These factors became the major reasons behind the issuance of Federal Decree-Law No. 37 of 2022 about Family Companies (“Family Companies Law”) on October 3, 2022, which was due for enactment on January 3, 2023. Financial free zones like the Dubai International Financial Centre (“DIFC”), the Abu Dhabi Global Markets (“ADGM”), and the RAK ICC established legal frameworks so that families may devise a succession plan that would accomplish their goals prior to the adoption of the Family Companies Law.
Understand the Concept of Family Business in the UAE
There is no universally agreed-upon definition of what a family business is because the term is used in many different contexts. The Family Companies Law defined a Family Company as a business (formed in line with the UAE Companies Law) in which individuals who are members of a single-family possess the majority of the company’s shares. This Family Company is registered in the special register mentioned above. But according to the Family Companies Law, a Cabinet Resolution outlining the parameters of a “one family” must be issued in due time.
We wonder if the Cabinet Resolution will hold the same definition of a “Single Family” as the DIFC Authority. According to the DIFC Family Office Regulations, a family qualifies as a “Single Family” if it consists of one person, a group of people who are all bloodline descendants of the same ancestor, or the couple who makes up that group (including widows and widowers, whether or not remarried).
Although the Family Firms Law says that companies founded in a particular Free Zone may be subject to its rules, the term “Family Company” only refers to businesses founded in conformity with the UAE Companies Law. The body of the statute expressly states that it is intended to apply to free zone companies, therefore this looks to be an oversight. The process for adding a free zone company to the special register will be made clear in due course, as was already mentioned.
Number of Family Members as Shareholders
- A maximum of fifty (50) shareholders are allowed for limited liability corporations under the UAE Companies Law and several additional laws and regulations that apply in different regions within the UAE (LLCs).
- Given that the UAE Personal Status Law’s compulsory heirship restrictions may be applied when ownership is transferred from one generation to the next, this statutory limit is of relevance to family enterprises that have individual family members as direct shareholders of the family holding company.
- There is no cap on the number of people who can become shareholders in a family company under the Family Companies Law.
- In general, it is advised that family groups design a structure in which family members will indirectly own shares in the Family Company through investment vehicles such as trusts, foundations, or corporate organizations.
The UAE government’s adoption of the Family Companies Law is a welcome piece of legislation that will help family businesses overcome obstacles while preparing for succession under the UAE Companies Law’s current legal framework. As a result of this significant development, we highly advise family businesses to think about how much they can profit from the Family Companies Law’s provisions in order to reduce any risks or problems that can disrupt their operation during a succession.
Stay tuned with Adam Global for any further updates regarding the new family office rules DIFC is live with. Also, feel free to get in touch with Adam Global business setup advisors in Dubai if you are looking to set up a business in DIFC.