Ever since the Dubai real estate market opened up to foreign ownership, investors have been looking for the best structure to ring-fence their assets. The search is over.
Since their introduction in the UAE in 2018, foundations have had a substantial impact on the structuring of domestic and regional assets, and possibly no other asset class has benefited more than real estate. In a series of podcasts, team M/HQ is discussing the multiple uses of foundations in practice from all angles.
In our third episode, Legal Director Kath Zagatti and Managing Partner Yann Mrazek discuss selected topics around the use of foundations for Real Estate structuring.
How the DLD’s practice with respect to foreign ownership evolved?
The right to ownership of Dubai real estate was given to foreigners back in 2006 in certain areas called “Designated Areas”. The number of Designated Areas has been updated and increased since then.
From 2006 till 2012, the DLD was assessing foreign ownership on a case by case basis. During this period, the DLD accepted registering properties in the name of entities incorporated out of UAE, for instance, BVI companies, which could hold the property directly or through another passthrough company, usually incorporated in the UAE.
After 2012, the DLD decided that JAFZA IBCs was the only type of offshore entity being able to directly own properties in Dubai; and restricted the corporate structure holding the property up to 2 layers till the Individual Beneficial Owners. At that time, it was standard practice to use JAFZA IBC owned by a BVI entity.
This previous DLD practice has always been a challenge, as it prevented investors from using sophisticated structures to own properties in Dubai.
Since 2018, the DLD has become flexible in terms of property ownership. The DLD has executed a series of Memorandums of Understanding with few Free Zones in the UAE, for instance, the DIFC, ADGM, RAK ICC and RAKEZ allowing entities incorporated in these free Zones to directly own properties in Dubai.
The game-changer is that investors can now invest in Dubai real estate using sophisticated structures, incorporated in a common-law regulatory framework: companies, partnerships, funds and foundations
Foundation and Real Estate, compatible?
Yes, definitely! For the past year, we have been registering Dubai properties directly and indirectly with Foundations.
An important observation though is that so far, the DLD is only accepting DIFC Foundations as direct or indirect owner of Dubai properties. And the same happens with the Land Department in Abu Dhabi, which currently only accepts ADGM Foundations as owner of Abu Dhabi properties.
What is the impact in practice of using a Foundation to invest in Dubai properties?
The use of foundations for investments in Dubai real estate tackles 2 important issues:local probate; and complexity /bureaucracy related to the use of multiple structures.
A probate is the process that takes place after someone’s death. This process will have to be put in place in case the deceased was holding assets in the UAE. This procedure takes time as it involves the Dubai Courts and it might lead to the distribution of assets in a way not favorable to the deceased’s direct heirs; e.g. spouse and children.
The other issue is the bureaucracy involved when a property is registered with an entity having multiple corporate shareholders. Whenever the Beneficial Owner of the structure wishes to transfer shares in any of the companies holding the property or the property itself, a full set of corporate documents of all companies involved in the structure will have to be submitted to the DLD and any document produced outside the UAE must be legalized till the UAE Embassy abroad and translated into Arabic.
The use of a foundation to hold the property eliminates the above 2 issues. Once the property is registered with the Foundation, the property does not make part of the Founder’s personal assets and estate. If the Founder passes away, nothing will happen to the property which will remain under the foundation. There will be no probate procedure. Also, considering that the foundation is a domestic structure, no costly legalization of documents will have to be prepared but only the translation of few documents as the UAE Free Zone Authorities already issue some of the corporate documents in Arabic and English.
What is the procedure to register Dubai real estate under a foundation?
There is no difference between registering a property with a foundation or a company. In the case of a Foundation, the DLD will require a NOC from the DIFC to confirm that this Authority has no objection to the foundation hold property in Dubai. Along with the NOC, the corporate documents of the Foundation (Charter, By-Laws, Certificate of Incumbency) will have to be submitted to the DLD. Once the applicable transfer fee is paid, the DLD will register the property under the foundation’s name and issue the Title Deed.
The standard transfer fees applicable by the DLD is 4% of the market value of the property. This rule however has an exception: when the property transfer is made among direct family members (spouse, parents, or children) or between the same Beneficial Owner, the transfer fee is reduced to 0.125% of the market value of the property.
In this context of Foundation, what is important to note is that: if the owner of a property wishes to transfer his property to a foundation where he is the Founder and sole Initial Beneficiary, or the beneficiary along with his spouse and children, the transfer fee applicable by the DLD will be only 0.125% of the market value of the property.
Change of beneficiaries, any impact?
Yes, if the beneficiary changes, the DLD will apply transfer fees. So for instance, if the father was the sole Beneficiary of the Foundation and he passes away, transfer fees will apply due to the change of beneficiaries in the foundation, which in most of the cases are the spouse and children of the previous beneficiary, and therefore the applicable fees would only be 0.125% of the property price.
Change of controllers, any impact?
No. If the Founder passes away or the Guardian or Council members change, there will be no impact or transfer fee to be paid.
A number of banks have recognized the importance of the tool and adapted their offering accordingly. Mortgaging properties held by a foundation is a reality.
Kath Zagatti I. De Moura