It’s no secret that the UAE hosts some of the best banking institutions in the world. The presence of tax-free jurisdictions, the ability to repatriate profits, and high-security standards with full protection of clients’ financial information offer incredible opportunities for family businesses, Foundations, and Holdings. In any case, the government aims to attract as many investments as possible, expecting that by 2026, the contribution of ultra-wealthy individuals to the UAE economy will reach $500 billion.
Why should someone with a highly profitable business consider opening a Holding or a Foundation? When a company’s income reaches millions, the owners will sooner or later need to think about preserving their wealth. After all, keeping money in corporate or personal bank accounts exposes it to credit risk. If, for any reason, a bank declares bankruptcy, this situation does not exempt the investor from tax obligations. Which legal form is best for preserving capital? Experts from Dynasty Business Adviser explore this step by step in this article.
What is a Holding
A Holding Company (Holding) is a business structure that owns shares, intellectual property, financial assets, real estate, and any other property that can be an asset of an operating (subsidiary) company. A Holding typically coordinates the activities of its subsidiaries and makes strategic decisions regarding investment direction. This structure can raise resources by selling shares of one of its subsidiaries or support the development of incoming enterprises by redistributing funds.
Advantages of Holding Companies:
- Legal protection of assets. A Holding Company is not obligated to cover the debt obligations of its operating companies. For example, if the real estate where a subsidiary’s office is located belongs to the Holding Company, in the event of the operating company’s bankruptcy, the building remains under the Holding’s control.
- Financial flexibility and resilience to financial risks. A Holding Company can attract investments and credit by using individual assets as collateral.
- Tax optimization. A Holding can derive income from its subsidiaries in the form of dividend payments, which are not subject to taxation. Additionally, if business tax rates in a particular region are high, the Holding can relocate to a jurisdiction with more favourable tax conditions.
- Confidentiality. Using a Holding Company to ensure confidentiality is a common practice. It involves not having to disclose information about subsidiary companies and their revenues, provided that the operation of the Holding does not violate local laws.
The UAE is attractive for Holding Companies due to its stable economy, tax benefits, and high-security standards. However, when establishing such companies, it is important to consider international law to avoid potential legal issues in the future.
If you decide to establish a Holding in the UAE, we recommend consulting with specialists at Dynasty Business Adviser. Our tax and international law experts will offer the best solutions for tax optimization.
What is a Family Office
A Family Office, or a Family Company, is a legal structure in the form of an LLC with a special license, allowing it to manage organizations, enterprises, holdings, assets, and the wealth of individuals within a single family. These entities help high-net-worth families effectively manage their assets and achieve specific financial goals, ranging from capital preservation to growth.
It’s interesting that the functions of Family Offices were originally performed by stewards in noble families (or by managers in merchant families) as early as the 16th century. In addition to managing the household, they were responsible for managing the family’s income, distributing it prudently and wisely. However, the first truly successful experience of handing over business management to an external manager occurred with the Morgan family in the early 19th century in the United States. This practice was followed by the globally renowned John D. Rockefeller in the late 19th century, who entrusted his assets to top-tier professionals.
After successful experiences in the U.S., Family Offices began to be widely used in other countries.Today, the functions of Family Offices have expanded significantly. Companies operating in the Family Office sector now offer clients a variety of financial, consulting, and legal services that help preserve and grow family wealth. Single Family Offices can hold shares in family businesses, which they receive from holdings and foundations.
What is a Foundation (Family Fund)
A Foundation is a legal entity with the right to own property and distribute assets to beneficiaries (third parties). Foundations can provide legal protection of assets and facilitate their transfer to specific individuals according to the settlor’s wishes. Only the beneficiary is entitled to receive income from the foundation’s activities. At the same time, the founder of the Foundation is permitted to be a beneficiary as well. Foundations can help avoid taxes and complications related to inheritance. Assets held within a Foundation can also be protected from creditor claims.
There are several types of Foundations:
- Living Foundation: created during the settlor’s lifetime, allowing them to use the assets. After the settlor’s death, the assets are transferred to the beneficiaries.
- Testamentary Foundation: established by will and comes into effect after the settlor’s death.
- Revocable and irrevocable Foundation: a revocable Foundation can be modified or terminated, while an irrevocable Foundation cannot.
The difference between a Family Business, Foundation, and Holding
Considering that a Family Office is essentially an LLC, comparing it directly with a Foundation or Holding Company isn’t entirely accurate. These are different types of entities. While a Family Office can also engage in investments and earn income from them, unlike a Family Office, Foundations and Holding Companies are not permitted to engage in commerce directly — only through their subsidiaries.
Note. Foundations and Holding Companies can be considered family entities if family members are included in the charter as founders or beneficiaries. There are also family businesses that are not much different from regular commercial companies. Essentially, any “Family Business” can be called such when it has two or more family members as founders. However, what distinguishes a Family Office from regular companies is that they are allowed to provide services exclusively to family members and their companies.
Let’s examine the key differences between a Family Office, Foundation, and Holding Company:
| Family Office | Foundation | Holding Company | |
|---|---|---|---|
| Function | A Family Office manages a family’s wealth, which includes developing investment strategies, providing tax and legal support, handling inheritance issues, and maintaining financial records. | A Foundation is established to manage assets for the benefit of another person (the beneficiary). It can function as an investment fund that manages property according to specified conditions. | A Holding Company owns shares in other companies. It consolidates several businesses and exercises control over them. |
| Purpose | Commercial activities. The aim is to generate income through effective management of the wealth of high-net-worth families. | Protection and management of assets in the interest of beneficiaries. Foundations are also used for inheritance, charitable purposes, and asset management. | Management of a portfolio of companies and coordination of their activities. |
| Who can create it | Consulting firms, law firms. | Any legal or natural person, government body, enterprise, institution, religious or charitable organization. | Any business wishing to consolidate several companies under common management. |
| Examples | Walton Enterprises LLC – assets around $225 billion. Cascade Investment – $170 billion. | HSBC: one of the largest companies in the world. EQUIOM: specializes in asset management and tax planning services. | Alphabet Inc. (parent company of Google) – $191 billion. Dubai Holding – $35 billion. |
Holding Company vs. Foundation (Family Fund)
There are significant differences in the structure and creation methods between a Foundation, Family Office, and Holding Company.
- The structure of a Family Office, Foundation, and Holding Company have the following differences:
| Family Office structure | Foundation structure | Holding structure |
|---|---|---|
| Family members sharing a common ancestor up to three generations, including adopted children, can be part of the structure. Businesses owned by family members may also be included. | Founder (creator, business owner). Manager (nominal director, manages assets). Trustee (oversees the manager’s work and makes decisions based on the Charter). Beneficiary (the interested party who benefits). | Parent Company including founders, partners, and directors. Subsidiaries – legal entities engaged in commercial activities (unlimited in number). |
- Differences in creation approaches of a Foundation, Family Business, and Holding Company.
| Family Office creation | Foundation creation | Holdings creation methods |
|---|---|---|
| Established similarly to registering a legal entity, including licensing as a family office. The company’s name must end with SFO DMCC. | Registration is similar to that of a legal entity. It requires the collection of relevant documents, the appointment of a beneficiary, a manager (and optionally a trustee), and the opening of a bank account. | Created through mergers and acquisitions by purchasing controlling stakes in other companies. Internal restructuring. Management buyouts. Privatization: the consolidation of state-owned assets into private holdings. The merger of independent companies into a conglomerate. Investments in private equity. |
How to choose between a Holding Company, Family Office, and Foundation
| Family Office | Foundation | Holding | |
|---|---|---|---|
| Type of activity | Family office. Conducting business in consulting, legal services, or real estate. Services can only be provided to family members, legal entities, Foundations, and Holdings. | A public Limited Liability company is engaged in asset distribution. | Ownership of shares. Financing and lending to subsidiaries. Ownership of real estate. Management and consulting services for subsidiaries. |
| Opportunities | Prestigious business, working with VIP clients. Ability to negotiate contracts with various payment methods, ranging from hourly rates to a percentage of income. | Charity. Pension plans. Confidentiality of wills. Protection of capital from depletion. Tax optimization. Ability to conceal the profitability of companies and foundation assets (even from beneficiaries for a certain period). | Accumulation and preservation of capital. Broad opportunities for development and optimization of financial risks. Confirmation of asset creditworthiness. Tax optimization. |
| ncome Sources | Commercial activities related to providing expert services. Investing, with the ability to control the activities of foreign fiduciary service providers. | Income from companies managed by the Foundation. Dividends, royalties, and other payments. | Dividends from subsidiaries. Profits from investments. Interest from loans. Royalties. Management fees from subsidiaries. |
| Taxes and benefits | Taxes are paid according to UAU law: VAT is 5%, corporate tax is 9% on income exceeding 375,000 dirhams. | 5% VAT on domestic financial transactions. | Holdings are not required to pay taxes when extracting funds from subsidiaries as dividends. A 9% corporate tax must be paid on transactions outside the interaction with subsidiaries. |
| Asset protection | Managing third-party assets under agreements. | Limited control over assets. | Full control over assets. |
Conclusion
Choosing the best legal structure between a Foundation, Holding Company, or Family Office to preserve accumulated wealth is no easy task. The best way to approach this is to trust the professionals.
How we can help you:
- We provide consultations on financial, legal, and tax matters.
- We conduct company audits whether required by tax authorities or for the purpose of buying or selling a business.
- We assist in selecting a bank and opening accounts for secure capital storage.
- We identify profitable and interesting businesses for purchase or investment.
- We constantly monitor market trends, legislative changes, and analyze the best opportunities for tax optimization.
- We develop strategies for investment companies to help increase their annual profits.
- We assist in organizing the seamless transfer of accumulated assets through inheritance. This matter requires particular attention in the UAE.
As a licensed agent of both offshore and onshore companies, Dynasty Business Adviser has been confidently guiding businesses, investment funds, and corporations into the UAE market for nearly a decade. By trusting our experience and expertise in international tax law, you can be fully assured that your accumulated wealth will be securely protected from credit risks.
