How to set up a DIFC trust

Trusts are legal arrangements that allow individuals or entities, known as trustees, to hold and manage assets on behalf of beneficiaries. They provide a secure and efficient way to protect and transfer wealth while ensuring confidentiality. In Dubai, there is a significant demand for trusts due to the city’s status as a global financial hub and its favourable tax and legal framework.

Trusts are widely used by individuals, families, businesses, and philanthropists to safeguard assets, ensure confidentiality, and facilitate succession planning. In this regard, the Dubai International Financial Centre (DIFC) stands out as the ideal location for setting up trusts. With its common law jurisdiction, stringent regulatory framework overseen by the Dubai Financial Services Authority (DFSA), and pool of experienced professionals, the DIFC offers a robust and trusted environment for trust establishment and administration.

What are the applications of a DIFC trust?

DIFC trusts are versatile tools, offering several applications and benefits. These include:

• Wealth Protection: A DIFC trust provides a robust mechanism for protecting and preserving wealth. By transferring assets into a trust, individuals can shield their wealth from potential claims, lawsuits, or creditors. The trust structure creates a legal separation between the assets held in the trust and the personal ownership of the settlor, enhancing asset protection.
• Succession Planning: DIFC trusts are widely used for effective succession planning. Through a trust, individuals can specify how their assets should be distributed among their beneficiaries upon their demise. This allows for a smooth transfer of assets and minimises the complications that may arise during probate or inheritance processes. Trusts provide flexibility in defining the timing and conditions for distributing assets to beneficiaries, ensuring their long-term financial security.
• Asset Management and Growth: DIFC trusts offer a structured framework for managing and growing assets. Skilled trustees can handle the investment and management of trust assets, leveraging their expertise to achieve optimal returns while adhering to the investment objectives outlined in the trust deed. This professional asset management can lead to increased growth and wealth accumulation over time.
• Confidentiality and Privacy: Trusts established in the DIFC offer a level of confidentiality and privacy to settlors and beneficiaries. The trust deed is not a public document, and details regarding the assets, beneficiaries, and terms of the trust are kept confidential. This confidentiality can be particularly valuable for high-net-worth individuals or families who wish to maintain privacy in their financial affairs.
• Philanthropic Endeavors: DIFC trusts serve as a means for individuals to establish charitable foundations and engage in philanthropic activities. By creating a charitable trust, settlors can donate assets to support specific causes or initiatives. The trust structure allows for effective management of charitable funds and ensures that the donations are utilised in line with the settlor’s philanthropic objectives.
• Tax Planning: DIFC trusts can be used for tax planning purposes, subject to the specific tax laws applicable to the settlor’s jurisdiction. By transferring assets into a trust, settlors may be able to optimise tax efficiency, minimise inheritance taxes, or take advantage of tax exemptions or favourable tax treatment in certain scenarios.

How do trusts work in DIFC?

Trusts in the Dubai International Financial Centre (DIFC) operate within the framework of the DIFC Trust Law and the regulations set forth by the Dubai Financial Services Authority (DFSA). The following is an overview of how they work:

1. Formation and Registration: To establish a trust in the DIFC, a trust deed or agreement is created by the settlor, outlining the terms and conditions of the trust. The trust deed must comply with the DIFC Trust Law and be registered with the DIFC Registrar of Trusts.
2. Trustee Appointment: The settlor appoints a trustee, who can be an individual or a corporate entity, to manage the trust assets in accordance with the trust deed and applicable laws. The trustee must meet certain eligibility criteria, including being licensed by the DFSA or being a DIFC-prescribed organisation.
3. Asset Transfer: The settlor transfers assets into the trust, which can include cash, investments, real estate, or other valuable property. These assets are held by the trustee for the benefit of the beneficiaries specified in the trust deed.
4. Trust Administration: The trustee assumes responsibility for administering the trust in accordance with the terms of the trust deed and the DIFC Trust Law. This includes managing and investing the trust assets, keeping accurate records, preparing financial statements, and distributing income or principal to the beneficiaries as stipulated in the trust deed.
5. Regulatory Compliance: Trusts in the DIFC are subject to regulatory oversight by the DFSA. Trustees must adhere to the DFSA’s rules and regulations, ensuring compliance with anti-money laundering (AML) and know-your-customer (KYC) requirements. They are also responsible for filing relevant reports and disclosures with the DFSA, maintaining proper governance, and providing regular updates to the beneficiaries.
6. Dispute Resolution: In the event of any trust-related disputes or issues, the DIFC courts, which operate under a common law jurisdiction, provide a specialised forum for trust-related litigation and dispute resolution.

How to set up a DIFC trust?

Registering a trust in the Dubai International Financial Centre (DIFC) involves following a specific process. The general steps are as follows:

1. Engage Professional Assistance: A professional wealth management and financial advisory firm with expertise in trust formation and administration can assist you in navigating the registration process and ensure compliance with DIFC regulations.
2. Prepare the Trust Deed: This outlines the terms and conditions of the trust, including the identity of the settlor, trustee, beneficiaries, and the purpose of the trust. It should adhere to the requirements outlined in the DIFC Trust Law and comply with the applicable regulations.
3. Submit the Application: Prepare the necessary documentation, which typically includes the completed application form, the executed trust deed, and any supporting documents required by the DIFC Registrar of Trusts.
4. Pay the Registration Fees: These are determined by the DIFC Registrar of Trusts and can vary depending on the complexity and value of the trust.
5. Compliance and Due Diligence: The DIFC has stringent anti-money laundering (AML) and know-your-customer (KYC) requirements. You may need to provide supporting documents, such as identification and proof of address, for the settlor, trustee, and beneficiaries. Additionally, the DIFC may conduct due diligence checks on the parties involved in the trust.
6. Review and Approval: The DIFC Registrar of Trusts will review the application, including the trust deed and supporting documents, for compliance with the applicable regulations. They may request additional information or clarification during the review process.
7. Registration Certificate: Upon successful review and approval, the DIFC Registrar of Trusts will issue a registration certificate for the trust. This certificate serves as proof of the trust’s existence and registration within the DIFC.
8. Post-Registration Compliance: After registration, trustees must comply with ongoing regulatory requirements, including maintaining accurate records, filing annual returns, and adhering to the DIFC’s rules and regulations.

FAQs

1. What types of trusts can be established in the DIFC?
   The DIFC allows for the establishment of various types of trusts, including discretionary trusts, fixed interest trusts, purpose trusts, and charitable trusts. The specific type of trust to be established depends on the objectives and requirements of the settlor.
2. Who can act as a trustee in the DIFC?
   Trustees in the DIFC can be individuals, corporate entities, or professional firms. The trustee must meet certain eligibility criteria, which may include being licensed by the DFSA or being a DIFC-prescribed organisation. Professional trustees are often preferred due to their expertise in trust administration.
3. Can a DIFC trust own assets outside of the DIFC?
   Yes, a DIFC trust can own assets both within and outside the DIFC jurisdiction. The trust can hold various types of assets, such as cash, investments, real estate, or other valuable property, subject to compliance with applicable laws and regulations in the relevant jurisdictions.
4. How are DIFC trusts taxed?
   DIFC trusts can benefit from the tax-efficient environment within the DIFC. Generally, DIFC trusts are not subject to personal or corporate income tax on income or capital gains generated within the DIFC. However, tax implications can vary based on the specific circumstances and applicable tax laws, so it is essential to seek professional tax advice.
5. Can a DIFC trust be established by non-residents?
   Yes, non-residents can establish trusts in the DIFC. The DIFC is an attractive jurisdiction for international clients seeking a reputable and well-regulated environment for their trust arrangements.
6. How is confidentiality maintained in DIFC trusts?
   DIFC trusts offer a level of confidentiality and privacy. Trust documents, including the trust deed, are not publicly accessible, ensuring confidentiality for the settlor and beneficiaries. However, some disclosure requirements may exist to comply with anti-money laundering (AML) and other regulatory obligations.
7. Are DIFC trusts recognised outside of the DIFC?
   The recognition of DIFC trusts outside of the DIFC depends on the laws and regulations of the relevant jurisdictions. While the DIFC is internationally recognised and its legal system is based on common law principles, the recognition and enforceability of DIFC trusts in other jurisdictions may vary. Professional advice should be sought to understand the legal implications of cross-border recognition.
8. Can a DIFC trust be used for business purposes?
   Yes, DIFC trusts can be utilised for business purposes. They can be employed as holding structures for shares or assets of companies, facilitate mergers and acquisitions, provide employee benefits, or serve as a vehicle for joint ventures and commercial transactions.
9. What are the reporting and disclosure requirements for DIFC trusts?
   DIFC trusts are subject to reporting and disclosure requirements, including the filing of annual returns and financial statements. The specific requirements vary depending on the type of trust and the regulations set forth by the Dubai Financial Services Authority (DFSA). Trustees must ensure compliance with these obligations.
10. Can a DIFC trust be migrated or redomiciled to another jurisdiction?
    Yes, it is possible to migrate or redomicile a DIFC trust to another jurisdiction, subject to the laws and regulations of both the DIFC and the target jurisdiction.

How can The Knightsbridge Group help?

The Knightsbridge Group has over 20 years of experience in the domain of corporate structuring and wealth management. We have unparalleled knowledge of business practices and legal requirements in the UAE as well as an international network of contacts and a deep understanding of the needs of modern-day high net worth clients and international businesses.

We can help you set up a DIFC trust, providing expert guidance and assistance in structuring and planning your trust, offering investment management services, ensuring compliance with regulatory requirements, and providing ongoing advisory support to trustees and beneficiaries.

If you need help with this or any other immigration, financial or corporate structuring issue, please don’t hesitate to contact us on info@kbgroup.ae and we will be happy to help.