WHY SETTING UP A FAMILY OFFICE CAN MAKE YOU MORE MONEY!

This article was updated on May 14th, 2024

This article has been researched and written by Scott Cairns and the team at Creation Business Consultants and has not used AI in generating this article.

FAMILY OFFICES AND THE SHIFT TO A UNITED APPROACH TO STRUCTURING

WHAT IS A FAMILY OFFICE?

A family office serves as an alternative to traditional wealth management options, providing specialized services for ultra-high net worth individuals. These private wealth advisory firms cater to the management and preservation of family wealth. With a single-family office (SFO), the investment management of the family’s accumulated wealth is handled by a privately held company.

The key value proposition of family offices lies in their ability to effectively structure and manage wealth while offering professional advice to meet the long-term goals of the family. According to The Economist and Forbes, the number of single-family offices has grown significantly, reaching around 10,000 worldwide. These offices collectively manage an estimated $5.9 trillion in assets.

In addition to investment activities, family offices are actively involved in succession planning and preparing the next generation. They serve as ideal vehicles for families seeking to preserve their wealth for future generations. As more families recognize the benefits of utilizing professionals to manage, enhance, and protect their personal and business affairs, the adoption of alternative structures, particularly in the Middle East, has gained momentum.

FROM TRUSTS TO ALTERNATIVE FUNDS: HOW NEXT-GEN FAMILIES ARE REIMAGINING WEALTH MANAGEMENT

Traditionally, many families have relied on Trusts or Foundations to safeguard and manage their assets. However, with the rise of dynamic second and third generations, the focus has shifted towards securing exclusive access to the most promising private equity opportunities. While heads of families prioritize the smooth transition of wealth to new decision-makers, a key challenge lies in preserving the family’s overall vision and professional structure.

Often, traditional legacy plans involved a network of Special Purpose Vehicles (SPVs) holding various assets like real estate, private company shares, investments, and private equity.

For the world’s wealthiest families, Trusts and Foundations remain central to wealth preservation. However, as wealth accumulates and investment preferences evolve, an increasing number of energetic next-generation members are opting for alternative fund structures.

Recently, renowned names like Edmond de Rothschild, EnTrust Global, Nomura Singapore Limited, and The Family Office Company established a presence in the Dubai International Financial Centre (DIFC).

This influx of notable institutions has propelled the DIFC to house over 300 wealth and asset management companies, representing an industry valued at a staggering $450 billion (Dh1.65 trillion). By the end of 2022, the centre had successfully domiciled over 150 funds.

With Dubai boasting the highest concentration of wealth ($517 billion) within any Middle Eastern city, the DIFC is rapidly attracting global and regional asset management firms to set up shop.

“The implementation of new regulations positions Dubai to witness a significant influx of wealth from established hubs like the US, Luxembourg, Singapore, and Hong Kong,” stated Vijay Valecha, Chief Investment Officer at Century Financial. “Dubai’s strategic geographic location and investor-friendly legal framework make it an especially attractive option for Asian family offices seeking to establish or expand their base.”

It’s noteworthy that roughly 30% of Asian family offices manage assets exceeding $1 billion.

INTERGENERATIONAL WEALTH TRANSFER: BALANCING CONTROL WITH DIVERSIFICATION FOR FAMILY BUSINESSES

The past decade has witnessed an unprecedented surge in the transfer of wealth from the founders of large family businesses to the next generation. While some situations might necessitate the complete diversification of assets, there often exists an opportunity to strategically release wealth and distribute responsibilities among family members without relinquishing certain benefits and control.

For families, maintaining ultimate control over their underlying assets remains paramount. They desire direct involvement in the decision-making processes surrounding investments, including entry, exit, and negotiation strategies. By establishing a collective investment platform, families can construct their own customized portfolios, directly investing based on their unique risk tolerance, investment timeline, and preferred sectors. This proactive approach empowers them to play a hands-on role in managing their wealth.

WHY IS THE UAE A GOOD CHOICE OF LOCATION TO FORM A FAMILY OFFICE?

• STRATEGIC LOCATION AND ROBUST ECONOMY: The UAE’s strategic location provides a gateway between East and West, making it a global hub for finance and trade. This geographical advantage is complemented by a robust and stable economy, which offers a secure environment for substantial financial activities and investments.
• FAVOURABLE TAX ENVIRONMENT: One of the most compelling reasons to establish a family office in the UAE is the favourable tax regime. The UAE offers a much lower rate of corporate income tax at only 9% (over AED 375,000) and no capital gains tax, which can significantly enhance the efficiency of wealth management and investment returns. Additionally, there are no inheritance taxes, and the UAE maintains a large network of double tax conventions, which can mitigate the tax burden on international operations.
• FLEXIBLE LEGAL FRAMEWORKS: The UAE provides various jurisdictions, such as the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM), which offer flexible and business-friendly regulatory environments. These jurisdictions are designed to cater specifically to the needs of family offices, offering benefits like simplified reporting requirements and the ability to operate with a high degree of confidentiality and control over family wealth.
• WEALTH PRESERVATION AND SUCCESSION PLANNING: Family offices in the UAE can take advantage of sophisticated legal structures for asset protection, estate planning, and succession planning. Local laws support the smooth transition of wealth across generations and offer robust mechanisms to handle family business governance and disputes.

WHY & HOW TO SET UP A FAMILY OFFICE IN THE UAE?

Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) have been the jurisdictional choice for many in the region, with families looking to become further institutionalised. The focus has veered into creating a structure not only to manage the wealth of a single family but align the interests of multiple families under one roof.

The motivation for a Family Office and its shareholders considering the use of a regulated entity or fund structure is ultimate control. Unlike a traditional trust, the Ultimate Beneficial Owner(s) could have an active right in the entity, and if structured correctly, can be identified as an asset or investment manager, hence being able to drive the objectives of the office. With alternative structures available, the application of a range of vehicles for a Family Office to use is typically open-ended investment companies such as an Incorporated Cell Company (ICC), Segregated Portfolio Company (SPC), to the newly formed Variable Capital Company (VCC), which came into force earlier this year in Singapore. A VCC can be used as a substitute for other commonly used structures. 

The use of a General Partner (GP) / Limited Partners (LP) structure allows the Family Office to own the GP shares which subsequently manage the LP and the contracts for investors. 

The Exempt fund provides a complete alternative to Family offices looking to invest capital into certain sectors by way of private placement. The process of distributing securities by way of a private placement tends to be more cost-effective and time-efficient compared to conducting a public offering by way of a prospectus filing. By issuing securities through a private placement offering, this structure is exempt from the extensive disclosure requirements that are otherwise requested from a public fund.

Regulators tend to adopt a somewhat lighter approach to this alternative structure; however, the actual level of regulation on these types of structures depends on factors such as the type, number of investors, and the nature of the assets acquired.

A regulated collective investment scheme would be the prudent choice for multi-family offices managing a variety of assets for unrelated family investors. In cases where all investors belong to a single family, the legal framework of a fund-type structure would provide transparency regarding the rights and responsibilities for the pool of family investors. This, in turn, would offer protection should a family dispute arise.

Regulatory bodies such as the Dubai Financial Services Authority (DFSA) at DIFC and the Financial Services Regulatory Authority (FSRA) at ADGM have traditionally been the go-to points for Family Offices looking to institutionalize. They offer a substantial level of comfort to new investors regarding a given structure and its management of assets.

This type of structure holds appeal as it opens several opportunities for direct investments, which could be managed internally by a Family Office team possessing the requisite professionalism and expertise.

The investment opportunities within the GCC and the wider Middle East, Africa & Southern Asia (MEASA) region, along with the numerous double taxation avoidance treaties that the UAE has in place, make the two well-established UAE financial free zones, the ADGM and the DIFC, attractive destinations for the establishment of such entities.

KEY CONSIDERATIONS WHEN ESTABLISHING A FAMILY OFFICE IN THE UAE

• Jurisdiction Selection – Choosing the right jurisdiction is crucial as each (e.g., DIFC, ADGM, DMCC) offers unique regulatory environments and benefits. Factors such as the type of financial activities and privacy levels should guide your choice. Each jurisdiction has distinct legal frameworks designed to cater to the varied needs of family offices, impacting everything from setup requirements to operational flexibilities.
• Regulatory Compliance – Compliance with local laws is mandatory. This includes understanding the specific anti-money laundering (AML) laws, financial services regulations, and any other legal requirements of the chosen jurisdiction. Ensuring that your family office meets these requirements is essential for legal operation and to avoid potential fines or legal issues.
• Office Structure – Deciding on the structure of the family office is pivotal. Single-family offices (SFOs) offer direct control and privacy, managing the wealth of one family, whereas multi-family offices (MFOs) serve several families, offering cost-sharing benefits and access to a broader range of professional expertise.
• Tax Optimization – The UAE’s newly implemented tax regime makes it a favourable choice of jurisdiction, but understanding how to correctly structure is important for financial planning. Consulting with CBC tax professional consultants can help optimize your tax strategy to make the most of the UAE’s tax benefits while ensuring compliance with all applicable tax laws.
• Estate Planning – Proper estate and succession planning are fundamental for wealth preservation across generations. This involves setting up legal mechanisms like trusts and wills, tailored to your family’s goals and the legal context of the UAE, to manage and transfer wealth efficiently and in accordance with family wishes.
• Governance Structures – Implementing effective governance is key to the smooth operation of a family office. This involves creating frameworks for decision-making, resolving conflicts, and ensuring transparent and fair management practices that align with family values and objectives.
• Continuous Compliance & Regulatory Management – Regulatory frameworks in the UAE can evolve, making continuous compliance monitoring and adaptation necessary. This ensures that the family office remains compliant with new financial and legal requirements, thereby protecting against compliance risks.
• Professional Advisory – Given the complexities involved, engaging with professional advisors who specialize in the UAE’s financial and legal systems is beneficial. They can provide valuable insights during the setup process and ongoing operations, helping navigate the intricate requirements of establishing and maintaining a family office.

Each of these steps involves detailed planning and execution, making the establishment of a family office in the UAE a comprehensive but rewarding endeavour for managing and preserving family wealth.

For more information on alternative structures and Family Office incorporation, contact our expert Corporate Structuring team for your free 30-minute consultation at [email protected] or call +971 4 878 6240.

Scott Cairns,
Managing Director