How do you set up a family office in Abu Dhabi – and why now?
Family offices entering the ‘Capital of Capital’
As the Abu Dhabi Global Market (‘ADGM’) continues to grow, we are seeing more interest in ADGM as a jurisdiction in which to establish family offices. Against this backdrop, how can families best use ADGM to structure and manage their wealth? What are the different ways a family office can be established, and what activities can it carry out? And what legal, regulatory and structuring considerations – including governance, tax and succession planning – should families and their advisers keep in mind when setting up in Abu Dhabi? This article explores these questions and provides a practical overview of establishing a family office in ADGM.
The definition of ‘family offices’ is notoriously broad. One person understands it to mean an investment office for a single individual, another understands it to be a succession planning structure such as a trust or foundation, and another understands it to be a regulated business which manages assets on behalf of multiple wealthy clients.
London, Switzerland, Singapore and other jurisdictions have been prominent family office structuring jurisdictions for many years. But the influx of capital in the UAE, especially in the ADGM in very recent times, has led to a greater number of enquiries from clients on how to use ADGM to host a family office.
The ADGM is known for its sovereign capital. Sovereign wealth funds like Mubadala, Abu Dhabi Investment Authority, Emirates Investment Authority and the newly established L’imad represent the “Tier 1” capital layer in Abu Dhabi. It is these enormous sovereign institutions that have given the ADGM its label, ‘the Capital of Capital’. However, it is the next tiers of capital that are increasingly looking to join the sovereign giants in Abu Dhabi. This may include regional or global merchant families who wish to organise their operations and wealth a little more tightly (a “tier 2”, if you will). There is also a “tier 3”, comprising newly minted entrepreneurs, many of them expats who have sold substantial businesses large enough to justify having some formal structure to their wealth.
In the years ahead, it will be interesting to see how these different tiers of Abu Dhabi capital grow and interact, but in the meantime we, as the lawyers, are helping them establish their wealth structures.
The ADGM legal framework
The ADGM, under the English Law Regulations, incorporates English common law and equity (and 48 Acts of English legislation) directly into its law, subject to local ADGM enactment. Thus the ADGM places its faith in the judiciary and common law of England to make sensible decisions, whilst reserving its ability to enact its own legislation when the opportunity or context demands it.
On the regulatory front, however, the ADGM has created its own regime, centred around the Financial Services and Markets Regulations 2015 (‘FSMR’) (in respect of regulated activity) and carefully drafted commercial legislation (in respect of non-regulated activity). The former is overseen by the Financial Services and Regulatory Authority (‘FSRA’), the ADGM’s regulator, and the latter by the ADGM Registration Authority.
Family offices as a ‘Controlled Activity’
The commercial licensing regime overseen by the ADGM Registration Authority has a set of robust rules governing family offices. For family offices who are not managing third party capital, their regulator is the Registration Authority (for regulated family offices see below).
Unregulated does not, however, mean unlicensed. ADGM law recognises the concept of ‘controlled activities’, which encompasses (inter alia) legal services, corporate service providers, auditing, tax consultancy and single family office activity. Family office activity can encompass one or more of the following through a legal entity (or legal arrangement such as a trust):
- Concierge services for the family;
- Human resources;
- Strategic and risk management services;
- Taxation and wealth planning;
- Investment management and advisory services (which one would expect to cover asset allocation);
- Legal and regulatory services (noting that ‘legal services’ are a separate controlled activity in the ADGM – this anticipates legal or regulatory services provided for the family rather than generally);
- Financial services;
- Holding company;
- Acting as trustee or foundation (for a single family – again not to be confused with the more general licensable activities of corporate service provision or the regulated activity of trustee services); or
- Any other controlled activity undertaken for a single family.
‘Single family’ is defined to mean all direct ancestors and descendants of an individual, or group of individuals who are all related, including blood relations, step-children and adopted children whether of the individual or group of individuals. Helpfully, this is broad enough to cover different family branches (e.g. cousins) as long as they have an ancestor in common. The definition does not however include spouses of those descendants, which may be a relevant factor when drafting legal documentation.
Thus any legal entity or arrangement carrying out such activity for a ‘single family’ will be conducting a controlled activity. This means that they cannot simply incorporate a standard company in the ADGM and begin family office operations; specific authorisations will be required from the ADGM Registration Authority.
ADGM law, it should be noted, stipulates that an ADGM single family office falling under the Controlled Activities Rules must have a minimum ‘value’ of USD 10,000,000. How does one define ‘value’? It is interpreted with reference to the net asset value of the family in question, as opposed to the balance sheet of the family office. This is important, given that (as acknowledged below), ADGM family offices will not necessarily be asset holding structures.
Regulated family offices
Regulated family offices in the ADGM fall within the FSRA’s broader framework for authorised financial services firms. In practice, a “regulated family office” is a single family office entity that will carry out one or more “Regulated Activities” under FSMR, such as managing assets, advising on investments, or arranging deals in investments. If the activity is conducted “by way of business,” the family office entity must obtain a Financial Services Permission (‘FSP’) from the FSRA to operate as an ‘Authorised person’ (that is assuming it doesn’t fall within an exemption). Typically, the authorisation will be under Category 3 or Category 4. Category 4 authorisations are normally required for advisory-only or arranging functions, while Category 3 applies where the family office exercises discretionary control over assets or operates in a manner functionally similar to a boutique asset manager.
As above, where a family office remains purely intra-family and does not provide services to external clients, it may fall outside the FSRA perimeter, in which case we return to our analysis above on Controlled Activities under the Registration Authority.
Regulated family offices are expected to comply with the full suite of FSRA requirements, including governance arrangements, compliance systems and controls, anti-money laundering obligations and, where applicable, prudential capital requirements under the FSRA Prudential Rulebook.
It ought to be noted that, unlike say the DIFC (with its Family Office Arrangements), the ADGM has no specific regulatory regime for family offices.
Trusts, foundations and tax considerations in ADGM family offices
As mentioned earlier, some clients and advisors equate family offices to succession planning vehicles such as trusts and foundations.
In fact, the structuring of the family office (including its regulation and legal status) is a separate consideration to how it is held. In some cases, the shares of a family office company are held by a trust or foundation, but sometimes they may be standalone companies (or more rarely partnerships).
In deciding whether a family office should be held within a trust or foundation structure, there are a number of considerations as set out below:
- Trusts and foundations sometimes hold underlying companies for tax reasons. In the UAE, a ‘family foundation’ (such definition including a trust) is eligible to make a corporate tax transparency election under Article 17 of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, since extended to underlying companies pursuant to Ministerial Decision No. 261. Whether or not tax benefits will accrue through the election is a separate matter, but it requires consideration nonetheless.
- There may also be regulatory considerations in the use of foundations and trusts. If full FSRA regulation is required, then an application to carry out Regulated Activities may be made by a Body Corporate or a Partnership, but not a trust or foundation.
- Succession planning questions arise. If indeed the family office is holding substantive assets (more likely with a fully FSRA regulated vehicle, but also possible under the Controlled Activities Rules), then a succession plan for the owner(s) must be considered. A Will executed by non-Muslims in the Dubai International Finance Centre may provide a solution. The Abu Dhabi Judicial Department also provide a Wills solution for a broader category of individuals than just non-Muslim expatriates. However, a trust or foundation is often preferred where the assets are material, and where probate processes would disrupt the flow of family office business should the shareholder pass away. The ADGM foundations and trust regimes provide solutions, as can offshore structures.
- Finally, in a family office structure there are governance issues that can be elegantly resolved through the use of foundations and trusts. Where oversight of a family office is required, trust or foundation ownership of the family office gives the broader family the opportunity to serve on the Council of the foundation (or board of the trust company, if a Private Trust Company). Then bespoke arrangements can be entered into to ensure there is information flow and suitable approvals between the family office entity and the shareholder trust or foundation. We have used this type of structure many times to help resolve (or prevent) family conflict in the family office.
The future of family offices in ADGM
ADGM is firmly establishing itself as a compelling jurisdiction for family offices, underpinned by its English common law legal framework, flexible approach to regulation, and the option to operate within or outside full financial regulation depending on the family’s needs.
With government bodies, regulators and service providers increasingly aligned in promoting Abu Dhabi as a family office jurisdiction, it is likely that the current trend in ADGM family office structuring will continue. However, successful implementation depends on careful structuring from the outset. Thoughtful consideration of regulatory requirements, family governance arrangements, and long-term wealth planning will be critical to ensuring that family offices established in ADGM are both compliant and resilient. In this context, coordinated legal and tax advice remains essential to achieving an effective and future-proof structure.
