MISTAKE 2: POOR ROLE DESIGNATION & INFORMAL NOMINEES
- What it is: Serving as a multiple role holder (e.g. Founder, Council Member, Beneficiary) to the Ultimate Beneficial Owner (UBO) or informal nominees such as employees or friends.
Redundant positions undermine government and create red flags of regulators. Informal nominees who are not put under check can easily be challenged in court as they are not held responsible. Let us go into an example where a 2024 DIFC compliance audit has shown that 15 percent of the structures were identified as being inadequate in terms of role separation.
- Solution: The council members should be professional and independent and the roles of the UBOs should not overlap. Implementation of licensed corporate service providers in the nominee contexts makes this possible.
MISTAKE 3: FAILING TO LEGALLY TRANSFER ASSETS
- What it is: Failing to move assets to the DIFC structure and provides it as an entity in token form.
Transfers of assets have to be legal with notarial documents to have enforceability. Without this, even a well-established structure may fail to meet DIFC structure compliance standards and could be unrecognized by UAE courts, especially when challenged by foreign creditors. In a 2022 case, a DIFC Foundation was struck down when a $5M property had failed to be transferred due to any formal transfer.
- Solution: Consult lawyers in order to carry out legalized movement of assets. Make documentation meet both the DIFC and foreign jurisdiction standards to reduce the risks of enforcing the measures.
- Consideration: Formal transfer can cause costs but it is paramount in terms of legal protection.
MISTAKE 4: OVERLOOKING THE COMPLIANCE ON THE GO
- What it is: Ignoring the regulatory requirements of DIFC including UBO disclosure, accounting and renewal of licenses.
The failure to comply is subject to either punishments or the deprivation of legal safety. As an example, the lack of filing of UBO information under the Economic Substance Regulations (ESR) of DIFC may lead to a fine of not more than AED 50,000. In 2024, 20 percent of DIFC entities were slapped with penalties because of missed filings.
- Solution: Introduce a compliance calendar on UBO disclosures, audited accounts and renewals. Creation Business Consultant can help you manage ongoing compliance effectively to avoid costly penalties and maintain regulatory adherence.
MISTAKE 5: SKIPPING SUCCESSION & CONTROL PLANNING
- What it is: The inability to have any succession plans (or the rules that govern them), Letters of Wishes or Charters, in writing.
In absence of Letter of Wishes, beneficiaries can have conflict regarding the asset allocation. Ambiguous Charters may bring about mismanagement. A 2023 survey carried out by Creation Business Consultants revealed that, 25 per cent of these Foundations in the DIFC did not have formal succession plan, which endangers family conflict.
- Recommendation: To provide an overview of succession and control measures, a comprehensive Letter of Wishes and Charter, edited by legal professionals should be drawn out.
- Advantage: Documentation clearly reduces a disagreement and makes your preferences executed.
MISTAKE 6: WAITING UNTIL IT’S TOO LATE
- What it consists of: Establishing an order following a legal intimidation or a lawsuit.
Late setups are likely to be considered by the courts as a fraudulent conveyance and the structure will be unwound. As another example, a 2024 flurry court decision in the UAE dismantled a DIFC Foundation that was formed after a lawsuit and thus made the assets vulnerable.
- Solution: It may be as simple as planned well in advance, preferably 12 months to 24 months before anything litigation or a creditor problem is going to manifest, then the structure will be legally sound.
MISTAKE 7: OVERENGINEERING FOR PROTECTION, UNDER PLANNING FOR LIQUIDITY
- What it consists of: Complicating the system to serve as protection without paying much attention to calculating access to funds.
It is possible that the needs of operations are not able to lock assets in a Foundation where there are no liquidity arrangements. In the year 2023, a customer experienced a case of cash flows because he had over-restricted a 10M Foundation.
- Solution: If protection needs to be followed by liquidity then structure it in with the use of instruments such as discretionary distributions or loan connection.
- Consideration: Over protectiveness may impose financial inflexibility, thus provision to access should be planned.
MISTAKE 8: OVERLOOKING INTERNATIONAL EXPOSURE
- What it is: Overlooking legal and tax implications across border of structures of DIFC.
Unless built with a global perspective, assets held in DIFC Foundation can continue to be liable to hijacking by foreign tax authorities or by holders of creditor claims. A report released by the OECD in 2024 portrayed that out of the 40 percent of off-shore entities analysed, 40 percent of off-shore structures had tax disputes across borders due to lack of proper planning.
- Solution: A cross-border review on various legal and tax concerns is necessary through international consultants to guarantee compliance and safety internationally.
- Advantage: International compatibility upsurges security and minimizes threats.
MISTAKE 9: NOT REVIEWING AND UPDATING THE STRUCTURE
- What it is: Not reviewing the structure after major change to your life and/or assets.
An event such as marriages, divorce, changes in location or acquisition of property may affect the effectiveness of the structure. A study done in 2023 on DIFC observed that 35 percent of the building structures were obsolete based on untreated life events.
- Solution: Have the structure reviewed and updated annually and after such life changing occurrences as marriage or divorce, or significant asset changes.
MISTAKE 10: MISTAKING PRIVACY FOR SECRECY
- What it is: It presupposes that the DIFC confidentiality assumes the lack of the adherence to the international reporting requirements.
DIFC structures are not exempt to the Common Reporting Standard (CRS) and FATCA regulations. Failure of cooperation is punishable as was observed in 2024, when a DIFC entity was fined a sum of $20,000 over CRS non-compliance.
- Solution: Explain the confidentiality of DIFC and abide by the international regulations like CRS or FATCA. Involve compliance experts like Creation Business Consultants that guarantee effectiveness in reporting.
- Advantage: Compliance ensures confidentiality and the absence of fines.
CASE STUDY : THE HIGH COST OF INCOMPLETE DIFC ASSET PROTECTION
A Swiss Family were planning to establish a DIFC Foundation to secure 7M USD of a real estate investment within the structure and set aside the proceeds to the beneficiaries of the family. This was never completed, and when the father and owner of the property faced a litigation case in 2024, it resulted in a loss and as the asset was part of his estate in his own name, the client spent half a million dollars to defend the case (with lawyers) and lost the asset.
Lesson: It is vital to transfer and manage (govern) assets properly, it is not enough that they are insured on paper. Such documentation and legal supervision would have saved the asset.
RAPID CHECKLIST: RED FLAG IN ASSET PROTECTION
- You directly still control the asset.
- The beneficiaries and the council members are not officially hired.
- No Letter of Wishes / no Charter.
- Transfers not transferred.
- Cited in the law RIP 2679 Nor review of structure in longer than 12 months.
- No ESR, UBO or filings compliance process.
- No updates since major life changes (e.g. marriage, divorce, changes in residences, large change in assets).
ARE COURTS ALLOWED TO UNRAVEL A DIFC FOUNDATION, WHICH IS ESTABLISHED TOO LATE?
Indeed, the establishment of a Foundation may be unravelled by a court as a fraudulent conveyance, notably in case of post-threatening establishment. It should have proactive planning.
IS A DIFC STRUCTURE A SHIELD AGAINST CROSS BORDER CLAIMS IN TAX?
DIFC companies provide a good level of protection but there is need to obey international taxes laws. Ask international tax experts in order to offset risks.
IS IT A LEGAL BINDING?
No, Letters of Wishes inform but do not qualify as the official directives to the trustees or the council members. They ought to be precise and frequently modified.
WHAT CAUSES A STRUCTURAL REVIEW?
A review is required by major changes in life (marriage, divorce, relocation), change in assets, or updates to regulation.
HOW FREQUENTLY WILL I PORTRAY MY DIFC STRUCTURE?
Review every year or when there have been major changes, to make sure that it fits your objectives and is up to your standards of compliance.
WHAT WE CAN DO
At Creation Business Consultants, we excel in designing and maintaining DIFC structures that meets your requirements. We do it all including:
- Structuring: Recommending the eclectic structure (Foundation, Holding Company or Family Office) to apply to your objectives.
- Asset Transfer: Transferring through legal and notarized transfer to assure a strong protection.
- Compliance Management: Managing UBO filings, ESR and renewals.
- Succession Planning: Writing to Wishes and Charters to govern without any hitch.
- Cross-Border Advisory: Reorganizing your organization so that it complies with Overseas laws and taxation.
We have acted on behalf of more than 200 HNWIs and family businesses in the DIFC since 2015 and we have secured billions of assets in the process.
CONCLUSION
The DIFC comprises of the top asset protection site in terms of legal and financial benefits. But it depends on how it is planned well, implemented at the right time and how well it is maintained to be successful. Jeopardizing your family wealth by these 10 pitfalls which most people fall into i.e. ill-fitting structures, ineffective governance, or a lack of compliance you can be sure that you and your family will never be one of them. Engage accomplished advisors to go through the intricacies of DIFC in order to build your financial future.
Select a proper framework to achieve an objective. Standardize the transfer of the assets and its control. Remain in compliance with the regulations of DIFC and international global regulations. Prepare in advance and check on a regular basis.
Ensure your DIFC structure is truly protecting your assets – Book a consultation with Creation Business Consultants today at [email protected] or +971 4 878 6240.
