Apex Group experts recently spoke at the Cross Border Wealth Management Conference in Dubai where much discussion focused on family offices in the region and the current challenges (and opportunities) they face.
Contrary to popular belief, wealthy family offices in the region are finding it increasingly difficult to open bank accounts, particularly with traditional banks. There are several reasons for this, including PEP status and the distinctive low volume but high value nature of family office transactions. Perhaps most pertinently, banks may be less willing to pay the higher compliance costs associated with family office onboarding.
The global pandemic has changed our relationship with technology, with many now expecting the ease and efficiency they experience as retail banking customers, to be replicated by their business banking provider.
As a result, more family office businesses are looking to so-called “neobanks” – exclusively digital banking platforms – which can provide a more nimble and flexible service and with lower compliance associated fees and costs.
Throughout the Middle East, foundations are significantly growing in popularity with increasing numbers being established in the market.
While trusts remain the predominant vehicle, many consider foundations to be a more compatible solution, owing to their discreet independent legal structure and better asset protection. Likewise, there is a growing sense that trusts are not fully Sharia compliant and should be used with caution.
The direction of travel suggests that more family offices will soon be considering and reviewing their trust structures and should explore the option of a foundation, which may provide greater flexibility and futureproofing.
These are complex and relatively new structures, however, so family offices consider seeking expert professional advice to help identify foundations that operate in line with a family’s needs.
Many family offices in the region have traditionally adopted Special Purpose Vehicles (SPVs) to hold assets and investments.
However, as more of these vehicles are accumulated, they become increasingly difficult to preside over, given the complexities of their individual structures and the myriad service providers involved. These factors can make it difficult for family offices to react appropriately when circumstances change, such as regulations or tax events, for example.
Cell companies offer a good alternative to SPVs. These vehicles are protected and independent, with each unique cell governed by an English Common Law TopCo structure, which provides increased efficiencies and opportunity.
Saudi Arabia is a hotbed of fiscal development, and the needs of its constituents are changing.
With the increase in tools and investment vehicles available, Saudi families are beginning to explore new methods of managing family finances, such as trusts, foundations and, in some cases, appointing professional fund managers to run private funds.
There is a greater emphasis on diversifying investments and with the financial community becoming more closely acquainted with Sharia Law, and with several Sharia-compliant investments having come to markets, families are keen to embrace a more modern approach to financial planning.
Proposed UAE corporate tax laws, and the potential issues that private wealth management may face as a result, was a recurring theme at the Dubai conference.
The UAE Federal Tax Authorities have recently released a consultation paper which provides a glimpse into how the jurisdiction plans to implement corporate taxes. Key issues to consider over the 3–5-year execution period include repapering, jurisdiction shopping and capital structure changes, with a new 9% federal corporate tax coming into effect from June 1st 2023.
Family offices need to be abreast of these changes and understand the alternative services available that may help mitigate such challenges.
There is a slow migration from Sharia-based family wealth planning, which is raising significant succession planning and asset protection questions and has led to a spate of very public succession planning disputes in the Middle East. This has focused minds across the family office space in the region on how critical it is to get their succession planning and preparations right.
Disputes of this nature can be lengthy and draining. These conversations can be uncomfortable, but it is worthwhile taking time to design and implement a succession plan that suits all parties and to avoid engaging in taxing disputes within the courts.
It should be noted that while having a will in place is a positive starting point, this alone does not constitute succession planning for a family office. It is important for family office leaders to engage with a trusted financial advisor well in advance, in order to alleviate any uncertainty and better protect your assets for the next generation.
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