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The Dubai International Financial Centre (DIFC) introduced new provisions to its Foundations Law and Trust Law

It is definitely positive that DIFC continues to develop its legislation, in particular, with a view to bringing the foundations in line with the best foreign practice. The following points are important to pay attention to.

The most notable changes are connected with preventing foreign judgments from undermining DIFC laws and ensuring the security of DIFC trusts and foundations.

The updated regulations state that foreign court decisions against DIFC structures will not be acknowledged or executed if they conflict with DIFC laws.

The new provisions also address situations where the person who sets up the DIFC structure transfers assets to it in order to deceive a creditor, leading to the transferor becoming insolvent. Previously, either of these reasons could result in the transfer of property to the structure being declared invalid. Now, if the creditor can prove both of these circumstances, the transfer of property may not be declared void, but the structure may be liable to satisfy the creditor’s claim.

Moreover, the changes introduce a three-year statute of limitations for proceedings related to establishment of a DIFC foundation and property transfers to it.

While the new rules emphasize the authority of DIFC laws, it is important to remember that transactions on disposition of assets to DIFC structures may be recognized as invalid, for example, in accordance with the law of the jurisdiction where the assets are located, the personal law of the founder, including in bankruptcy and other proceedings. The transfer of assets into a structure can also be challenged in marital property division claims and inheritance disputes. In this regard, additional factors indicating retention of control over the structure by the founder, both by formal and informal mechanisms, may be a substantial argument for declaring disposition of assets to be sham and the property transferred to the structure to be actually owned by the founder. This is why it is important not to undermine the discretionary nature of the structure set up for succession planning purposes and to ensure that the settlor is solvent and the assets are transfered to trustees or foundations in a correct way.

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