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Foundations vs Trusts


Foundations and Trusts are both legal entities that are used to manage assets and provide financial support for specific individuals or organizations. However, there are some key differences between the two that should be considered when deciding which one is best for a particular situation.

One of the main differences between Foundations and Trusts is their structure.

Structure of Foundations
Foundations are not permitted to conduct commercial profit generating activities and are governed by a Council of Members (the equivalent to a Board of Directors). They are often established for a specific purpose or goal (i.e. the protection and further investment of assets or to ensure the family business is protected following the death of the founder) and are typically funded by a single individual or family. 

They are governed by a Charter & By-Laws (the equivalent to the Articles of Association) that outline the Foundation's purpose, governance, and operations. In addition, Foundations must comply with regulations not dissimilar to those required of a company, including the requirement to maintain annual accounts and file an annual return for the renewal of its operating license. Foundations in the DIFC are governed by the DIFC Foundations Law, which sets out the legal framework for the establishment and operation of foundations. This law provides a flexible and modern legal framework, which allows for the creation of a wide range of foundations, including charitable, private and purpose foundations.

Structure of Trusts
Trusts, on the other hand, are legal arrangements in which a trustee holds and manages assets on behalf of one or more beneficiaries. Trusts can be set up for a variety of purposes, including estate planning, tax planning, and asset protection but they are not necessarily restricted to non-profit activities. Trusts are typically private arrangements, not subject to public disclosure requirements and are governed by a trust agreement, which outlines the terms of the trust and the rights and responsibilities of the trustee and beneficiaries. 

Trusts in the DIFC are governed by the DIFC Trust Law, which sets out the legal framework for the establishment and operation of trusts. This law provides a modern and flexible legal framework, which allows for the creation of a wide range of trusts, including charitable, private and purpose trusts.

Control over assets
Another key difference between Foundations and Trusts is their level of control over the assets they hold. Foundations typically have more control over their assets, and can use them to support specific programs or initiatives. They are required to utilize them in accordance with the particulars set out within the Charter and By-Laws which reflect the goals and wishes of the Founder (i.e. for investment and generation of return). This ensures that Foundations use their assets for the intended purpose and do not simply accumulate wealth. Trusts, on the other hand, are more limited in their control over assets, and are typically required to use the assets only for the benefit of the beneficiaries. Trusts are usually set up for specific individuals or organizations and the trustee is responsible for managing the assets for the benefit of the beneficiaries.

Tax Benefits
In terms of tax benefits, Foundations and Trusts in the DIFC are generally tax-exempt organizations. They do not have to pay any tax on income, capital or profits generated within the DIFC. Additionally, the DIFC does not impose any withholding taxes on dividends, interest, or royalties paid to non-residents. 

Conclusion
In conclusion, Foundations and Trusts are both useful vehicles for managing assets and providing financial support, but they have different structures, levels of control over assets, and tax implications. The best option for a particular situation will depend on the specific goals and needs of the individual or organization involved.

It is always recommended to consult a lawyer when setting up a Foundation or Trust so that we may help you navigate the legal and tax implications, and ensure that the entity is set up in a way that meets your specific goals and needs.


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