An in-depth look at wealth structuring trends in Bahrain
Faizal Bhana, Director Middle East and Africa, Jersey Finance and Shaikha Al Jalahma, Solicitor, Trowers & Hamlins give us an in-depth look at wealth structuring trends in Bahrain.
What benefits (and disadvantages) does Bahrain offer compared to other jurisdictions for wealth management and preservation?
Bahrain has a modern and flexible trust law which incorporates a number of key provisions when structuring local assets. These unique features include two main elements that sets it apart:
a. Waiver of foreign ownership restrictions: trusts can own land anywhere in Bahrain. This represents a unique investment opportunity for foreign investors in the Middle East.
b. Waiver of transfer fees: assets transferred from the settlor to the trust are no subject to the usual transfer fees. By way of example, the transfer of land in Bahrain is normally subject to a transfer fee being 2% of the property value. In the context of transfers to a Bahrain trust, this fee does not apply. The availability of a robust wealth legislation needs to be complemented by essential services. These include services provided by private banks such as managing the underlying funds, and by fiduciary companies such as trustee services. Although renowned private banks have found their way into the Kingdom, there is a relatively limited choice of licensed trust companies in Bahrain, when compared to mature wealth management jurisdictions such as Jersey which is home to nearly half of the top 25 banks in the world, by Tier 1 Capital and over 1,100 worldwide members of The Society of Trust and Estate Practitioners (STEP) – which is one of the largest branches globally.
GCC countries are now implementing taxation. How will this impact regional wealth management and preservation in the coming years?
The journey for tax in the GCC commenced in January 2018 when VAT first made its way to the region starting with the UAE. Most of GCC countries introduced the VAT at a rate of 5% including in Bahrain. In July 2020, Saudi Arabia increased this rate to 15%. In mid-October 2020, Oman issued its VAT law that will come into effect in April 2021; this will see it become the fourth GCC country to introduce VAT taxation. Overall, the impact of VAT on public finances has been significant, especially during this time of crisis.
As far as personal tax is concerned, Oman remains the outlier in the GCC in announcing its intention to implement income tax. It will be interesting to see if other GCC countries follow suit – none of them have announced any plans to impose personal tax, but as the world moves away from its reliance on oil and invests more in diversification, alternative sources of government revenue might be needed in the form of taxes.
Although the details of this have not been published yet, tax changes tend to have an impact on structuring. Of course, where possible, individuals usually want to maximise efficiencies within their operations and personal wealth structures to assist with minimising their liabilities, including tax, within the tax legal framework. This is where jurisdictions like Jersey which enjoy a long history of excellence and credibility come into play; the stability and certainty of its regulatory and legislative regime, the focus on service quality, and the impressive level of expertise offered by a 14,000 strong financial services workforce are among the factors that will help instill confidence in a fast-changing and challenging landscape.
What is the significance of Bahrain’s trust law?
The Kingdom of Bahrain continues to prove time and again that it is committed to keeping pace with international standards and leading practices by making changes to its legislative and commercial frameworks. This goes back to the importance of laws in forming a robust infrastructure and foundation that the government relies on to press on with its ambitious plan to diversify the economy, strengthen the private sector and attract more foreign direct investment. The signification of the trust law and changes it went through must be understood within this context.
From the perspective of Jersey, which has links to the Middle East including the GCC going back decades and the specific bilateral collaboration and partnership with Bahrain also goes back many years, the Kingdom of Bahrain has always been at the forefront of wealth management, and the update to the trust law in 2016 was really important in showing its commitment to innovating in this space and ensuring that laws are up to date.
What are the biggest risks encountered when trying to manage and preserve substantial wealth?
The most significant risks in the Middle East are common to many jurisdictions, but there are some issues that are accentuated in the region. Overall, we see that the lack of succession planning remains a key risk as Jersey’s research from November 2018 shows that 92% of ultra-high-net worth individuals (UHNWIs) are ill prepared and inadequately structured for the transition of wealth across generations.
Diversification in all forms matters in this part of the world. However, we often see that wealth is tied up in land or businesses in the GCC where traditionally structuring is challenging due to restrictions on foreign ownership. For example, it is difficult for an offshore trust or foundation structure to hold local assets. It is, therefore, encouraging to see that local structuring laws such as the Bahrain Trust Law addresses this to some extent.
In our experience, other issues often arise. For many individuals and families, there is skepticism around the trust concept. Some skepticism is healthy, but much of it is unfounded. We are starting to see a shift in this regard due to changes in laws, and as the younger, next generations come through. Therefore, the wealth management industry has a role to play in educating clients in this region about trust structures.
For private individuals, trusts offer a confidential way of holding family wealth for the long-term. Previously, trusts were believed to cater only to UHNWIs. Once fees dropped, and trusts became more understood, we started seeing a greater adoption of trusts structures for private wealth management planning.
Family trusts can help protect selected assets against claims and creditors – for example, protecting a family home from the failure of a business venture. They can also be used to set aside funds for special reasons, such as grandchildren’s education, or to protect assets for future generations.
Furthermore, choosing a jurisdiction to manage and structure private wealth to minimise risk is essential. Jersey, for example, has been establishing structures for high-net-worth families and employers looking to set up to offer benefits to employees for 60 years.
The stability and quality of Jersey’s trust law, a template adopted by many other jurisdictions worldwide, remains highly attractive to international private wealth clients, including those focused on philanthropic and socially responsible wealth management. The Island also offers a tax-neutral environment – another positive for private clients.
How does your industry need to change to best serve its high-net-worth clients, now and in the future?
Technology is, of course, increasingly important and has greatly changed the way assets are bought and sold, where, how fast and at what cost. However, understanding families and family dynamics is very different and we expect that client contact and bespoke services will remain crucial. Nevertheless, clients will expect delivery to evolve. The industry as a whole can further adapt and facilitate the delivery of its services to high-net-worth clients by being receptive to new trends. One way of realising this is by servicing clients through virtual platforms where appropriate and like most other sectors this has been forced on us by Covid-19, but will likely remain. Tech innovation will almost certainly be key in improving the client experience over time, virtual document signing software and direct access to file and case management services will be common practice.
Over the years, we have seen a massive increase in the growth of IF structures utilising Jersey, from jurisdictions like Bahrain, whether by families, corporates, or government or quasi-government entities – all sharing a global investment outlook and looking to invest in every corner of the world. As the clients’ needs evolve and change, our forward-thinking industry remains committed to supporting local governments as well as our clients – whether through structuring their wealth and helping them preserve it for future generations or collaborating with local jurisdictions to evolve laws and best practices.
