Caroline Rao draws three case studies for three very different types of asset holder in Dubai, each of whom considers succession planning a vital consideration.
Seemingly never out of the limelight, this relatively new kid on the block has enjoyed a rise to fame only an X Factor best of breed could hope to emulate. Dubai has often given the air of celebrity: serviced by an enviable fleet of Emirates aircraft, adorned with the finest buildings such as the Burj Dubai, and adored by numerous fans in the form of tourists and businessmen. That's not to say it is all fairytales (as recent events have shown) and Dubai would not be the first celebrity to learn that its fans can be fickle (rightly or wrongly). However, fans and critics alike would probably agree that whether by choice or economic circumstance, some individuals will be drawn to this young and ambitious state and others will leave. Consequently, this article will take three different individuals and identify certain asset holding/succession options open to them.
United Kingdom (UK)-resident and English-domiciled non-Muslim individual who has purchased Dubai real estate
Unlike some other Gulf Cooperation Council (GCC) countries, real estate ownership by foreigners is permitted in certain areas in Dubai.
A UK-resident, English-domiciled individual is taxed in the UK on his worldwide income and gains and his worldwide estate suffers UK inheritance tax.
The area of inheritance/succession can be very tricky to navigate in the GCC region. As this individual is a foreigner in the United Arab Emirates (UAE), the laws of his home country, generally speaking, should apply, therefore he (being UK-resident and UK-domiciled) should be able to execute an English will to govern the succession of his directly held assets in Dubai. However, there is some argument as to whether local inheritance laws will be applied to real estate assets in Dubai, even if owned by a foreigner, so it is important to seek legal advice regarding cross-border succession.
If this individual purchased the real estate through a non-UAE holding company (and held the shares directly), he would be subject to UK income tax and capital gains of the company. An exemption is available for directors' living accommodation benefit charge if the accommodation is outside the UK. The value of the company shares would be in his estate for inheritance tax purposes. Upon death, although the value of the shares in the company would rebase for capital gains tax purposes, there would be no rebasing of the property held by the company. However, this individual could execute a will to govern the shares in a holding company (depending on the situs of the holding company) without concern as to whether local inheritance laws will be applied in Dubai.
This individual could hold the property through a trust but if the value is above his available nil rate band, he will face a 20 per cent inheritance tax (IHT) charge at the date of settlement and a further 20 per cent if he dies within seven years of settlement. The trust would also be subject to 10-yearly and exit charges.
A former UK resident non-Muslim who has permanently relocated with his family to Dubai and who has a trading business, real estate and bank accounts in Dubai
Traditionally, establishing and owning businesses in the GCC region has not been straightforward for foreigners, particularly as many countries have foreign ownership restrictions. Some non-GCC nationals have dealt with such restrictions in Dubai by appointing a local agent or sponsor with whom they establish the company. The local agent holds 51 per cent of the shares and the remaining 49 per cent of the shareholding is held by the non-GCC national. A separate agreement is entered into to determine the profit/loss split. There are several complications with this, not least the cost of maintaining a sponsor and succession issues on the death of the local agent or sponsor. There has been suggestions that these restrictions may be relaxed in future (as in Oman where foreign ownership of up to 70 per cent of the shares in a company is permitted).
In recent years, it has been possible to establish a variety of companies and partnerships in the Free Zones in Dubai, eg Dubai International Financial Centre(DIFC) and Jebel Ali Free Zone(JAFZA). The Free Zone chosen often depends on the type of business to be conducted, as certain Free Zones are only permitted to issue certain trade licences. The location of the Free Zone is also important, as a physical presence in the relevant Zone is usually mandatory. Such companies are attractive as the Free Zones permit 100 per cent foreign ownership, 100 per cent repatriation of capital and profits, no corporate or personal tax, and no local partner is required.
In terms of succession planning for the shares in a trading business and real estate assets for this individual, one key factor here is domicile. Has he shed his UK domicile of origin in favour of a domicile of choice in Dubai? If he has shed his UK domicile and acquired a Dubai domicile of choice as far as the UK is concerned, in what circumstances (if any) would the UAE apply Shari’a inheritance rules upon this individual's death? That is a discussion topic in itself, but if this individual does not want to risk his UAE estate passing in accordance with the Shari’a inheritance rules, he may prefer to settle assets on trust during his lifetime. Although as a non-UK domiciled individual he can settle assets on trust without an immediate charge to UK IHT, the settlor's capacity and the drafting of the trust structure documents should be carefully considered to ensure the structure is robust.
Certain assets should never be put into trust, including personal bank accounts. Shari’a lacks an equivalent concept of Personal Representatives in which the estate is vested upon death. Instead, each asset of the estate is treated as passing to the Shari’a heirs in the appropriate (undivided) percentages. This includes local bank accounts. It is often prudent, therefore, to ensure that husbands and wives have their own separate local bank account (ie not in joint names) so that upon the first death, if the local bank accounts of the deceased are frozen pending determination of the estate by a Shari’a scholar, the survivor has access to funds until such time as they can gain access to the proportion of the deceased's assets to which they are entitled.
Should this individual choose to settle assets upon trust, he may consider a Dubai trust. In 2005, the DIFC introduced a trust law which enabled trusts to be established within the DIFC and under the exclusive jurisdiction of the DIFC court. The DIFC claims to have a statutory and regulatory framework which has "borrowed from the best to be the best", but it remains to be seen how the DIFC trust law will operate. It is encouraging that a number of leading English chancery barristers have been admitted to practice at the DIFC bar but this is a very new and untested trust jurisdiction and it will be interesting to see whether many new trusts will be established in the DIFC rather than in the traditional trust jurisdictions.
The DIFC has also introduced legislation governing Single Family Offices (SFOs). This individual could therefore incorporate a SFO to provide services (including investment, fiduciary, accounting, philanthropy, concierge and governance services) to one or more of his family members (bloodline descendents of a common ancestor or their spouses), a Family Fiduciary Structure (ie a trust or similar entity of which a family member is the settlor or founder), a Family Entity or a Family Business (ie certain companies controlled by the SFO). As a DIFC incorporated entity, the SFO would need to be physically present in the DIFC, but it is not regulated by Dubai Financial Services Authority (DFSA). An SFO must designate an Authorised Representative ordinarily resident in the UAE, who is responsible for compliance.
A UAE national
UAE nationals are subject to local inheritance laws governed by the Shari’a courts.
Shari’a is based on the text of the Qur’an. It is not a law in the sense of a strict code, but rather a set of principles to which one must adhere. Consequently, issues governed by Shari’a can be subject to different interpretations and there are varying schools of thought as to how the principles set out in the Qur’an and Sunna should be applied.
Many UAE nationals do not make wills, because their estate automatically passes to their Qur’anic heirs in the appropriate portions confirmed by a Shari’a scholar. However, a Muslim can leave up to a third of his estate to non-heirs upon his death.
It is also possible for a Muslim to make gifts to both Qur’anic and non-Qur’anic heirs during his lifetime, provided they are complete (absolute) gifts, and he does not make such gifts whilst suffering from an illness which ultimately causes his death. Making gifts in this way can sometimes circumvent the application of Shari’a inheritance rules upon death, and can potentially provide for the transfer of assets into a trust, foundation or waqf. Understandably, many Muslims wish to adhere to the Shari’a principles of inheritance in the same way as they adhere to wider Shari’a principles in conducting their daily lives, but often there is still good reason to settle assets into a trust or foundation structure (as indicated in the following paragraph) which can be drafted to incorporate the Shari’a inheritance principles.
There are no asset ownership restrictions for UAE nationals in Dubai and many businesses are family owned. One practical problem with the Shari’a succession laws is that they can fragment a family business, making it difficult to manage, especially where some of the heirs have differing strategic views or personal objectives or simply have no interest in the business operation. Ultimately, this can lead to the failure of an otherwise profitable enterprise. Of course, this practical problem is not unique to Shari’a but it can be quicker to manifest itself because the class of Qur’anic heirs can be significantly larger than those in non-Muslim countries, particularly those where individuals enjoy testamentary freedom and can leave business assets to fewer individuals involved in running the family business. When looking at the structuring of a UAE family-owned business, it is important to devise a structure during the client's lifetime which incorporates family and corporate governance to both ensure the efficient and effective continuation of the family business and to cater for each of the Qur’anic heirs' interests.
The options above are not exhaustive by any means. Succession and estate planning in the UAE and wider GCC region is notoriously difficult, so professional advice should always be sought prior to any action.
Caroline Rao, Solicitor, Tax and Private Capital, Lawrence Graham LLP