In a country where East meets West and modernism mixes with tradition, a permanent dialogue between cultures has been established, increasingly blurring legal boundaries for business owners. Today, the United Arab Emirates seem to be oscillating between Islamic shari’a and Western jurisprudence, with a business often left in a haze upon the death of one of its owners. Executive talked to lawyers and specialists to help make sense of the UAE inheritance system.
In the UAE, the transfer of legal ownership of a deceased’s assets to his heirs is built primarily on Islamic law, based on religious texts, mainly the Qur’an and the Sunna. Far from being a codified law, shari’a is subject to various interpretations and is often the source of much controversy. While shari’a is applied to UAE nationals, the UAE Civil Code also rules that, “inheritance shall be governed by the law prevailing in the country of the deceased at the time of his death, in a reference to the large expatriate community established all over the United Arab Emirates,” according to Elias Hanna from Al-Quari, Hanna, Harfouch and Boulos, a legal firm.
New probate law for foreigners
In 2005, a new law was introduced, providing residents with the option to choose between the law of their home country or the national laws of the UAE regarding matters such as divorce and custody of minors. “This has led to much debate within the profession, but we still ignore the full repercussions of the law in matters of inheritance, and whether it will be contested or not by concerned parties,” explained Hanna.
Within this particular framework, lawyers advise foreign clients inheriting a business or personal property in the UAE to obtain from their home countries a probate to settle the estate of a deceased person and distribute it accordingly, which will be executed by UAE courts. “This solution is much simpler than going through the actual process of proving and applying foreign law in local courts. This option is also ideal for Lebanese, Turkish or Moroccan Muslim nationals who can revert to the law of their country of origin,” Hanna added. The process includes an application for representation to be filled in the deceased person’s country of domicile. Once the probate is obtained, it will be notarized and legalized before it is recognized and validated by UAE authorities, who will grant trustees the power to administer the deceased’s estate.
For Muslims, however, estates are always ruled by shari’a, which rules that any assets owned by the deceased, such as money, property, stocks, shares, bonds or jewelry, will be included in the estate. Pensions, however, are excluded from an inheritance, while debts and mortgages are always settled in full before any heirs may claim their share. Every Muslim is also allowed to donate one-third of his possessions to charitable causes, while the other two-thirds are earmarked for its rightful descendants as recognized by shari’a.
Other exceptions are also mentioned in UAE laws such as Article 17-5 in relation to real estate property. The text states that: “The law of the UAE shall apply to wills made by aliens disposing of their real property located in the State.” Hanna explained, “When real estate property is included in an estate, heirs have to submit a copy of the UAE court verdict to the developer for obtaining a change in ownership. Nonetheless, this can only be applied to property purchased in freehold projects, which allow for foreign ownership. Foreigners married to Muslim nationals can only inherit property located in such projects.”
In the UAE, only citizens or GCC nationals are allowed to own immovable property. However, recent developments with respect to foreign ownership of land in Dubai have altered this position. In 2003, the emirate’s ruler, Sheikh Mohammed bin Rashid, created 100% freehold ownership projects, made available to all nationalities.
As Karim Ghandour, managing director of Money Line, explains, regardless of the legal framework, the death of a shareholder holds three serious consequences for businesses: (1) the personal repercussions the death of a shareholder may have on the owning family, (2) the financial costs that dovetail such an occurrence, and (3) time-consuming administrative paperwork. When a family is involved, death of one of the shareholders weights heavily on a company and may often cause its demise when an amiable distribution of the deceased estate is impossible to achieve. As he pointed out, “It is a time bomb slowly ticking away,” adding, “The administrative costs incurred can also be massive. As an example, a widow of one of our foreign clients who owned a training company in Knowledge Village, had to allocate as much of her late husband’s company capital to insure ownership transfer.”
Foreign ownership structure
According to the specialists, most companies with foreign ownership in the UAE are structured following a simple 49/51 rule, whereby 49% of the company’s shares are owned by an expatriate while 51% are “owned” by a local partner. Two contracts consolidate the partnership: a power of attorney that grants full voting rights and managerial power to the foreign shareholder, and a loan agreement whereby the expatriate “lends” an amount of the capital’s money to the local, which “allows” him to set up the company. In this particular structure, two scenarios may take place depending on which shareholder — the foreign or local partner — will first pass away. In the first case, the power of attorney ends with the death of the foreign associate and his or her heirs have no other choice but to wait until completion of the estate’s probate. In the second case, when death of the local partner is somewhat expected, the foreign partner may be able to transfer the power of attorney to another local partner. “However, when death comes unexpectedly, the foreign associate has no other choice but to wait for the estate’s probate, which is always a lengthy process and has no quick solution,” said Ghandour.
Hanna advises business owners to set up an offshore company which will own 49% of the UAE company and will help circumvent the first scenario. “Perpetuity is one of the advantages offered by attributing ownership of a local company to an offshore mother company. In this case, the death of the foreign associate will not impact the company and its daily operations. In the UAE, offshore companies are also allowed to own property purchased in freehold projects such as ones developed by Emaar and Nakheel.” Ghandour concurred on the many advantages of owning an offshore company, which falls naturally under the jurisdiction of the country where the company has been established.
“Our advice to business owners is to establish an offshore company that will own UAE local operations, thus insuring perpetuity of the structure. This is one of our industry’s golden rules,” he said. The specialist also recommends taking the process one step further by creating a trust fund, which, in addition to safeguarding contracts underlying the company structure such as the power of attorney, the partnership and the loan agreement will also put an end to the question of asset distribution in case of death. “Well structured trust funds are bullet proof.”
