The United Arab Emirates (UAE) is a federation of the seven emirates of Abu Dhabi, Dubai, Sharjah, Ajman, Fujairah, Ras al-Khaimah and Umm al-Quwain. The city of Abu Dhabi in the Emirate of Abu Dhabi is the federal capital. The Emirate of Abu Dhabi is the largest emirate by area and population and the wealthiest in terms of oil resources. Dubai is the second-largest emirate by area and population and is the trade and financial hub of the region.
As a hub for cross-border trade, financial services and an important market in the oil and gas industry, the UAE is home to numerous ultra-high net worth individuals and family conglomerates.
The UAE and, in particular the Dubai International Financial Centre (DIFC) (which is a federal financial free zone in the Emirate of Dubai) is home to a number of the world’s leading wealth and asset managers, servicing the needs of their local and regional clients.
There are no personal or corporate income taxes in the UAE at the federal or emirate level other than emirate level income taxes on oil-producing companies and foreign banks. There are no exchange controls on the remittance of funds. Additionally, the UAE enjoys relatively low import tariffs and there are few restrictions on foreign trade.
The UAE is considered to be one of the most politically stable and secure countries in the region and consequently is regarded as a safe haven for investment in the region and a destination for tourists. The UAE has been unaffected by political upheaval or social unrest.
One of the UAE’s most significant attractions is the absence of taxation and the ease of remitting money into and out of the country. In the past year, there has been discussion of the introduction of a value added tax of 5 per cent on the sale of goods and services. At present it appears that this might be delayed beyond 2018.
A UAE corporate entity may be used for payment or receipt of royalty, interest or dividends. These structures can be established to take advantage of the UAE’s extensive double taxation treaty network.
The UAE has signed double taxation avoidance treaties with over 60 jurisdictions, including China, Hong Kong, Singapore, Japan, Switzerland, Mauritius, the Seychelles, Ireland and Cyprus. Through these agreements, and by obtaining tax residency status in the UAE, it is possible to structure investments in a tax-efficient manner.
i UAE residency
It is possible for a foreign investor to become a UAE resident by establishing a corporate entity in the UAE (this may also be done by setting up a corporate entity in one of the UAE free zones (see below)) and obtaining a residence visa sponsored by such a company. The foreign investor will require an employment contract with such a company to obtain a residence visa (such employment contracts are customarily standard form documents prescribed by the authorities).
To maintain a UAE residence visa, a UAE resident must return to the UAE within six months of departure. There is no other requirement to maintain status as a UAE resident.
ii US Foreign Account Tax Compliance Act (FATCA)
The UAE and the United States reached an agreement in May 2014 to include the UAE on the list of jurisdictions to be treated as having an intergovernmental agreement (IGA) in effect in relation to FATCA. The UAE has adopted Model 1. Subsequently, the IGA was executed between the UAE and the United States on 17 June 2015, and the agreement has been ratified by the UAE pursuant to Federal Decree No. 9 of 2016. Banks and financial institutions in the UAE are complying with the requirements of IGA.
iii OECD memorandum of understanding
The UAE has proposed to adhere to the OECD (Organization for Economic Co-operation and Development) standards on transparency and tax exchange information. As a first step, on 11 June 2013, the UAE Ministry of Finance signed a memorandum of understanding (MoU) with the UAE Central Bank. The MoU contains an agreement to share tax-related information of all UAE bank customers with all countries that have double-taxation agreements with the UAE. The UAE became a participant in the Development Assistance Committee on 1 July 2014.
Under UAE law, inheritance is governed by UAE Federal Law No. 5 of 1985 (the Civil Code), by UAE Federal Law No. 28 of 2005 (the Personal Status Law), and, in some instances, by the DIFC Wills and Probate Registry Rules (the Probate Rules).
All inheritance matters within the UAE are dealt with by the shariah courts or the DIFC Probate Registry. The shariah courts apply principles of Islamic shariah. The DIFC Probate Registry does not.
Article 17(5) of the Civil Code provides2 that where real estate is concerned, UAE law shall apply to wills.
Article 1(2) of the Personal Status Law provides3 that an individual who is resident in the UAE at the time of death may seek to avoid the application of the Personal Status Law (and thus avoid the rules it prescribes in relation to the fixed proportions for the heirs of the deceased). However, the Personal Status Law does not expressly amend the Civil Code and, accordingly, it remains unclear whether a non-Muslim foreigner may seek to avoid the application of principles of shariah in relation to the inheritance of real estate located in the UAE other than by making use of the DIFC Probate Registry.
One issue with real estate is that even where the deceased leaves a will it may be contested by the heirs of the deceased on the grounds that a will not made in accordance with the shariah contravenes the provisions of Article 17(5) of the Civil Code.
In so far as moveable assets are concerned, inheritance is governed by the law of the jurisdiction in which the testator is domiciled (for non-UAE nationals, this would normally be the country of their nationality, assuming that only one passport is held).
Accordingly, in so far as moveable assets (such as funds in bank accounts, shares and securities) are concerned, it is possible for a non-Muslim foreigner to provide for the devolution of moveable assets in a manner selected by him or her.
To avoid uncertainty non-Muslim foreigners generally own real estate in the UAE through corporate entities, which avoids the application of shariah law to the inheritance of real estate.
Alternatively, non-Muslims may make use of the newly created DIFC Probate Registry. The DIFC Probate Registry allows non-Muslims who are at least 22 years of age and have assets located in the geographical limits of the Emirate of Dubai to prepare and register wills in respect of such assets. Wills registered with the DIFC Probate Registry shall be governed by and construed in accordance with the Probate Rules.
Wills intended to be registered with the DIFC Probate Registry must be drafted in accordance with the rules of the DIFC Probate Registry, which prescribe a recommended form for a will. In addition, such wills must be signed before an officer of the DIFC Probate Registry and electronically stored in the DIFC Probate Registry’s system. The testator (i.e., the individual making the will) will be required to appoint one or more administrators to his or her will. The administrator shall have responsibility for distributing the assets of the testator in accordance with the terms of the will. A fee of 10,000 dirhams is payable upon registration of a will.
Once registered, the intention is that the terms of the will can be given effect to by the DIFC courts. Decisions of the DIFC court must as a matter of law, be enforced by the Dubai courts. It is then anticipated that the other relevant Dubai governmental authorities (such as the Department of Economic Development in respect of assets such as company shares, or the Lands Department in respect of real property) would abide by orders ratified by the Dubai courts. It is hoped that, eventually, the various government departments will accept orders made by the DIFC courts directly (i.e., avoiding the need to get the DIFC orders ratified by the Dubai courts).
The DIFC Probate Registry is a new, and insofar untested, system. Accordingly, it remains to be seen how wills registered with the DIFC Probate Registry are in practice enforced in the Emirate of Dubai.
IV WEALTH STRUCTURING & REGULATION
UAE law (outside the DIFC) does not provide for the creation of trusts. Notwithstanding the foregoing, the UAE courts will generally acknowledge a duly created foreign trust pursuant to the laws of a foreign jurisdiction. A trust can, however, be created pursuant to DIFC law (which is based on general principles of English common law).
To provide clarity for the purpose of succession planning, it is common to structure the ownership of assets through bodies corporate. One further option is to establish a foreign body corporate to own UAE assets to avoid the application of UAE inheritance law and effectively allow overseas distribution of assets based in the UAE.
The Emirate of Dubai permits property to be registered in the name of corporate entities established in the Emirate of Dubai.
If the Dubai company is in turn owned by a foreign company, any transfer of ownership of UAE assets owned through such a structure can then take place offshore, but may still trigger the payment of transfer fees where the assets include real estate.
For real estate located within the DIFC, it is permissible to hold property in the name of an offshore entity or trust. To do so, an investor must satisfy the due diligence requirements of the DIFC Registrar of Real Properties. This procedure may also involve disclosure of the ultimate beneficial owner of the real estate. Note that DIFC Law No. 4 of 2007 (as amended by DIFC Law No. 4 of 2012) (the DIFC Real Property Law) contemplates that transfers of shares in an unlisted company shall fall within the definition of a ‘transfer’ and accordingly trigger both (1) payment of transfer fees (currently at 5 per cent of the higher of the transfer or market price) and (2) a filing with the DIFC Registrar of Real Properties in relation to the transfer. Note that transfers of real estate that constitute a personal restructuring (for example a transfer from an individual to a corporate entity that is wholly owned by such an individual) does not trigger the payment of transfer fees but will still require the submission of a filing with the DIFC Registrar of Real Properties.
Once established, regulation and oversight of companies in the UAE (outside the DIFC) is generally non-intrusive. The relevant regulator will only enquire into the affairs of a company if it suspects that illegal activities are being conducted or if the company fails to renew its annual licence or property lease. Corporate actions (e.g., changes of directors, managers, shareholders or amendments to the company’s constitutive documents or share capital) are just about the only times when regulators must be approached.
Each free zone authority requires its own level of regulatory compliance and generally these authorities do not interfere in the affairs of companies established within their respective jurisdictions. Note, however, that companies incorporated in the DIFC (and especially those regulated by the Dubai Financial Services Authority, the independent regulator for the DIFC) are subject to extensive reporting requirements, which are strictly enforced.
i DIFC Single Family Office regime
It is also possible for high net worth individuals to use the UAE as an administrative base from which to manage their investments. The DIFC offers a convenient location, developed infrastructure and a sophisticated legal system that can be used by high net worth individuals and families to manage their wealth.
Such individuals or families may establish a Single Family Office in the DIFC. Such an office would be licensed pursuant to the DIFC Single Family Office Regulations (the SFO Regulations). A Single Family Office established in the DIFC can be used to service the needs of a ‘Single Family’4 (see below for further information on this), which can cover the following services:
- a the provision of services to one or more ‘Family Members’;5
- b the provision of services to a ‘Family Fiduciary Structure’;6
- c the provision of services to a ‘Family Entity’;7 or
- d the provision of services to a ‘Family Business’.8
A Single Family Office in the DIFC is a potentially useful base from which high net worth individuals can manage their administrative, financial and investment decisions.
ii Anti-money laundering regime
Money laundering is a criminal offence in the UAE. The UAE has put in place a rigorous anti-money laundering regime. Currently, this regime is governed primarily by UAE Federal Law No. 4 of 2002, as recently amended by UAE Federal Law No. 9 of 2014 (the AML Law) and by the UAE Central Bank Regulation No. 24 of 2000 (as amended) (the AML Regulation).
The AML Law states that the following shall constitute money laundering:
- a the transfer, transport or deposit of funds with an aim to disguise or conceal an illegal source;
- b the concealment or disguise in any other manner of the source or origin of funds; and
- c the acquisition, possession or use of such funds.
In addition to the AML Law, financial institutions are required to comply with the AML Regulation. The AML Regulation specifies checks that financial institutions must put in place to prevent, detect and, where applicable, report suspected or confirmed money laundering activities.
Media reports have indicated that the UAE federal government is planning to introduce a number of amendments to the AML Law. It is anticipated that these amendments will seek to broaden the type of activities that may constitute money laundering.
In addition to the AML Law and the AML Regulation, entities operating in the DIFC are required to comply with the Dubai Financial Services Authority’s Anti-Money Laundering, Counter-Terrorist Financing and Sanctions Module (the DFSA AML Module). The DFSA AML Module seeks to provide a single point of reference for those entities that are regulated by the DFSA.
V CONCLUSIONS & OUTLOOK
The UAE enjoys a stable political and economic outlook. The zero-tax environment, combined with the relative ease of doing business, means that the UAE has the potential for further economic progress.
It is expected that, in line with international trends, the UAE will enhance regulation of financial and wealth management services. In particular, one key trend that is expected to play an important role in future regulatory activity is the regulation of foreign private wealth managers servicing clients in the UAE without a presence in the UAE. The UAE Securities and Commodities Authority has recently also introduced regulations to curtail marketing and sales activity in the UAE by unlicensed individuals and entities from outside the UAE. In particular, it has issued a number of regulations addressing how investment funds, securities and financial services can be marketed to residents of the UAE.
1 Amjad Ali Khan and Stuart Walker are partners and Abdus Samad is an associate at Afridi & Angell.
2 Article 17(5) provides that the laws of the United Arab Emirates shall apply to wills made by aliens disposing of their real property located in the state.
3 Article 1(2) provides that this Law shall apply to citizens of the United Arab Emirates state unless non-Muslims among them have special provisions applicable to their community or confession. This shall equally apply to non-citizens unless such a non-citizen asks for the application of his or her law.
4 A family constitutes a ‘Single Family’ either where it comprises one individual or a group of individuals all of whom are the bloodline descendants of a common ancestor or their spouses (including widows and widowers, whether or not remarried); or subject to such other limitations or conditions otherwise agreed with the Registrar. It is envisaged that all members of a family will be included in a Single Family and that individuals adopted as minors, stepchildren, children of adopted children and all biological children of a qualifying family member shall be regarded as members of the Single Family.
5 In references to a Single Family, a ‘Family Member’ means an individual forming part of the group of individuals comprising the Single Family.
6 ‘Single Family Fiduciary Structure’ means a trust or other similar entity (such as a foundation): of which a Family Member of a Single Family or a Family Entity related to the Single Family is the settlor or Founder; and the beneficiaries of which, or persons otherwise capable of benefitting from which, are all: (1) Family Members; (2) charities; (3) Family Entities; or (4) other Family Fiduciary Structures related to the Single Family.
7 ‘Family Entity’ means an entity (such as a body corporate or partnership) controlled by a Single Family.
8 ‘Family Business’ means a business (whether a body corporate or partnership) controlled by a Single Family.