Middle Eastern tax and estate planning: focus on the United Arab Emirates, Dubai (and the DIFC)

In recent years, the United Arab Emirates (UAE) has become an international finance hotspot (Dubai and the Dubai International Finance Centre (DIFC) in particular). 2022 was a record-breaking year for growth in the DIFC. This growth agenda (known as the D33 strategy) forms part of the Emirati pitch to diversify their demographic and the emirate’s economy; this strategy has led to Dubai being recognised as a wealth and asset management global hotspot and certainly the leading finance centre in the MENA region.

The emirate has created a special economic zone to facilitate this growth, the DIFC. The DIFC applies different taxes and laws to those applied in the rest of the emirate (the DIFC has been created as a separate jurisdiction).

From a succession and wealth structuring standpoint, the growth of the DIFC is important: more and more international high and ultra-high net worth families will have a footprint in Dubai and an increasing asset base. These assets will need to be incorporated into the family’s global tax and estate plan strategy. Equally, greater numbers will have to consider the potential of becoming Emirati domiciled, which will impact upon existing tax and estate plans (resulting in unintended tax and succession implications). Those that have relocated to the UAE, acquired Emirati assets, or that are considering relocating to the UAE, would be well placed to review their existing estate plans to ensure that assets are held appropriately and that their wishes will be carried out following their death. (For the purposes of this article, I will not focus on assets held through a UAE foundation, usufruct, or other international structure).

Succession of assets within the UAE / Dubai / the DIFC

The UAE makes an important distinction between Islamic & Non-Islamic individuals, as well as foreign nationals.

1. For Muslims, the UAE will apply Sharia Law to the succession of assets of individuals that die intestate (ie they die without a will).
2. Muslims can also prepare a will and direct to whom one-third of their property should pass. The remaining two-thirds of their Emirati property would be subject to Sharia Law.
3. Non-Muslims that die intestate will have their assets passed in accordance with the rules as set out in Articles 11 and 12 of Federal Decree-Law No. 41 of 2022. These rules are not the same as the UK intestacy rules (which govern the devolution of intestate English estates).
4. Non-Muslims can apply for the laws of their nationality to apply to their Emirati estate. For UK nationals, it is, therefore, possible for English law to apply to the succession of Emirati assets.

Estate planning options for Islamic clients

For those looking to prepare Sharia compliant wills, a trust structure is typically used – this structure ensures that an estate passes to a trust (or trusts) and, thereafter, assets are distributed or held in accordance with Sharia principles by the trustees of the trust. Some prefer to remove the requirement for a trust and trustees altogether – this is to provide beneficiaries with certainty over their inheritance – and some form of corporate structure or foundation is used instead.

Estate planning options for UK expats (non-Muslims)

Those from the UK either living in the UAE or with Emirati assets have the option of applying English law to the succession of their Emirati assets. The primary benefit of applying English Law to Emirati assets is that English law provides complete testamentary freedom ie the person making the will can give their assets to whomsoever they want. There is no form of forced heirship under English law as long as a valid will is in place.

In turn, this means that estate plans can be curated with the individual needs of beneficiaries and potential global taxes in mind. This is important for UK domiciled and deemed domiciled individuals as worldwide assets would be subject to UK inheritance tax at a rate of 40% in excess of allowances and reliefs. These taxes could affect UK expats living in the UAE.

Many clients with an origin in the UK have been drawn to Dubai, especially over the last 10 years. It is common for such ex-pat clients to structure their global estate through a third party jurisdiction (such as the Channel Islands), allowing a global estate planning structure and succession plan, to be streamlined through one jurisdiction but holding assets in multiple jurisdictions (with differing succession and tax laws). This will typically occur whilst the individuals are living and ‘tax resident’ in Dubai.

Estate planning options for non-UK expats (non-Muslims)

For those with Emirati assets from a non-UK, non-Muslim background, an opportunity also arises. In many jurisdictions, succession of assets is limited by forced heirship (for example, most European countries implement some form of forced heirship) and so it might not be preferable to apply national law to Emirati assets. An alternative might be to obtain UK nationality (if possible) and elect for English law to apply to Emirati assets. This would circumvent Emirati law and it would also circumvent national law where is forced heirship, resulting in a bespoke estate plan. From a tax perspective, there is freedom allowing for tax-efficient structuring too.

Likewise, as set out above, international clients often structure their international estate whilst living in (or ‘tax resident’ in) Dubai; through a third state (not Dubai or their jurisdiction or origin).

Weightmans and the UAE

Increasingly, Weightmans’ international private wealth team has noticed the relocation of high net worth clients to the UAE. Weightmans is pleased to be able to deal with DIFC compliant succession structuring, including the use of the DIFC Wills Service (these wills cover the succession of all assets held in the UAE).