Tax and inheritance planning in the Middle East: the UAE, Dubai and DIFC.

According to the latest data, Dubai is recognized as a global hub for wealth and asset management, as well as a leading financial center in the MENA region.

In recent years, the United Arab Emirates (UAE) has emerged as an international financial center, especially Dubai and the Dubai International Financial Center (DIFC). 2022 was a record year for DIFC growth. This growth strategy, known as the D33 strategy, is part of the UAE's plans to diversify its demographics and economy.

Through this strategy, Dubai is recognized as a global hub for wealth and asset management, as well as a leading financial center in the MENA region. The Emirate has created a special economic zone to accommodate this growth - the DIFC. The DIFC applies different taxes and laws from those applied in the rest of the emirate (DIFC is set up as a separate jurisdiction).

In terms of inheritance transfer and wealth management organization, the growth of the DIFC is important: more and more international families with high and ultra-high wealth will have a presence in Dubai and expand their active base. These assets should be included in the family's global tax and inheritance strategy. Also, more people should also consider becoming UAE residents, which will impact existing tax and inheritance plans (which may have unintended tax and inheritance consequences).

Those who have moved to the UAE, acquired assets in the UAE or are considering moving to the UAE should carefully review their existing inheritance plans to ensure that assets are in the right estates and that their last wills will be executed upon their death. (For the purposes of this article, I will not consider assets held through UAE funds, right of use or other international structures).

Transfers of assets in the UAE / Dubai / DIFC

The UAE makes an important distinction between Muslims and non-Muslims, as well as foreign nationals. For Muslims, the UAE will apply Sharia law to the transfer of assets of persons who have died without a will. Muslims can also make a will and specify to whom one-third of their estate should be given. The remaining two-thirds of their estates in the UAE will be subject to Sharia law.

Muslims who die without a will will have their assets transferred in accordance with the rules set out in Articles 11 and 12 of Federal Decree-Law No. 41 of 2022. These rules differ from the UK inheritance rules (which govern the transfer of intestate succession in England). Non-Muslims can apply to have the laws of their nationality applied to their property in the UAE. For UK citizens, it is therefore possible to apply English law to the inheritance of assets in the UAE.

Inheritance planning options for Muslim clients

For those who wish to make a will in accordance with Shariah principles, a trust structure is commonly used - this structure ensures that assets are transferred to a trust (or multiple trusts) and the assets are then distributed or held in accordance with Shariah principles by the managing trustees.

Inheritance planning options for British expatriates (non-Muslims)

People from the UK who live in the UAE or have assets in the UAE have the option of applying English law to the inheritance of their UAE assets. The main advantage of applying English law to assets in the UAE is that English law provides complete freedom of probate, meaning that the person making the will can pass their assets to whomever they wish. Under English law, there is no forced inheritance as long as there is a valid will. This means that inheritance plans can be tailored to meet the individual needs of heirs and potential global taxes.

This is important for UK domiciled individuals who are deemed to be UK residents, as assets worldwide are subject to UK inheritance tax at a rate of 40% over and above the allowable reliefs and allowances. These taxes could affect British expatriates living in the UAE. Many clients with roots in the UK have been attracted to Dubai, especially in the last 10 years. Often these clients structure their global inheritance through a third jurisdiction (such as the Canal Islands), which allows them to combine the inheritance structure and plan in one jurisdiction, but have assets in different jurisdictions (with different tax and inheritance laws). This usually happens when people live and are tax residents of Dubai.

Inheritance planning options for non-Muslim emigrants (non-Muslims)

For those with assets in the UAE from a non-Muslim background, an opportunity also arises. In many jurisdictions, inheritance of assets is limited to forced succession (e.g. most European countries implement some form of forced succession), so it may not be desirable to apply national law to assets in the UAE. An option may be to obtain British citizenship (if possible) and choose to apply English law to assets in the UAE. This would bypass Emirati law and national law, where forced inheritance is present, and allow for an individualized inheritance plan. From a tax perspective, this structure also allows for tax efficient structures.

As mentioned above, international clients often structure their international inheritance while living (or being tax resident) in Dubai; through a third jurisdiction (not Dubai or their jurisdiction of origin).

Weightmans and the UAE

The Weightmans international team has recently noticed a move of high net worth clients to the UAE. Weightmans is pleased to be able to engage in DIFC compliant estate planning, including the use of the DIFC Wills Service (these wills cover the transfer of assets held in the UAE).

The content of this article is intended as a general understanding of the subject area only. Specialized advice should be obtained for your specific situation.