Dubai’s population has been steadily doubling every 10 years approximately. Dubai’s suitable location between East and West, its top infrastructures and its tax-free environment (supported by an appealing network of double tax treaties) augur the continuity of this demographic growth – especially with the business opportunities rising in preparation for the EXPO 2020.
As of 2014, Dubai had a population of 2,250,000 – out of which 85-90% were expatriates.
These numbers are important in terms of asset protection.
UAE laws are Sharia compliant and do not allow the same degree of flexibility when compared to other inheritance laws internationally. The UAE's Sharia-based Personal Status Law (Law N° 5 of 2005) covers marriage, divorce and succession. Article 1 retains the applicability of the law to non-Emiratis - unless they choose their home-country's law. Consequently, when expatriates move to the UAE, the UAE laws will apply unless an express selection of their home country’s law is made. Such selection is generally made via testamentary provisions but there are a number of assets which would not entertain the application of a different law.
An option to hold real estate assets, for example, would be to set up an offshore entity (since 2011 only JAFZA offshores are permitted). A second alternative would be the setup of a Trust through the Dubai International Financial Centre – in furtherance of DIFC Law N°11 of 2005which came into existence on 9th November 2005 and was subsequently amended by Law N°2 of 2007 and Law N°1 of 2010 (“DIFC Trust Law”).
The DIFC Trust Law outlines the procedures and types of trusts that can be set up – i.e. express, protective trust, charitable or non-charitable trust. The regulatory body is the Dubai Financial Services Authority which is the sole and independent financial service regulatory authority for DIFC.
The Trust Lawis exclusive to the DIFC and governed by the DIFC courts. The DIFC Courts will have jurisdiction over a trust (whether a Dubai Law Trust or one established under another jurisdiction's law) if (a)it is governed by Dubai Trust Law; or (b)the trustee is resident in DIFC; or(c) the Trust property is based in DIFC; or(d) the trust is administered in DIFC.
There is no restriction in terms of residence or domicile of the settlor or the beneficiary or location of assets. A foreign trust can be managed out of DIFC if it is a DIFC trust, or trustee of foreign trust is resident in the DIFC or its property is situated in the DIFC or its administration is carried out of DIFC.
The Trust Law is to be complemented by common law principles of equity.
The factors contributing to the attractiveness towards having a DIFC trust in Dubai are:
Despite the apparent suitability – as per the mentioned benefits – of the trust vehicle as an asset protection, we do note that the DIFC Trust Law has not been welcomed with the positive attitude expected. The reasons are twofold when one compares the main demographic split between nationals of UAE and the GCC vs Expats.
On the one hand, the former perceive the DIFC Trust as potentially contravening the immovable sharia law succession rules – which is not well received. Also, one needs to bear in mind that the DIFC is an authority based on common law foundations as opposed to the UAE legal system – which is a civil system with Egyptian and French roots.
To counter this perception, the Waqf Trust Services was established in 2007, to provide sharia trust services within the DIFC yet respecting in full the Sharia principles of wealth management and succession rules along with usual trust functions of maintaining confidentiality, asset protection and control management.
Waqf Trust was established as a joint venture between DIFC and Dubai Islamic Bank, but was dissolved in September 2014 with the DIFC financial restructuring following the Dubai real estate crisis.
Along with with the disclosed differences with Sharia Law, a second factor supporting the unwelcoming receipt of the Trust Lawisa culturally rooted response to the novelty of the trust as asset-protection vehicle. Indeed, there may be a cultural reluctance (in response to being a new vehicle) to place in the hand of a custodian part of the family assets – with the consequent perceived risk of misuse.
On the other hand and with respect to the 85-90% of the Dubai population, the uncertainty with respect to the manner in which the Dubai courts will resolve any dispute concerning a trust – in terms of validity, enforceability and/or breach of trust issues,may be the cause preventing expats and foreign registered trust setting up in Dubai.
However, we anticipate the fears to dissipate over time making the DIFC Trusts a suitable asset protection vehicle for Dubai’s high net worth individuals – both local and expat.
The expats’ fear should be mitigated by (a)learning about the 2009 Protocol of Jurisdiction between the DIFC Courts and the Dubai Courts – pursuant to which decisions rendered by the DIFC Courts will be respected in full by the Dubai Courts without entertaining the re-hearing of the matter; and (b) as the number of trust matters are settled satisfactorily – existing positive jurisprudence – through the DIFC-Dubai Courts protocol assistance.
In addition, despite the initial reluctance of the local emirate and GCC community, one could expect the same to be softening with the acceptance of the legal cultural differences and with the aim to benefit from the tax and wealth management sophistication.
Abdalla Alzari, Founding Partner / Chairman, Dubai Office of United Advocates
Abdallah holds 26 years proven management, directorship and legal skills within the legal Transport industry. His key expertise lies in the drafting and negotiations of international contracts and tenders. Complementarily, he has extensive experience in the field of corporate advice within the UAE boundaries and beyond, along with finance and auditing.
Maria Rubert, Partner, Dubai Office of United Advocates
Maria is a Spanish and US lawyer registered with the Dubai Ruler's Court and the DIFC Courts.Maria is specialized in international arbitration, mainly dealing with commercial and real estate matters. In parallel to her counsel role, Maria is listed as an arbitrator with most institutions in the UAE and abroad.
