From the introduction of Dubai International Financial Centre (DIFC) Wills and Trust and Foundation regimes to more recent developments around economic substance and the ownership of family property, the United Arab Emirates (UAE) has seen tremendous legal and regulatory changes in the private wealth space. As the UAE plays a key role as an investment hub in the region, its legal and regulatory environment may influence how ultra-high net worth individuals (UHNWI) in the region plan for succession and transfer of wealth to the next generation. Given the concentration of private wealth in the Middle East and the vital role family owned businesses play in the region, the successful transition of wealth to the next generation is critical.

This article explores some of the recent legal and regulatory changes in the UAE and considers how these changes may impact succession planning and wealth planning in the Middle East over the next decade.

Family Ownership Law

Dubai has seen major progress in family ownership law in 2020. In his capacity as Ruler of Dubai, Vice President and Prime Minister of the UAE His Highness Sheikh Mohammed bin Rashid Al Maktoum issued Law No. 9 of 2020 (the “Law”) regulating family-owned businesses in Dubai. The law will come into effect from the date of its publication in the Official Gazette. By introducing a clear legal structure, the Law aims to secure families’ wealth, enhance family business contributions to economic and social development, as well as encourage the growth of family businesses.

The Law is optionally applicable to new and existing family businesses, including corporate equity securities and proprietorship, but it excludes family ownership in public joint stock companies and movable and immovable property.

With its introduction, the Law will provide a legal framework for the internal processes of family businesses. It regulates articles of family ownership contracts, the business’ structure and management, management’s powers and limitations, and the formation of the board as well as the responsibilities delegated to it. It also defines the responsibilities of government entities when it comes to facilitating the formation of family businesses.

The Law sets the conditions for a family ownership contract to be legally binding. The first condition requires all parties of the contract to be members of the same family and have a single common interest. The contract must also clearly define the share of each member, and, lastly, parties to the contract must own all the legal rights of the monies and assets that are under the purview of the contract. If these conditions are met, the contract must also be duly attested by a notary public according to the rules and regulations stipulated in Dubai law.

100% Foreign Ownership

In a recent move, and in its continued efforts to ensure a conducive legislative environment to open up the economy to all nationalities, the long-awaited 100 percent ownership by foreign nationals of companies licensed and registered in the UAE has been introduced by Cabinet Resolution No. 16 of 2020. Over the past few years, individual Emirates have moved towards allowing foreign national owned companies to acquire the remaining stakes on a case by case basis, but this has now been implemented on a national level. The decree passed by the UAE President, His Highness Sheikh Khalifa bin Zayed Al Nahyan, overhauling foreign ownership rules of commercial companies came into effect on 1 December 2020.

The decree introduces significant amendments to the UAE Federal Law No. 2 of 2015 on Commercial Companies, which stipulates that foreign shareholders are limited to owning a maximum 49 percent in a 'limited liability company' (LLC) operating as an onshore UAE business. In turn, this required an Emirati individual, or a 100 percent Emirati-owned company, to own a 51 percent share as a local sponsor. The amended law now allows natural and legal persons to establish companies without the need for a specific nationality. However, it will not apply to certain companies defined by Cabinet decisions or to companies that are wholly owned by federal or local governments, or their subsidiaries.

The decree supersedes UAE Federal Law No. 19 of 2018 on Foreign Direct Investment and introduces amendments that allow non-joint stock companies to engage in investment activities on behalf of third parties, if laws governing these activities allow it. The amendments also include provisions for organizing the business of limited liability companies and one-person entities.

The Cabinet resolution linked to the decree identifies a total of 122 economic activities across 13 sectors that have become eligible for up to 100 percent foreign ownership such as renewable energy, space, agriculture, and manufacturing industry. Other areas of ownership by foreign investors include hospitality and food services, information and communications, professional, scientific and technical activities, administrative services, support services, educational activities, healthcare, art and entertainment, and construction. Local governments will determine the ownership percentage of foreign investors in these activities based on their circumstances.

This long-awaited step serves the UAE’s goals of facilitating business and opening new economic sectors in the country to attract new investors and talent to improve the competitiveness of the local economy. As investors and UHNWIs look to take advantage of these opportunities and move their businesses and families to the UAE, they would also need to plan for succession and transfer of their UAE assets in accordance with their wishes.

Changes to UAE Personal Status Law

Along with the legislation amendments to boost business, the UAE has committed itself to family law updates to further encourage foreign nationals to settle and start their businesses in the country. Most recently, in November 2020, the UAE announced comprehensive changes to Personal Status Law, including the interpretation of inheritance laws.

Previously, the law in the UAE stipulated that the estate of the deceased would be distributed as per Sharia Law regardless of nationality or religious affiliation. This has led to cases where bank accounts were frozen and where guardianship of children and distribution of assets were assigned through Sharia Law and not in line with the wishes of the deceased. To avoid such situations, non-Muslim residents had started opting for non-Muslim wills to ensure their wishes were fulfilled.

With the recent changes passed in November, a person’s assets are now automatically distributed following the inheritance laws of their country of citizenship, which means that non-Muslim residents no longer require a will. Local courts will no longer apply Sharia Law when distributing the assets of a resident when they are citizens of a country where such a law does not apply. An exception remains with respect to UAE real estate, which shall continue to be subject to UAE laws, unless a will has been registered in the UAE. However, these changes may provide more incentive for more non-GCC individuals and families to retain more assets in the UAE and make use of private wealth structures available in the UAE.

Economic Substance Regulations

It is also worth mentioning that the UAE’s Economic Substance Regulations came into effect in April 2019 and the rules apply to onshore and free zone companies (and certain other businesses) that are based, managed and controlled in the UAE, and carry out a Relevant Activity. Although the regulations may have implications and compliance requirements for families looking to restructure or establish a Family Office in the UAE, the adoption of international standards and good practice strengthens the UAE’s position as a holding location for private assets.

Overall, as the UAE opens to more foreign investors, the introduction of robust laws and regulations focused on private wealth and private business ownership is likely to have a positive impact on succession planning for individuals and families.

If you would like to discuss potential implications of these new laws and regulations further, we would love to hear from you, or alternatively contact your local Family Office & Private Client adviser.

Authors:

Greg

Greg Limb

Global Head of Family Office & Private Client and Head of Family Office & Private Client,

KPMG in the UK