Inheritance tax and inheritance law in United Arab Emirates

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The Global Property Guide looks at inheritance from two angles: taxation, and what inheritance laws apply to foreigners leaving property in United Arab Emirates: what restrictions there are and whether making a will is advisable.


How high are inheritance taxes in UAE?

There are no inheritance taxes in Dubai. Inheritance rights under UAE law state that the law applicable is the law of the deceased person's domicile.

The thorny issue of inheritance has caused a lot of debate. It is hoped that the position will be clearer once the New Land Law is enacted.

Currently many agents and unfortunately some legal firms are telling their clients that the law applicable is the law of the deceased person's domicile. However, it is actually still unclear whether this applies to real property, or whether Sharia law applies. It is also unclear what happens where the foreign law says that the law which applies is that of the country where the property is located.

It is essential to get legal advice. Major international law firms advise non-Moslems and non-UAE nationals to draft a will specifying exactly whom they want their UAE property to pass to upon their death. The will must be notarized by the Sharia Court, and registered in the names of the chosen beneficiaries at the Land Registration office.

Another alternative is to establish an offshore company (Dubai has offshore zones) with the spouses as directors. In the event of their demise, the shares of company pass to the surviving spouse and beneficiaries. Although the spouse has died the offshore company has not, and the internal transfer circumvents Sharia law.


What inheritance laws apply in United Arab Emirates?

The UAE's property inheritance law, as it applies to foreigners, is still unclear

Matters of inheritance in The United Arab Emirates (UAE) are governed by Federal Law No. 5 of 1985 regarding the law of Civil Transactions in the UAE (the "Civil Code"), and by Federal Law No. 28 of 2005 regarding UAE Personal Affairs Law (the "Personal Affairs Law").

As a general rule, inheritance issues for Muslim UAE nationals are dealt with in accordance with Sharia (a system of Islamic law based on the Quran), whereas for foreigners, the law of the deceased's home country applies.

It is not clear, however, whether this rule applies to real estate located in the UAE.

The inheritance of property is a special case, and the position was not clarified by the Personal Affairs Law (2005). Legal opinion is still divided.

Whereas the Civil Code states, in one part, that the law of the home country applies to matters of inheritance, the same Civil Code later goes on to state, in another part, that where a will made by a foreigner involves the disposal of real estate in the UAE, then UAE law applies. This is consistent with the fact that in general in UAE, the law of the state where property is located applies to real property rights.

It was hoped that the passing of the Personal Affairs Law (2005) would bring clarity to the terms of the Civil Code. But whilst it confirms that the laws of the home country apply to matters of inheritance for foreigners, it makes no specific reference to real estate located in the UAE.

Opinion is divided as to whether or not the general provisions of the Personal Affairs Law override the specific restrictions of the Civil Code. Some lawyers believe that if a non-UAE national makes a specific reference in their Will to the disposal of property in the UAE, a Court will follow the wishes of the deceased. Others believe that the Personal Affairs Law only applies to general matters of inheritance and that the inheritance of real property continues to be governed by the Civil Code.

The UAE Courts decide how the property of a foreigner in UAE is distributed

Ultimately, it is up to the UAE Courts to decide which laws to apply on a case by case basis. If the Court decides to apply local law, or if the law of the deceased's home country states that local law applies to matters of inheritance, then the provisions of Sharia apply.

Inheritance issues are initially heard at the Court of First Instance

Issues can also be appealed at the Court of Appeal, and finally at the Court of Cassation. Court proceedings in the UAE can be lengthy and expensive.

A way out of the uncertainty: ownership of property may be transferred through shares in a company

One way to avoid the application of UAE law to the disposal of property in UAE is to incorporate an offshore company as a purchase vehicle. If the property is owned in the company's name, ownership of the property can be transferred via shares in the company. Therefore, if a shareholder dies, it is only shares that are disposed of, and not the property. This avoids the specific provision in the Civil Code that matters of real estate must be dealt with in accordance with the UAE law, and means that the general provision allowing the laws of the home country to apply to general matters of inheritance are followed. There are however, potential disadvantages to this approach. In particular, many banks are reluctant to offer mortgage finance to offshore companies, and there are time and cost implications.

The reserved portion in Sharia

Under Sharia law each legal heir is entitled to a 'reserved portion' of the estate. Complex guidelines surround how the shares in the estate are calculated, and depend on whether the heir is male or female. In each case a Sharia scholar must be appointed to identify the heirs and to decide how the estate is distributed. For example, if a father leaves a wife, a son and a daughter, the wife receives one eighth or less of the total estate, the son receives up to two thirds of the remainder and the daughter, up to one third. All illegitimate or adopted children are excluded from being heirs. If an heir is still in utero at the time of death, the estate cannot be distributed until the birth of the child and the sex is known. If there are no heirs, then any real property located in the UAE which was owned by the deceased becomes vested in the state.

It is advisable for a foreigner to make a will

Generally, Muslims in UAE do not make a will, because the principles of Sharia apply. Since uncertainty surrounds the laws of inheritance for foreigners, it is advisable for a foreigner to make a will to clarify his/her intentions regarding the disposal of property in the UAE. It is not necessary to make a local will in the UAE because the Courts look at whether the will is valid in the country of origin. It is advisable for foreigners who own property in the UAE, but who do not live in the UAE, to make a will according to the laws of their own nationality, and have the will attested by the UAE Embassy in their home country. This makes it easier for the local Courts in the UAE to determine whether the will is valid, and if the deceased has opted for the laws of their home country to apply.

No restrictions apply to making gifts before death

According to Sharia law items owned by the deceased at the time of death (excluding stolen items, items acquired by breach of trust pensions) are considered part of the inheritable estate. The beneficiary of a gift made during the lifetime of a donor must be in possession of the gift upon the death of the donor, otherwise the gift is considered to be part of the disposable estate.

Ownership of property must be registered

The UAE courts look for legal evidence of ownership, and it is therefore important to register ownership of real estate at the local Land Department. There is no equivalent to the "right of survivorship" concept found in other jurisdictions (e.g. where property passes from a deceased joint owner to the surviving joint owner). In the UAE, joint owners hold equal shares in property, unless stipulated otherwise.

Children and persons without legal capacity can inherit

Under the provisions of the Personal Affairs Law, a guardian must be appointed to receive property left to a child or person without full legal capacity. When the child is eighteen, the guardian may permit him to receive or manage some or all of the property. The guardianship is first awarded to the father, then to a male heir on the father's side, in accordance with the order of inheritance.