Starting a Firm and the Succession Issues to Keep in Mind for UAE

, Entrepreneurs

You are a man with a vision; you have started from scratch; you started with one business and then branched out – you still remember the struggle it took to start it your mother country and then to start business in UAE again. You had lady luck on your side and you made it for yourself, your family and your employees.

Now imagine a counter scenario. You worked so hard for that LLC Company Setup Dubai or the Freezone Business Setup Dubai. Suddenly, one day, you are diagnosed ill. You don’t even have a succession plan in place – now what happens?

A tough scenario to imagine and one that should not even be thought about. Sadly, you have to think about it and plan for it too. Where do you start? Let’s see the succession issues and the laws in place in the UAE.

If you run a business, then the option of retirement gets slightly more complicated. Apart from having enough money to retire on, you have to decide what happens to the business –

1. Who will manage it when you don’t or can’t work?

2. How will ownership be transferred?

3. Will your business carry on or will it have to be shut down?

When you are a business owner, it is possible that your personal wealth is tied up in the business. At some point, you need to plan the exit and manage the transfer of the family-owned business. Any unplanned transfer, especially in cases of an accidental death, is disastrous for the business and will leave your family in the lurch.

Business succession planning is the most important method through which you can prevent your business from being caught up in ownership issues. It could also prevent unnecessary hostile takeover bids by outsiders or even company professionals. It could also mean a lot of peace for your family, so it is in the interest of everyone that the succession planning is done carefully and smartly.

The situation gets more complicated when you have to deal with succession issues in a foreign land. So, the best thing to do is to explore and look at the current situation and law prevailing in the UAE. The UAE is a civil law jurisdiction. There are provisions in the Civil Code about inheritance. Article 17(1) primarily talks about the fact that inheritance matters are governed by the ‘law of the deceased’ at the time of their death. This means the law of the ‘nationality of the deceased’. Further to that, Article 17(5) tells us that with regards to real property, the UAE law will apply. That is not very alarming or different from the system that is in place in India, for example where domicile and location of property are the determining factors. So the moveables are covered under one law and immovables under another law. However, in practice, the Dubai Courts do not apply that regime.

Sadly, when somebody dies in Dubai the Shariah law is applied so the fixed inheritance shares derived from the Quran applies. The end result is that it does not achieve what the individual wanted and if executors and heirs are unhappy with the devolution of the estate then it is upon them to appeal the decision. That process of appeal is a long-drawn affair. Typically two years or sometimes even more if the legal wrangle is more complicated. Till the time that the case is heard and decided, assets are frozen while it costs good money to go through that process.

Due to uncertainty surrounding inheritance issues in Dubai, clients have tended to try and structure around those rules. The simplest way out is to try and keep assets offshore as much as possible. That means that if you are a resident of Dubai, you need to have access to cash for your day to day living expenses but should keep those deposits to a minimum. If you are the husband and wife and maintain separate bank accounts, assets usually get frozen on death until the debts are paid. In terms of real estate that is the most important asset class. In terms of land ownership, foreigners can only buy freehold property in certain specific areas.

In any case then, you can’t move the property and can only structure things around that. Only a particular type of company can own real estate in Dubai and that is JAFZA which is a freezone in Dubai. Then you need to incorporate an offshore company which would hold the shares in the JAFZA Company and create trusts which would have non-Indian domiciled expats. The scenario mentioned above holds true for the succession issues faced by non-Muslims as such. If you happen to be Muslim then of course, it would be much like other non-resident laws in terms of division of assets as applies to a Dubai resident.

Complicated yes, but nothing that can’t be worked upon, so plan it smart and play it safe!

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