13 Nov 2018

DIFC Foundations and Shari’ah

Authored by: Ahmad Sergieh and Bilal Snaineh

In brief:

  • Upon the establishment of a foundation, the founder may endow certain assets by way of a gift;
  • It is advisable that any such endowments or gifts are structured in a certain manner; and
  • The advice of local expert lawyers should be sought in relation to any such structure to ensure that the potential risks and issues are identified and mitigated to the maximum extent permitted under applicable UAE laws.

Background

Under the new DIFC Foundations Law (DIFC Law No. 3 of 2018), a DIFC foundation may be initially established with a minimal amount (e.g. AED 1,000). Upon such foundation having been duly established, the founder may endow certain assets by way of a gift.

We set out below certain considerations that should be taken into account in relation to the endowment of assets to the foundation by way of a gift.

Considerations to take into account

a) UAE Civil Code

Under the UAE Civil Code “a gift is the passing of property or a right in property to another person during the period of the lifetime of the owner without consideration”.

Although both a gift and a donation are generally made without any consideration, the UAE Civil Code permits the donor to set out certain conditions that the donee should satisfy in order to be entitled to receive the gift. If the gift being made comprises real estate assets then such gift may only be effected if the conditions required for the transfer of ownership over such real assets are satisfied in accordance with the provisions of the UAE Civil Code.

b) UAE Personal Status Law

In the event the founder wishes to endow all or, a substantial part of, his assets to a foundation by way of a gift then it would be advisable that such endowment is structured in a manner which complies with certain key provisions of the UAE Personal Status Law No. 28 of 2005 (UAE Personal Status Law) which addresses a number of Shari’ah related matters.

Under the UAE Personal Status Law “shall be considered void, every fraud to the provisions governing inheritance by way of sale, donation, testament or other dispositions”. Accordingly, the UAE Courts would normally examine the underlying intentions and objectives at the time of making the gift to the Foundation to ensure that the rights of the relevant parties are preserved in accordance with the provisions of the UAE Personal Status Law and the concepts and Islamic inheritance rules under Shari’ah.

For example, if as a result of the gift being made during the lifetime of the donor, the heirs would be deprived of their rights then this might be seen by the Dubai Courts as a breach of the Islamic inheritance rules under the UAE Personal Status Law irrespective as to whether this is inconsistent with the provisions of the DIFC Foundations Law. It remains to be seen how the joint committee formed by the Dubai Courts and the DIFC Courts will address such potential issues where there is a potential conflict of jurisdiction between Dubai Courts and the DIFC Courts. We understand that this specific issue is currently being addressed and expect that the outcome will ensure that the objectives of the DIFC Foundations Law will be preserved and dealt with accordingly between the relevant UAE Courts.

Mitigating risks

It is important to note that there are certain ways to mitigate the risks set out above in respect of disgruntled heirs. Therefore, the advice of local expert lawyers should be sought in relation to any structure using a DIFC foundation holding assets in onshore UAE to ensure that the potential risks and issues are identified and mitigated to the maximum extent permitted under applicable UAE laws.

For more information, please contact us on sectors@hadefpartners.com.