SUCCESSION IN THE UAE: SHARIA LAW V.S. ENGLISH COMMON LAW

Ivan Joson

Business Setup Advisor

12 Jan 2024

The legal system in the United Arab Emirates (UAE) is a mix of civil law and Sharia law. Sharia law applies to personal status matters and blood money compensation for Muslims, while non-Muslims follow civil law for personal status matters. The UAE constitution established a federal court system, and emirates can also have local courts. Abu Dhabi, Dubai, and Ras Al Khaimah have local courts, while other emirates use the federal court system. Some free zones in Abu Dhabi and Dubai have legal systems based on English Common Law, allowing local businesses to opt for common law courts in business contracts. Currently, there are only two free zones in the UAE that are both operating under English Common Law: Dubai International Financial Centre (DIFC) Court and the Abu Dhabi Global Markets (ADGM) Courts.

Owning and operating a company in the UAE, it’s important to note the significant differences between Sharia Law and English Common Law. The following are a few of its major differences:

LEGAL SYSTEM:

Sharia Law: Sharia law is based on Islamic principles and teachings found in the Quran and Hadith. It encompasses a wide range of religious, ethical, and legal principles.

English Common Law: Common law is based on precedent and decisions made by judges in the past. It relies on judicial decisions and case law to interpret and apply the law.

OWNERSHIP STRUCTURE:

Sharia Law: Sharia-compliant companies adhere to specific Islamic principles, which can impact the ownership structure, decision-making, and financial practices.

English Common Law: In the common law system, companies typically follow a more flexible and familiar Western structure of ownership and management.

REGULATION AND COMPLIANCE:

Sharia Law: Sharia-compliant companies must adhere to Islamic ethics, which can involve adhering to specific financial and contractual structures. Compliance often requires adherence to Islamic financing principles and ethical guidelines.

English Common Law: Common law systems often prioritize contractual obligations and adherence to statutory laws. Regulations are generally more standardized and in alignment with international business practices.

CONTRACTS AND AGREEMENTS:

Sharia Law: Sharia-compliant contracts must adhere to specific principles, such as avoiding interest (riba) and ensuring that agreements do not involve prohibited activities (haram). Contracts may need to be structured by these principles.

English Common Law: English contract law is widely recognized for its flexibility and adaptability. Contracts are typically straightforward and based on the intentions of the parties involved.

DISPUTE RESOLUTION:

Sharia Law: Sharia-compliant dispute resolution can involve Islamic courts (Sharia courts) and scholars who interpret Islamic law. Resolutions are based on Islamic jurisprudence and principles.

English Common Law: Common law systems use courts, arbitration, and alternative dispute resolution mechanisms for resolving disputes. Decisions are based on precedent, statutes, and contractual agreements.

FINANCIAL PRACTICES:

Sharia Law: Sharia-compliant companies must adhere to Islamic financial principles, which prohibit charging or paying interest (riba) and engaging in unethical or haram activities. Islamic banking and financing principles are followed.

English Common Law: Business and financial practices in common law systems typically follow conventional banking and investment practices.

FOREIGN OWNERSHIP:

Sharia Law: Sharia-compliant principles can sometimes influence foreign ownership regulations. Certain sectors may restrict foreign ownership, and in some cases, local partnership or sponsorship may be required.

English Common Law: Common law systems may allow for full foreign ownership or have relatively liberal regulations concerning foreign ownership.

Furthermore, there are both onshore (mainland) and free zone options for setting up a company. Free zones may have their own regulations and are often more flexible in accommodating foreign investors. The application of both Sharia Law and English Common Law in the UAE can vary depending on the specific emirate, type of business, and the company’s location.

In the UAE, inheritance blends tradition and choice. Sharia law guides inheritance for Muslims, but non-Muslims can often choose their home country’s laws. Even within Sharia Law, interpretations adapt to modern families and circumstances. This blend ensures inheritance reflects not just old rules, but the diversity of today’s lives.

SUCCESSION UNDER SHARIA LAW

1. Islamic Inheritance Rules:

Sharia Law prescribes specific inheritance rules known as “faraid.” These rules dictate how a deceased person’s estate, including business interests, should be distributed among heirs. The shares of inheritance are generally fixed based on relationships and the gender of heirs.

2. Non-Testamentary Succession:

Under Sharia Law, a portion of the estate must be distributed to specific heirs, such as children, spouses, parents, and siblings, according to predetermined shares. These shares may vary based on factors like gender, kinship, and the presence of other heirs.

3. Limited Testamentary Freedom:

While Sharia Law allows for some testamentary freedom (one-third of the estate), this portion is subject to certain restrictions and cannot be allocated to heirs who are already entitled to fixed shares under faraid.

SUCCESSION UNDER ENGLISH COMMON LAW

1. Testamentary Freedom:

Common law jurisdictions generally uphold the principle of testamentary freedom, allowing individuals to decide how their assets, including business interests, are to be distributed in their wills. This extends to the shares or ownership stakes in a company.

2. Legal Formalities:

Succession planning and the transfer of business assets are often governed by the legal formalities of wills, trusts, and corporate agreements, such as shareholder agreements. Businesses often have provisions in their governing documents to address succession and the transfer of ownership.

3. Probate And Inheritance Tax:

In common law systems, the probate process is used to authenticate wills, and inheritance tax may apply depending on the jurisdiction. Proper succession planning can help minimize tax liabilities.

In conclusion, navigating the legal landscape of the UAE requires an understanding of its diverse legal systems, from Sharia law to English common law in DIFC and ADGM. It is vital to recognize the importance of clarity and efficiency in legal matters in setting up a business in Dubai.

If you are considering establishing or expanding your business in the UAE, our team at EZONE is here to assist you. With expertise in business setup and comprehensive knowledge of local regulations, we can guide you through the complexities of the legal environment. Contact us at hello@dubaibusinesslicense.com for tailored solutions to meet your business setup needs and ensure a smooth journey in the vibrant business landscape of the UAE.