As interest grows among Muslims in the UAE and wider GCC, questions about whether Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) foundations align with Sharia law are increasingly relevant.
This is particularly true for UAE and GCC nationals looking to establish structures for managing assets and planning for the future—especially when family dynamics and succession wishes become complex.
Two main concerns often arise:
- Can UAE foundations be designed to comply with Sharia rules and regulations?
- Once assets are placed in a foundation, are they exempt from Sharia rules and regulations, and removed from the founder’s estate?
Regarding the first question, DIFC foundations can indeed be structured to ensure that distributions to beneficiaries are in line with Sharia principles where this is desired (such as where a founder retains control of a foundation’s asset during their lifetime). Families can specify in the foundation’s by-laws that the council must seek guidance from Sharia scholars before making distributions and that any beneficiary’s discretionary entitlements (if any) should pass to their Sharia heirs after their demise.
Additionally, the UAE’s Family Business Law (UAE Federal Decree-Law No. 37 of 2022 on Family Businesses) allows families the flexibility to structure governance in ways that ensure interests pass to specific descendants. This not only supports unique family business needs but also creates tailored solutions that align with both business goals and Sharia requirements. For example, families can set provisions for profit distribution or decision-making processes, ensuring that their vision is upheld across generations.
As for the second concern, guidance which we have received from a Sharia scholar indicates that once assets are transferred to a foundation, they are no longer considered part of the founder’s estate under Sharia law—provided the transfer of any assets is executed as a valid lifetime gift.
For a gift to be considered valid, the individual giving the assets must not retain any benefit from them. They should also be of sound mind and free from serious illness that could lead to imminent death. Therefore, an emphasis on careful planning during a person’s lifetime is crucial, as it helps families navigate their options effectively.
Establishing a foundation offers a way to safeguard family assets and clarifies wealth distribution in a Sharia-compliant manner. This clarity is especially important in complex family situations, ensuring that all parties understand their rights and responsibilities, and to create a suitable governance framework for the family in relation to family businesses and family assets.
It is worth noting that this area has not yet been challenged in court, so it is crucial to think about potential issues with these foundation structures including challenges from disgruntled heirs and challenges to capacity. In our view, one of the biggest issues with the foundation structure is that it is an offshore (i.e., free zone) solution. Therefore, heirs could contest a distribution if it conflicts with Sharia law, given that one is governed by financial free zone laws and the other is governed by the federal personal status law. Heirs could disagree on the distribution of assets outside the financial free zone and challenge the validity of the inclusion of such assets, for example, regarding real estate assets which can only be owned by UAE nationals.
It is also possible to include in a foundation’s constitutional documents that any disputes regarding the foundation must be resolved by arbitration, further promoting confidentiality in sensitive family matters and allowing for subject matter experts to be the arbitrators. Arbitral awards are generally easier to enforce than court decisions, especially in countries that are subject to the New York Convention. Arbitrations can also be faster than court proceedings, as parties can set their own timelines.
In summary, understanding how DIFC and ADGM foundations can align with Sharia law is essential for UAE and GCC nationals navigating complex family dynamics and succession planning. With the right structure and guidance from Sharia scholars, families can create effective asset management solutions that honour their traditions and ensure the smooth transfer of wealth to future generations. This proactive approach not only secures financial interests but also nurtures the values families cherish, creating a lasting legacy.
By Natasha Zahid, partner and head of disputes and investigations (MENA), and Laura Sperling, associate (corporate and private wealth)Â at Taylor Wessing, Dubai.
