Author: Afridi Angel Editor

Planning for Canada’s Departure Tax

We have written previously about the importance of planning for the tax consequences of emigrating from Canada; see our previous inBrief here. In this inBrief, we will describe a number of more advanced planning options for Canadian residents who are considering giving up their Canadian residency. Bear in mind that not all of the approaches discussed in this inBrief will be right for any particular person, as each person’s individual circumstances will differ.

 

Upon becoming a non-resident, Canada imposes a departure tax in the form of deemed disposition of certain capital assets, causing any unrealized capital gains to be realized in the year of departure. It is common for high net-worth individuals in Canada to hold their public and private investments through holding companies (Holdcos), so one major source of capital gains upon emigration is the shares they own in their Holdcos. We will also touch upon foreign trust planning, Canadian real estate holdings, and charitable donations.

 

With respect to Holdco shares, much emigration planning focuses on how to minimize the departure tax by reducing the fair market value of those shares prior to exit. Some potential options to achieve this may include.

 

Strategic Dividends: Causing Holdco to pay out dividends to the maximum extent it can out of tax-preferential accounts maintained by it, which may include Holdco’s capital dividend account (CDA), eligible refundable dividend tax on hand (ERDTOH) and non-eligible refundable dividend tax on hand (NERDTOH). Dividends can be paid out of Holdco’s CDA tax-free, and dividends that are paid out of its ERDTOH and NERDTOH result in tax refunds to the company, making them somewhat more tax-efficient. In advance of doing this, it may be advisable for Holdco to sell some of its investments, thereby realizing capital gains and creating additional CDA that can be dividend out tax free. The payment of dividends in this manner will reduce the fair market value of Holdco’s shares, thereby reducing the amount of the deemed capital gain on such shares upon emigration.

 

The other reason you should be sure to dividend out all CDA in any Holdco prior to emigration is because such dividends lose their tax-free status when paid to a non-resident shareholder. Once you are a non-resident, Holdco will be required to apply a withholding tax to any dividends paid to you, and you will be taxed on such dividends personally under the laws of your new country of residence. If Holdco will continue to operate after you emigrate and will continue to have Canadian resident shareholders, it would be prudent to create separate classes of shares that allow for dividends out of CDA to be paid to Canadian shareholders (who can receive them tax-free), and other dividends to be paid to you (as you may very well be in a position to receive them much more tax-efficiently than a Canadian shareholder[1]).

 

Life Insurance: Cause Holdco to acquire life insurance on your life, acquiring a policy that is maximum funded at the outset but with attributes that result in the policy having a low fair market value. This expenditure in exchange for an asset that is initially low-value (the life insurance policy) reduces the value of the Holdco shares. There are several other potential benefits to this approach that stem from the value of the insurance policy itself, because its value will increase after you have emigrated and can be leveraged as a valuable asset of Holdco going forward (i.e., front-end or back-end leveraging strategies to extract value from the policy during your life), in addition to the security of the death benefit.

 

If Holdco does leverage the life insurance policy by borrowing against it, Holdco will be able to use those funds for income-generating investments and will be permitted to deduct the interest on the loan. This can be an attractive arrangement.

 

You may wish to consider whether it makes sense to introduce a foreign ownership structure that is more forward-looking and supports your wealth and estate plans more broadly. For example, if you intend to establish a family trust structure in an offshore jurisdiction as part of your post-emigration planning, it may be prudent to transfer the shares of Holdco to the foreign trust at approximately the same time that you emigrate from Canada. You would do this after having taken any available steps to reduce the value of Holdco’s shares, as described above. If Holdco’s value is derived primarily from Canadian real estate holdings, this approach could be beneficial if you foresee a sale of Holdco in the future. In that case Holdco shares will be “taxable Canadian property” and will be taxed in Canada, and you can reduce the impact of that tax by reducing the value of Holdco’s shares through dividends after you are a non-resident (at the lower beneficial treaty rate).

 

There are special considerations with respect to Canadian real estate holdings. Canadian real estate is “taxable Canadian property” and is not subject to the deemed disposition upon emigration.[2] How you can best structure your holding of Canadian real estate as a non-resident will depend on whether it is property for your personal use, or if it is a rental property. If it is for personal use, you will need to consider whether your ownership of it puts you at risk of being deemed to be Canadian resident for tax purposes even after your emigration.[3] If it is a rental property, you will likely wish to transfer ownership of it to a Canadian holding company, otherwise the tenant will be required to withhold an amount in respect of tax from every rent payment they make to you as a non-resident owner.

 

Finally, an option that is not to be overlooked is simply making a charitable donation of assets that have significant accrued capital gains before you emigrate, which will have the effect of reducing both the value of your holdings as well as reducing your departure tax exposure. It will also generate a charitable tax credit which you may use to further reduce your tax burden on exit. If your charitable intentions are relatively large and you wish to maintain some ongoing involvement and control over the how the endowment is managed, you may wish to establish a charitable foundation instead of simply donating funds or assets to an existing charity. A charitable foundation that is registered as such with the Canada Revenue Agency will qualify as a registered charity and can issue charitable tax receipts, and can carry out activities and funding in line with its charitable purpose in Canada and overseas. The charitable options should, of course, only be considered where the primary objective is furthering the chosen charitable purpose with any tax incentives being secondary.

 

The strategies discussed in this inBrief are intended to illustrate that there may be effective pre-emigration planning that you can consider, aimed at reducing the impact of Canada’s departure tax. All such strategies are complex in their planning and application and professional advice is required to evaluate and execute them. If you are interested in exploring planning of this nature, please contact us and we will be delighted to assist. ■

 

—

[1] The withholding tax that Holdco would be required to apply to dividends paid to you as a non-resident would be a default rate of 25% if you reside in a non-treaty country, or could be 5%, 10% or 15% if you  reside in a treaty country.  You may need to hold your shares through a company established in your new country of residency to access these reduced rates.

[2] You may elect to trigger a deemed disposition of taxable Canadian property if you prefer, in order to trigger gains or losses which you are able to offset against other losses or gains on exit, respectively.

[3] Very briefly, owning a residential property which is available for your personal use in Canada will cause you to be deemed tax resident in Canada, unless there are tie-breaker rules in the applicable treaty with your new country of residence.  Ensuring that you will indeed be non-resident for tax purposes is a critical aspect of non-residency planning.

 

UAE Corporate Tax Law (CT) – the Conditions under which the Presence of a Natural Person in the UAE will not Create a Permanent Establishment for a Non-Resident Person

The UAE Minister of Finance by Ministerial Decision No.83/2023 dated 10 April 2023 has set out the conditions under which the presence of a natural person in the UAE would not create a Permanent Establishment for a Non-Resident Person.

 

For the sake of context, Article 12 of CT provides that a Non-Resident Person is subject to Corporate Tax on Taxable Income in certain circumstances, which include, the Taxable Income attributable to the Permanent Establishment of the Non-Resident Person in the UAE.

 

While Article 14 (1) and (2) of the CT deals with circumstances under which a Non-Resident Person is considered to have a Permanent Establishment in the UAE. Article 14 (3) of the CT sets out the circumstances a fixed or permanent place of a Non-Resident Person in the UAE will not be considered as a Permanent Establishment.

 

Article 14 (7)(a) of the CT also provides that for the purpose of Article 14(3), the Minister may prescribe the conditions under which the mere presence of a natural person in the UAE does not create a Permanent Establishment for a Non-Resident Person where the presence of such natural person in the UAE is due to a ‘temporary and exceptional situation’. The conditions are set out in Ministerial Decision No. 83 of 2023 which states that, a ‘temporary and exceptional situation’ is where all of the following conditions are met:

 

a) The presence of the natural person in the UAE is due to exceptional circumstances of a public or private nature;

 

b) The exceptional circumstances cannot reasonably be predicted by the natural person of the Non-Resident Person;

 

c) The natural person did not express any intention to remain in the UAE when the exceptional circumstances end;

 

d) The Non-Resident Person did not have a Permanent Establishment in the UAE before the occurrence of the exceptional circumstances; and

 

e) The Non- Resident Person did not consider that the natural person is creating a Permanent Establishment or deriving income in the UAE as per the tax legislation applicable in other jurisdictions.

 

The Ministerial Decision states that ‘an exceptional circumstance’ is a situation or an event beyond the natural person’s control, which occurred while such person was already in the UAE, which he could not reasonably predict or prevent and which prevented him from leaving the UAE as originally planned.

 

The Ministerial Decision continues to provide further guidance on what ‘exceptional circumstances of a public nature’ and ‘exceptional circumstances of a private nature’ are:

 

Exceptional circumstances of public nature include: (a) adoption of public health measures by the competent authorities in the UAE or in the jurisdiction of the original workplace or by the World Health Organization; (b) imposition of travel restrictions by the competent authorities in the UAE or in the jurisdiction of the original workplace; (c) imposition of legal sanctions on the natural person preventing them from leaving the UAE; (d) acts of war or occurrence of terrorist attacks; (e) occurrence of natural disasters or force majeure beyond reasonable control.

 

Exceptional circumstances of a private nature include occurrence of an emergency health condition affecting the natural person or their relatives up to the fourth degree, including by way of adoption or guardianship. ■

UAE Corporate Tax Law (Law 47 of 2022) – Exemption for Qualified Public Benefit Entities

Pursuant to Article 9 of the Corporate Tax Law, a Qualifying Public Benefit Entity will be exempt from Corporate Tax if the conditions set out in Article 9 (1) of the Corporate Tax Law are met. In order to benefit from this exemption, Article 9 (2) also requires the Qualifying Public Benefit Entity to be listed in a Cabinet Decision. Yesterday, on 24 April, the schedule to the Cabinet Decision 37 of 2023, listed the names of the Qualified Public Benefit Entities. The UAE Ministry of Finance has also clarified that Qualified Public Benefit Entities are eligible for tax exemption under the Corporate Tax Law because they are established and operate for the wider public benefit, such as charitable, religious, cultural, healthcare and educational purposes. Pursuant to Article 9 (3) of the Corporate Tax Law, the Federal Tax Authority may routinely request relevant information or records from a Qualifying Public Benefit Entity to monitor the continued compliance of the Qualifying Public Benefit Entity.

 

Donations, grants or gifts to a Qualifying Public Benefit Entity may be allowed as deductible expenditures for Corporate Tax purposes pursuant to the Corporate Tax Law. ■

Corporate Tax: Threshold for “small business relief” set at AED 3 million or less

The UAE Ministry of Finance today issued a new ministerial decision providing the threshold for “Small Business Relief”. Accordingly, taxable persons that are resident persons can claim “Small Business Relief” pursuant to Article 21 of the Corporate Tax Law if their revenue in the relevant tax period is below AED 3 million for the taxable period. If however the revenue threshold of AED 3 million for each tax period is exceeded, the “Small Business Relief” will not be available. This means that a taxable person that generates revenue of AED 3 million or less for each taxable period may elect to be treated as not having derived any taxable income.

 

The AED 3 million revenue threshold will apply to tax periods starting on or after 1 June 2023 and subsequent periods ending on or before 31 December 2026. ■

Evolving Landscape for Whistleblower Protection in the UAE

Whistleblowing or simply put, the act of drawing attention to or complaining about perceived wrongdoing, misconduct, unethical activity within one’s organisation has been a topic of great relevance in the last few years. While there is no federal law relating to whistleblowing in the UAE, there have been significant legal developments in this area.

 

The Dubai Law No. 4/2016 on Dubai Economic Security Centre which applies to all entities licensed in Dubai and the freezones established the Dubai Economic Security Centre (DESC). The DESC is tasked to fight corruption, crimes of fraud, bribery, embezzlement, damage to public property, forgery, counterfeiting, money laundering, financing terrorism and monitor financial violations and markets. This law defines a whistleblower as a person who notifies or cooperates with the DESC about any matter that may prejudice the economic security of Dubai. DESC is required to ensure confidentiality and provide the necessary protection to the whistleblower from retaliation or discrimination. However, this law has not seen much practical implementation and is yet to be tested.

 

In this inBrief, we look at whistleblowing policies that have been adopted by three freezones in the UAE: the Dubai Multi Commodity Centre, the Dubai International Financial Centre, and the Abu Dhabi Global Markets.

 

Dubai Multi Commodity Centre (DMCC)

 

Subsequent to the establishment of the DESC, the DMCC, one of Dubai’s most prominent freezones, also issued a whistleblowing guidance note for its members on 10 November 2019. The DMCC has defined whistleblowing very widely to include any concern regarding actual or potential illegal activity, or unacceptable or undesirable behavior of public concern which may have reputational impact including financial malpractice, fraud, failure to comply with a legal obligation, human rights abuses, dangers to health and safety or the environment, etc. The guidance extends to (i) employees and former employees; (ii) consultants; (iii) accredited members of DMCC clubs; (iv) owners, residents and visitors to DMCC free zone; and (v) owners’ associations and management companies.

 

Any such complaint must be made to the dedicated email ID of DMCC Authority and may be made anonymously. It also contains principles relating to confidentiality and protection if such complaint is made in good faith and with reasonable suspicion.

 

Dubai International Financial Centre

 

The Dubai Financial Services Authority (DFSA) published its own Whistleblowing Regime in April 2022 that applies to a registered auditor, a DFSA Authorised Person (an entity licensed to undertake financial services in the DIFC), or a Designated Non-Financial Business or Profession (which includes real estate developers, dealers in precious metals, law firms, accounting firms, company service providers or a singly family office). All these entities need to put in place appropriate and effective policies and procedures to facilitate the reporting and assessment of regulatory concerns. The whistleblowers may make a complaint to its organisation or directly to the DFSA. Legal protections are available to the whistleblowers only when the disclosure relates to a reasonable suspicion that the organisation has contravened any law or is engaged in money laundering, fraud or any other financial crime provided that the disclosure is made in good faith. These provisions have been given legal effect by making adequate amendments to the DIFC Regulatory Law 2004.

 

The Abu Dhabi Global Markets (ADGM)

 

The ADGM, the other financial freezone in the UAE aside from the DIFC, is the latest entrant to this regulatory space. The ADGM issued Guiding Principles on Whistleblowing in December 2022 and, unlike the DIFC, the ADGM has issued a non-binding Guidance which is proposed to complement its regulatory framework and act as guidance for all ADGM entities when designing and implementing a whistleblowing infrastructure. It is worth noting that the ADGM Authority and its financial regulator, the Financial Services Regulatory Authority, also provide infrastructure (on their websites) to make such complaints directly to the authorities. However, it is advised (but not mandated) that the complainant tries contacting the relevant entity directly in the first instance as this can often lead to a swift and efficient resolution of the issue.

 

The ADGM Guidance is very comprehensive and sets out the following principles:

 

1. Guiding Definition of Whistleblowing: ADGM encourages entities to use a broad definition of whistleblowing which could include references to fraud, money laundering, corruption, breaches of legal or regulatory requirements, unethical conduct and/or acts to cover up wrongdoing. It should be clear that whistleblowing is distinct from an employee grievance or a customer complaint.

 

2. Non-Retaliation: A whistleblowing framework should at all times adequately protect whistleblowers from any and all forms of retaliation or disadvantage arising from their whistleblowing. The policy of non-retaliation should be credible and convincing.

 

3. Confidentiality and Due Process: ADGM entities should have controls in place to prevent unauthorised access to whistleblowing reports or any information that might inadvertently or inappropriately reveal the identity of a whistleblower or the subject of the complaint. Disclosure of information to appropriate external whistleblowing channels – such as a regulator or independent investigator – should be expressly exempt from confidentiality requirements.

 

4. Reporting in Good Faith: Protection to whistleblowers is only afforded if the report is made in good faith, i.e. based on an honestly held belief that the information offered at the time of disclosure is true. While a genuine misunderstanding should still be protected, deliberate false disclosures or those made exclusively in self-interest do not meet this criterion.

 

5. Components of a Whistleblowing Framework: No one-size-fits-all approach. Each entity has the flexibility to decide its own policy and reporting requirements depending on its size, business, risk profile and complexity. Independent assessment and investigation should be supported with appropriate training and awareness sessions for staff and managers.

 

6. Culture: The Guidance insists on a ‘tone from the top’ approach and emphasises that a robust whistleblowing approach is ineffective if not supported in practice. It highlights issues such as under resourcing, low responsiveness, inadequate investigation and poor confidentiality as roadblocks and insists that the entity culture should be such that whistleblowers feel safe to raise issues, and that there are credible channels they are aware of and can use.

 

The ADGM Guidance adds to the regulatory regime applicable across UAE and provides entities with several key issues that they must consider while drafting their internal whistleblowing policies. Similar to the DIFC, it can be expected that the existence of an effective whistleblowing policy, and measures taken by an entity to enforce it, may be considered as a relevant factor while determining any penalties or sanctions imposed by the ADGM against such an entity. This would imply that an ADGM entity should take adequate measures to formulate and maintain its internal policies in line with the Guidance. ■

Key clauses in Sale and Purchase Agreement for off-plan properties in Dubai

Introduction

 

Off-plan properties are those which are sold in advance of completion and can offer attractive payment plans and potentially high returns on investment. Therefore, the acquisition of off-plan property has always been a favored form of investment for those seeking to profit from the booming Dubai Real Estate market.

 

However, it is vital for buyers to understand the risks involved. The governing document that is put in place between developers and buyers to regulate the purchase of off- plan property is a Sale and Purchase Agreement (SPA).

 

In this article we will examine a number of key clauses usually present in a SPA to which buyers should pay particular attention.

 

Key clauses

 

1. Completion and Risk

 

The completion clause present in a SPA typically outlines the date upon which a developer anticipates that a property will be completed. Generally, such a clause will permit a developer to vary this date for specific reasons if required (typically for a period of twelve months). A buyer of off-plan property should keep in mind such obligations under the SPA including financial obligations when reviewing the completion clause as it is necessary for these to be fulfilled by the completion date specified in order for a buyer to take possession of a property.

 

The passing of risk is also dealt with within a completion clause in a SPA. It is vital that buyers of off-plan property understand fully at what point they will assume rights and responsibilities including risk in relation to a property. The passing of risk occurs upon the handover of a property to a buyer.

 

2. Purchase Price

 

A SPA will contain a clause outlining the amount and timing of the purchase payment required for the buyer to acquire a property. A payment schedule is typically attached which a buyer of off-plan property should ensure that they can adhere to as a failure to maintain these payments may result in the termination of the SPA and the forfeiture of sums paid to a developer. This clause may also set out the consequences of a late payment, which would usually involve the application of interest.

 

3. Handover

 

A handover clause will specify the condition in which an off-plan property will be handed over to a buyer. A SPA will usually detail the quality of finishes, fixtures and fittings that a developer should provide as well as outlining the process in relation to any defects present in the property and the repair of same. Typically, buyers of off-plan property are permitted to inspect a property in order to identify any deficiencies present. The handover clause is essential to ensure that the buyer receives the property in the agreed condition.

 

4. Restrictions on Disposals

 

Buyers of off plan property do not receive a full title deed to a property until completion occurs. Until such time, they acquire the right to own a property once it is completed provided that they comply with their obligations as contained in the relevant SPA.  Many investors often seek to sell off-plan properties during the construction process to take advantage of spikes in property prices. However, it is important to note that developers will usually include restrictions in a SPA that will limit a buyer’s right to dispose of an off-plan property during construction. Such restrictions will usually be linked to a payment of a certain percentage of the overall purchase price for an off-plan property.

 

5. Termination

 

The termination clause contained in a SPA will outline the circumstances under which a SPA may be terminated by either party and the consequences of such termination. Termination usually consists of a failure to meet contractual obligations (such as payment), inability to secure financing, insolvency of one of the parties, or any other specified circumstances. Typically, such clauses are drafted in favour of the developer and a buyer of off-plan property should review these clauses carefully to ensure that they understand the circumstances that could give rise to a termination of a SPA and their ramifications.

 

6. Dispute Resolution

 

A dispute resolution clause outlines the process for resolving any disputes that may arise between the buyer and the developer. The SPA should specify the method of dispute resolution, such as court, arbitration, mediation, or other forms of alternative dispute resolution. The dispute resolution clause is essential to provide a clear process for resolving any disagreements between the parties. Buyers of off-plan property should be mindful of this clause and ensure that the dispute resolution mechanism prescribed is acceptable.

 

Conclusion

 

Acquiring off-plan properties can be a lucrative form of investment, however it is important that buyers conduct the essential due diligence on the specific project, the developer and the SPA before making such an investment.

 

Given the potential risks involved in such an investment, potential buyers of off-plan property in Dubai should seek the advice of a qualified lawyer in reviewing and explaining the terms and provisions of an SPA prior to signing. ■

 

VARA Compliance and Risk Management Rulebook

The Virtual Assets Regulatory Authority (VARA) is a regulatory body established by the government of Dubai to oversee and regulate the virtual assets industry. In line with its mandate, VARA has issued a number of rule books, in particular the Compliance and Risk Management Rulebook (CRM), which sets out the regulatory framework for virtual asset service providers (VASPs) operating in Dubai. The purpose of this brief is to provide an overview of the CRM, and to analyze its implications for VASPs operating in Dubai.

 

I. Overview of the Compliance and Risk Management Rulebook

 

The CRM is a comprehensive regulatory framework that sets out the requirements and standards that VASPs must comply with to operate in Dubai. The CRM covers a wide range of issues, including licensing, customer due diligence, risk management, compliance, and reporting.

 

A. Licensing Requirements

 

All VASPs operating in Dubai must be licensed by VARA. To obtain a license from VARA, VASPs must meet a number of requirements, including:

 

  • demonstrating that they have adequate financial resources to operate their business;
  • implementing robust customer due diligence procedures;
  • having effective policies and procedures for managing risks associated with virtual assets;
  • having systems in place to detect and prevent money laundering and terrorist financing;
  • having effective governance and internal controls; and
  • ensuring that their senior management and staff are fit and proper to carry out their roles.

 

B. Customer Due Diligence

 

The CRM requires VASPs to implement robust customer due diligence (CDD) procedures to identify and verify the identity of their customers. The rulebook sets out minimum requirements for CDD, which include:

 

  • obtaining and verifying the customer’s identity;
  • obtaining information about the purpose and nature of the business relationship;
  • conducting ongoing monitoring of the customer’s transactions and activities; and
  • having systems in place to detect and report suspicious transactions either linked to money laundering or financing of terrorism.

 

While the virtual asset ecosystem relies on complete anonymity through decentralized platforms and exchanges, private wallets, and other types of products and services that enable or allow for reduced transparency and increased obfuscation of fund flows, the CDD requirements set forth in the CRM require VASPs to ensure that they understand the nature of their relationships with their customers prior to commencing business with them. It will be interesting to see how VASPS in Dubai, in particular VASPS that are not providing exchange or custody services, will comply with the CDD requirements set forth in the CRM.

 

C. Risk Management

 

VASPs must have effective risk management policies and procedures in place to identify, assess, and mitigate the risks associated with virtual assets. The CRM sets out the minimum requirements for risk management, which include:

 

  • conducting a risk assessment of the VASPs’ business and customers;
  • having policies and procedures for managing the risks identified in the risk assessment;
  • having effective systems in place to monitor and manage the risks associated with virtual assets; and
  • regularly review and update the VASPs’ risk management policies and procedures.

 

D. Compliance

 

VASPs must put in place and maintain effective compliance policies and procedures to ensure that they comply with all applicable laws, regulations, and standards. The CRM sets out certain minimum requirements, which include:

 

  • having a compliance officer who is responsible for overseeing the VASPs’ compliance program;
  • having effective policies and procedures for monitoring and reporting on compliance issues;
  • providing regular training to staff on compliance matters; and
  • conducting regular internal audits of the VASPs’ compliance programs.

 

E. Reporting

 

The CRM requires VASPs to provide regular reports to VARA on their activities and compliance. The CRM sets out the requirements for reporting, which include:

 

  • providing regular financial statements and other reports to VARA;
  • reporting any suspicious transactions or activities to VARA;
  • providing regular updates on the VASPs’ risk management and compliance program; and
  • providing any other information or reports that VARA may require.

 

We consider that this is a positive step in light of the myriad of scandals caused by VASPs elsewhere and VARA’s initiative in advancing a comprehensive and sound regulatory and compliance framework is welcome.

 

Implications for VASPs

 

The CRM has significant implications for VASPs operating in Dubai. VASPs must comply with the CRM’s requirements to obtain and maintain their license to operate in Dubai.

 

A. Increased Compliance Costs

 

Complying with the CRM will require VASPs to incur significant compliance costs. VASPs must invest in robust compliance, risk management, and governance systems, as well as in training and educating their staff on compliance matters. This may require VASPs to hire additional staff, implement new systems and procedures, and incur other costs.

 

B. Increased Regulatory Scrutiny

 

VASPs operating in Dubai will be subject to increased regulatory scrutiny and oversight as a result of the CRM. VARA will monitor VASPs to ensure that they comply with the CRM’s requirements and may conduct regular inspections and audits to assess compliance.

 

C. Improved Customer Protection

 

The aim of the CRM is to improve customer protection by requiring VASPs to implement robust customer due diligence procedures and other risk management measures. This will help to prevent money laundering, terrorist financing, and other financial crimes, which will enhance the integrity of the virtual assets industry and protect customers from financial harm.

 

D. Increased Confidence in the Virtual Assets Industry

 

The CRM further aims to enhance the credibility and reputation of the virtual assets industry in Dubai. By setting clear regulatory standards and requirements, the CRM will help to increase public confidence in the industry and attract more investors and businesses to Dubai’s virtual assets market.

 

II. Conclusion

 

The CRM provides a comprehensive regulatory framework that sets out the requirements and standards that VASPs must comply with to operate in Dubai. The CRM aims to improve customer protection, enhance the integrity of the virtual assets industry, and increase public confidence in the industry. However, compliance with the CRM will require VASPs to incur significant compliance costs. VASPs should carefully review the CRMs requirements and ensure that they have robust compliance, risk management, and governance systems in place to meet these requirements.■

Corporate Criminal Liability in the UAE and the Duty to Report Crime

Introduction

 

Recent years have seen the UAE making regular updates to its laws in order to guarantee a legal regime that is forward-looking, and consistent with international standards and principles. The leaders of the UAE have been particularly cognizant of the need to have a robust criminal law regime to encourage legitimacy in business, and dissuade any unscrupulous activities that could reflect negatively on the UAE as a determined and fast-developing economy. This is especially true of Dubai, whose ruler, HH Sheikh Mohammed bin Rashid Al Maktoum, recently unveiled plans to catapult Dubai into the top three cities by economic strength by 2033, and to place it within the top four global financial centres.

 

In such circumstances, it is particularly important for companies based in and operating out of the UAE to stay abreast of legislation which penalises criminal conduct of directors, employees and other representatives. Crimes that are more relevant for corporate entities would be fraud, bribery, forgery, and money laundering.

 

Brief overview of the criminal justice system 

 

All laws in the UAE are codified, and there is no system of stare decisis or binding precedent, as understood in a common law jurisdiction, that is followed. Consequently, each case is decided on its own merits, though previous decisions may serve as useful guide and have some persuasive effect on the courts.

 

The principle that no one shall be punished for any act which did not constitute a criminal offence under the law at the time when it was committed is safeguarded in Article 27 of the Federal Constitution which states that ‘[l]aw shall define crime and penalties. [n]o penalty shall be inflicted for any act performed or abandoned before the enactment of the law stipulating it.’

 

Additionally, although the UAE law has not expressly recognised traditional common law standards of proof such as the balance of probabilities test in civil claims, or the beyond reasonable doubt standard for criminal matters, the courts in their decisions have consistently reiterated that allegations in criminal cases must be proven to a degree that leaves no reasonable doubt.

 

In terms of the Criminal Procedure Code, the public prosecution has exclusive jurisdiction to lodge and pursue criminal cases, excluding cases otherwise specified by law.  Cases relating to any criminal offence will generally be filed and prosecuted by the public prosecution before the criminal courts of first instance (save for example, certain crimes involving national security which will be heard directly by the Union Supreme Court). In practice, when presented with complex crimes or crimes which heavily feature commercial aspects, the court will appoint an expert to conduct an inquiry and submit a report to the court with findings and recommendations. More often than not, the courts adopt the view of the expert, unless there are serious errors which are evident on the face of the record.

 

Can companies in the UAE be held liable for criminal conduct of employees?

 

Juristic persons, including companies based in the UAE, can attract liability for offences committed by directors, employees and other agents. Federal Decree Law No. 32/2021 On Commercial Companies (the Companies Law) provides that companies shall be liable for damage caused due to unlawful acts committed by the company’s chairman and board members while managing the company. The Companies Law also provides for personal liability of board members and executive management of companies to the company, shareholders, and third parties, for acts of fraud and abuse of power.

 

Federal Decree Law No. 31/2021 on the Issuance of the Crimes and Penalties Law (the Penal Code) goes beyond the provisions of the Companies Law which appears to be limited to acts of the company chairman, board, and executive management. Article 66 of the Penal Code provides that juristic persons shall be criminally liable for crimes committed by their representatives, directors, or agents acting on their behalf or in their names. Although the law does not expressly mention “employees”, it is likely that a court in the UAE would interpret “representative” or “agent” to include an employee acting on behalf of the company. The provision clarified that juristic entities may only be sentences to a fine, confiscation and other penalties prescribed by law. Where the law provides for a principal penalty other than a fine, the penalty for juristic persons would be restricted to a fine not exceeding AED 5 million, unless otherwise provided by law.

 

Corporate criminal liability is also recognised under Federal Decree Law No. 20/2018 on Combating Money Laundering Crimes, the Financing of Terrorism and Financing of Unlawful Organisations (the Anti-Money Laundering Law), which states that the legal person can be criminally responsible for the crime if it is committed in its name or for its account intentionally.

 

While the position in some other jurisdictions is that only the criminal acts of a senior person representing the company’s controlling mind and will can incur liability on the company, the law of the UAE does not make such distinction. All that is required for a company to attract liability is for the individual concerned to have committed the criminal act in the company’s name or when acting on behalf of the company. As noted above, the courts are likely to interpret the provisions widely to include employees exercising some level of managerial powers and acting on behalf of the company. However, where an employee commits a criminal offence in the pursuance of some personal interest or agenda, the company will not be criminally liable.

 

Do companies have a duty to report crimes or suspicious transactions?

 

It is important to note that the Penal Code imposes a general duty on all persons who have knowledge of a crime to report it to the competent authorities, and failure to do so is a punishable offence. Where there is concern of potential money laundering, the Anti-Money Laundering Law imposes a specific duty on financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs) who suspect, or have reasonable grounds to suspect, that a transaction or funds constitute proceeds of crime, to report to the Financial Intelligence Unit (FIU) of the Central Bank “without delay” and provide it with a detailed report including all data and information on such transaction and the connected parties. The Anti-Money Laundering Regulations define DNFBPs to include independent legal professionals and independent accountants. Article 251 of the Companies Law imposes a separate obligation on auditors of Public Joint Stock Companies to notify the Securities and Commodities Authority within 10 days of detecting any crime. Article 104 (1) of the Companies Law provides that the provisions on Joint Stock Companies apply to Limited Liability Companies (LLCs) to the extent they are consistent with their nature. Therefore, auditors of LLCs may also be bound by the obligation to report crimes under Article 251.

 

Is it still money laundering if the proceeds were obtained overseas?

 

The provisions of the Anti-Money Laundering Law apply where any person willfully does any of the acts mentioned under Article 2 (1) with proceeds or funds having knowledge that the proceeds or funds are the proceeds of a Predicate Offence. The law defines Predicate Offence as any act which constitutes a felony or misdemeanor under the UAE law, whether it is committed within the UAE or elsewhere, provided it is punishable in the State where it was committed as well as in the UAE.

 

When should a crime be reported?

 

The Penal Code is silent on the time-frame within which a crime must be reported. The Anti-Money Laundering Law only states that financial institutions and DNFBPs (which includes independent auditors) must report suspicious transactions to the FIU “without delay”, and does not specify any further.  On the other hand, the Companies Law requires company auditors to report any crime within 10 days of detecting the crime. Read with the Companies Law, it is likely that the duty imposed on independent auditors to report “without delay” under the Anti-Money Laundering Law means that the report must be made within 10 days or less.

 

It is also important to note that while the Penal Code and the Companies Law require crimes or violations of the law to be reported, the duty to report under the Anti-Money Laundering Law is much wider and requires the relevant persons to report upon suspicion. This is in keeping with the intention of the drafters of the Anti-Money Laundering Law, that is the strict deterrence of any money laundering activities in the UAE. ■

Family Governance in Trust Structures

When contemplating a family wealth structure that is intended to endure, such as a family trust or foundation, it is important to consider how the structure will be governed, particularly in the longer term after the founder’s lifetime. Governance mechanisms that are designed to encourage ongoing family involvement in the structure have proven to be effective at averting second, third and future generation conflicts that can undermine the structure. The most common family governance mechanisms are the family charter and the family council. This inBrief will provide an introduction to those mechanisms and explain why they can be useful for many families.

 

Trust Governance versus Family Governance

 

Most family trusts are fully discretionary, meaning the trustees are given very broad discretion to manage the trust assets and distributions. Such trusts are also normally made subject to some common governance and control mechanisms which set out either firm rules or soft guidance for the trustees. Those mechanisms typically consist of the terms of the trust deed, the appointment of a trust protector, and the issuance of a letter of wishes. These governance structures are discussed in more detail in our inBrief “A Matter of Some Discretion: Controlling Your Trust.”

 

The usual control mechanisms for a trust are a necessary starting point; however, if the trust is intended to survive through multiple generations and successfully serve the needs of the family, family governance becomes very important. When a family wealth structure fails over time, it is most often because of relationship breakdown among family members, no matter how well-drafted the trust deed was or how effective the tax planning. It would be rare, for instance, for a founder to be able to successfully lay out the detailed investment and distribution scheme for a trust beyond one or two generations into the future, after which that exercise becomes overly cumbersome and complex and will probably be incorrect.

 

The main purpose of a family governance structure is to enable long term harmony between family members; it achieves this by keeping all family members engaged with and informed about the trust, and by placing some important decision-making powers in their hands.  When a grandchild or great-grandchild is a beneficiary of a trust, they will likely lack personal context around the ancestor (founder) who established it and why, and they may quite naturally view the trust through the lens of self-interest without any broader family context.  They may not know or care about the ongoing future success of the structure. The natural outcome over time is conflict between family members or with the trustees or both.

 

Family governance mechanisms can be especially important when there is a family business that is owned by the trust, since trust ownership can lead to a lessening of family members’ emotional attachment to the business over time. There is also a natural divide between passive family member beneficiaries, and family members who are involved in the family business.

 

Good family governance seeks to remedy these disconnects and prevent that sort of conflict by ensuring each family beneficiary, over generations, is kept informed about the structure and has a voice along with other family members in decision-making for the trust.

 

Family Charter and Family Council

 

A family governance structure sets out how a family makes decisions in the context of a wealth structure like a family trust, how family members are kept informed, and how family governance integrates with other structures such as a trust or family business. Family governance usually consists of two main components: the family charter and the family council.

 

The Family Charter

 

The family charter is essentially the family’s constitution or code of conduct. Its contents are unique to the particular family’s needs and wishes and should retain some flexibility for amendments so it can adapt to future needs. It is a document that should have moral and ethical value to the family, while operationally it is intended to set out how family decisions will be made, when such decisions are required, and some principles or guidelines to inform those decisions. It has been aptly described as a bridge between family and business, or family and trust. Some of the topics typically addressed in a family charter include[1]: a preamble for important context; the family history; core values or goals of the family; adherence by family members; formation of a family council and its functions, decision making and voting rights; relationship with the family trust/business structure; family philanthropic/charity/education goals; conflict resolution; and procedures to amend the family charter.

 

Although family charters are generally not intended to be legally binding documents, that possibility is not ruled out. While it is not an area that has been sufficiently tested given the private nature of such documents, there is a growing belief that family charters can be legally binding (at least in part) if they are drafted and executed in a manner that indicates a clear intention to be bound.  Even where a family charter is not legally binding, it can of course remain very morally persuasive.  Importantly, it can carry tangible consequences by properly linking compliance with the terms of the family charter to one’s ongoing entitlement to benefits from a family wealth structure.  That is, a family member might be given reduced or suspended entitlements to receive trust distributions in case of non-compliance with requirements set out in a family charter, and such consequences can be given effect by a family council using influence or control that it enjoys over the role of trust protector, for example.

 

The Family Council

 

If the family charter is the family constitution, then the family council is the parliament or board of directors, made up of representative members of the family.  The family council is tasked with giving effect to the family charter, making decisions on behalf of the family as a whole, balancing competing interests, and communicating trust and company business to the other family members who otherwise would not have visibility into or involvement with the family wealth structures.

 

The family council can build harmony by communicating with the broader family and representing their interests at family council meetings thereby giving them a voice through representation, among other things.  It can also advise on how and when to make distributions equitably across branches of the family and across generations, taking into account the purpose of the structure, individual needs, or current versus future needs.  Sometimes the family council can also be a useful vehicle to track informal shared ownership arrangements in which one family member may be tasked with owning property for the broader benefit of other family members, in an arrangement that relies on family integrity rather than legally enforceable obligations.  Such informal arrangements can be very beneficial because they do not generally trigger reporting, disclosure, registration, attribution, FATCA/CRS, tax, and other consequences that arise when formal trusts are created.  This is a benefit of greater family strength, and is one way in which tangible value is produced by good family governance.

 

Integration of Family Governance

 

As noted above, family trusts are usually the sole creation of a founder with little or no input from family members (although that dictatorial approach seems to be softening these days). One way to promote the success of a family trust over multiple generations is to have the founder consult representatives of the family members during the trust planning process, and in particular in the family charter drafting process. The trust document may integrate the family charter and family council and include ways for the family representatives to select, remove and replace the trustees, or to act collectively as trust protector or trustee advisory committee.   It could also include dispute resolution provisions to avoid future litigation among beneficiaries and trustees.  Allowing for future members of a family council to exercise control over a trust, in the role of protector or otherwise, ensures that the trust’s operations remain flexible over time and are adapted to best serve the family through evolving needs and successive generations.  Having room to adapt to changing family and legal environments is crucial to the long-term success of any wealth structure.

 

Vesting trust protector and advisor powers in a diffuse, multi-person committee can also be important from a tax planning point of view.  Where only one person has effective control over the trust in the role of protector, there is a risk that trust income will be taxable in such person’s hands, or that the trust itself will be deemed tax resident in the place of such person’s residence.

 

This inBrief has focused on family governance in the context of a family trust. We would note that the same concepts apply to private foundations as well, and to family businesses through the terms of shareholders’ agreements, partnership agreements, or other comparable constitutional documents.   In all cases, the goal is to provide for a vehicle through which family interests are represented and communicated, in an effort to achieve a fair and sustainable balance between family interests versus business interests, and immediate needs versus future needs.

 

Finally, although our focus as a firm is to ensure a robust legal and tax structure, we would be remiss if we did not acknowledge the fact that family governance structures can be valuable beyond the wealth management context, and we encourage families to capture their broader beliefs, values and goals and reflect them in their family charters.

 

Planning with trusts, foundations and business structures is complex, and particularly so in the cross-border context. It is critical to obtain legal and tax advice from experienced professionals before embarking on such planning. Please don’t hesitate to contact us and we will be delighted to discuss how we can assist.■

 

–

 

[1] This is not an exhaustive list of topics that can be included in a family charter. For further information on the drafting and substance of family charters, please contact the author.

Invest in Start-ups in Canada: Qualify for Canadian Citizenship

Venture capital (investing in startups) has been a popular form of investment for many over the years. In recent years, Canada’s Start-up Visa Program has offered Canadian permanent residency (leading to Canadian citizenship upon qualification) to immigrant investors as well as immigrant entrepreneurs with the skills and potential to build businesses in Canada that are innovative; can create jobs for Canadians; and can compete on a global scale.

 

 

A qualifying immigrant investor can now invest a minimum of CAD115,000 in a qualifying Angel Fund and a qualifying startup (and an approved immigrant entrepreneur can manage and operate such start-up) in order to qualify for Canadian permanent residency. Based on past cases, it takes between two to two and a half years to process such application and to obtain Canadian residency if all proceeds in the ordinary course. Such investor and entrepreneur could further qualify for Canadian citizenship by remaining in Canada for three years (during a five year residency).

 

 

Under this program, designated organizations (certain venture capital funds, angel investor groups or business incubators) choose which startup investment business proposals to review and to invest in. The startup does not even have to be in Canada: it can be a foreign startup and then the immigrant entrepreneur can relocate with the start-up to Canada and become eligible for Canadian residency. Each designated organization has its own intake process for proposals and criteria used to assess the proposals. If a designated organization chooses to support the start-up business idea, it will give applicants a Letter of Support. For example, for an incubator, such Letter of Support will mean that the incubator is willing to accept the start-up into its program and help the business grow in Canada while providing guidance and expertise. As a result, the investor and entrepreneur are not alone in growing the start-up: they receive support and direction from the incubator, in addition to obtaining Canadian residency leading to Canadian citizenship upon qualification.

 

Finally, it is important to note that the ability to communicate and work in English, French or both languages will help a start-up succeed in Canada. As a result, applicants will have to take a language test from an approved agency. Applicants will also need to give proof that they have sufficient initial funds to support themselves and their dependents after arrival in Canada. For example, this requirement can be satisfied for a family of four if an applicant and family bring CAD25,000 to Canada. ■