Author: afridi-angell

COVID-19: Entry into the Emirates of Dubai and Abu Dhabi

On 12 September 2020, the UAE Ministry of Health and Prevention (MoHAP) reported 1007 new COVID-19 cases in the UAE. With the number of cases rising both within the UAE and in most other countries, the UAE government has reiterated the importance of adhering to preventive guidelines and has further placed safeguards, particularly in Abu Dhabi, to ensure that those traveling to the UAE are confined to prevent the transmission of the virus.

 

Currently, individuals traveling to Abu Dhabi from outside the UAE must first update the details of their visas on the website of Federal Authority of Identity and Citizenship (ICA) and confirm their entry to the UAE. (The same is true of passengers arriving in the UAE via airports other than those in Dubai). An instant response message from the ICA with a “green status” indicates that the entry has been confirmed by the ICA. A message with a “red status” indicates that the request to enter the UAE has been rejected and the applicant must wait for a few days to re-apply. Travelers who are not UAE nationals or holders of UAE residence visas are not permitted to enter. Following receipt of the “green status” message, the traveler can proceed to book a flight and comply with any additional requirements of the airline. Most important, a negative COVID-19 PCR (Polymerase Chain Reaction) test result must be provided at the airport and must not have been taken more than 96 hours prior to departure. The test result must be printed and be either in English or Arabic. The test must be conducted at a UAE government approved testing center.

 

Upon arrival at Abu Dhabi airport, travelers will be tested again for COVID-19. Unlike in Dubai, passengers arriving from certain jurisdictions (no published list is as yet available) are made subject to a mandatory institutional quarantine of 14 days (irrespective of the test results, whether positive or negative) at a government facility. The traveler is also mandated to wear a tracker provided by the health officials. After 12 days of the 14-day quarantine, travelers are required to re-test themselves and with the confirmation of a negative test result (usually received by message) they are permitted to return the tracker and formally end the quarantine. Additionally, upon entry, travelers are required to sign an undertaking at Abu Dhabi airport to comply with the rules and guidelines of the UAE authorities and also to install the AlHosn App to assist the authorities in contact tracing.

 

Last month, the Dubai government announced that travelers by air to Dubai are required to first obtain approval online from the General Directorate of Residency and Foreigners Affairs in Dubai (GDRFA). Travelers (those having a Dubai residence visa) must now apply for the approval via the new smart platform of GDRFA Dubai on https://smart.gdrfad.gov.ae/ and provide the details of their visas. Travelers must submit to the airline and the airport a printed negative COVID-19 PCR test result in English or Arabic which again must not have been taken more than 96 hours prior to departure. Upon arrival, travelers will be tested again at the Dubai airports. Post-arrival, a home-quarantine is mandatory in Dubai until the results of the PCR test are obtained, if negative. However, a traveler who tests positive must self-quarantine for 14 days from the time of arrival in Dubai. Similar to Abu Dhabi, a signed undertaking and a declaration to abide by the rules and install the DXB Smart App, a contact tracing app, must be submitted at the time of arrival at Dubai airports. Unlike Abu Dhabi, foreigners without UAE residence visas may enter the UAE via Dubai’s airports.

 

Within the UAE, those traveling into Abu Dhabi from any other Emirate must also provide a negative PCR test result or a negative DPI test (Diffractive Phase Interferometry) both conducted no earlier than 48 hours prior to their entry into Abu Dhabi. Individuals who will then stay in Abu Dhabi for six consecutive days or more must also take a PCR test on the sixth day of each visit to the Emirate.

 

The UAE government has further reiterated that failing to comply with the rules and guidelines shall attract heavy fines and can also lead to criminal prosecution if the offense is repeated. ■

DIFC Increases Scope and Fines

The DIFC has expanded the scope of the common reporting standards, meaning more people must make filings plus increased fines for non-compliance.

 

With effect from 16 August 2020, DIFC Law 6 of 2020 (the CRS Law Amendment Law) was enacted to amend the Common Reporting Standard (CRS) Law, DIFC Law 2 of 2018 (the CRS Law). This enactment follows the issuance of the new CRS Regulations, which came into effect on 30 July 2020.

 

Briefly, the CRS Law serves to apply CRS on the financial institutions within the DIFC (known as the ‘Reporting Financial Institutions’ in the CRS Law). CRS is a standard developed by the Organisation for Economic Cooperation and Development (OECD) by which the DIFC (and other participating jurisdictions) are required to obtain financial account information from financial institutions and automatically exchange them with the other participating jurisdictions on an annual basis. Under the CRS Law, Reporting Financial Institutions that fail to report such information shall be subject to a fine for non-compliance, ranging between USD 280 (with an additional fine per each day of non-compliance up to a limit) for a minor non-compliance and USD 70,000 for a significant non-compliance. The main purpose behind CRS is to limit tax evasion.

 

The CRS Law Amendment Law made the following changes to the CRS Law:

 

  • The CRS Law now additionally applies to a Controlling Person (as defined in the CRS Law). This means that where an account with the Reporting Financial Institution is held by an entity, the natural persons exercising control over such entity are also subject to the CRS Law.

 

  • New offences and penalties are introduced in the CRS Law. An account holder or a Controlling Person that provides inaccurate or incorrect self-certifications where he knew or ought to have known to be inaccurate or incorrect shall be fined USD 5,500. A Reporting Financial Institution that fails to obtain valid self-certifications when a new account is set up shall be fined USD 300.

 

The amendments to the CRS Law are aimed to elevate the compliance requirements of Reporting Financial Institutions thereby aligning DIFC’s legal and regulatory framework with international best practice. ■

New Law on Registering Security over Movable Assets

Federal Law No. 4 of 2020 on Guaranteeing Rights Related to Movables (the New Mortgage Law), which came into effect on 1 June 2020, has updated the regime for registering security interests over movable assets in the UAE.

 

The new regime

 

The New Mortgage Law repealed Federal Law No. 20 of 2016 on Mortgaging of Movable Property as Security for Debts (the Old Mortgage Law). The Old Mortgage Law had been a welcome development as it introduced a whole new regime for registering a security interest over movable assets located in the UAE and addressed a number of shortcomings inherent under the earlier security registration regime, including the ability to create a security interest akin to a common law “floating charge” over future assets, dispensing with the requirement to deliver possession of the secured asset, the ability to perfect a security interest through registration, and a public register for registered security interests.

 

Whilst the New Mortgage Law retains most of the positive features of the Old Mortgage Law (as discussed above), it contains some key differences (as outlined below). The most significant differences are the introduction of a new security registry, to be established by a resolution of the Council of Ministers, and new implementing regulations (the Implementing Regulations) to be issued by the Ministry of Finance, which will regulate the operation of the new security registry. The New Mortgage Law provides that the Implementing Regulations will be issued within six months of the publication date of the New Mortgage Law (i.e., by 2 December 2020). This new security registry replaces the current Emirates Movable Collateral Registry (EMCR) which is operated by the Emirates Development Bank.

 

Key developments

 

Whilst the New Mortgage Law largely replicates the provisions of the Old Mortgage Law, it also introduces some other key changes including:

 

1.  The list of assets that cannot be registered in the security register has been reduced and no longer includes (i) objects intended for personal or home use necessary for the person and his dependents, unless used as a mortgaged property to finance the purchase thereof, (ii) entitlements of the insured or beneficiary of an insurance contract, unless these entitlements are considered proceeds of the security asset and (iii) future rights entailed from inheritance or Will.

 

2. The definition of an accounts receivable (i.e., a right to receive money owed to the security provider by a third party) now specifically excludes the right to collect payments established in endorsable deeds, the right to collect payments deposited in accounts payable at the banks and the right to collect payments under securities/financial instruments.

 

3. It is now possible to register a security interest before the conclusion of the relevant security contract (i.e., the agreement creating the security interest), provided the security provider has given written consent to the same.

 

4. If secured assets are sold or disposed of in the ordinary course of business, then they shall pass to the purchaser free from any security interest, provided that the purchaser was unaware of the secured party’s interest over the security assets, at the time that it entered into the sale agreement. This is in contrast to the position under the Old Mortgage Law, where the goods could be disposed of (without any security interest) even if the purchaser was aware of the security interest, provided that the disposal was made at market price.

 

5. Where the security interest relates to acquisition financing (for example, of equipment, inventory or IP rights), the security interest over the financed assets must be registered in the register within seven working days of the security provider gaining possession of the same.

 

6. In the event that multiple security interests are enforceable over the same fungible product or mass, these rights shall have equal priority status over the product or the mass and every secured party may claim their right from the product or the mass at the ratio of their security interest to the mass or the product at the time of integration.

 

7. A security interest under the provisions of the New Mortgage Law shall survive commencement of any bankruptcy procedures against the security provider and shall remain as such, and it shall retain the priority that it had prior to the commencement of the bankruptcy procedures. This is in contrast to the provisions of the Old Mortgage Law, which provided that none of the execution procedures on the mortgaged property under the Old Mortgage Law would be valid, in case of commencement of bankruptcy procedures against the security provider. This will be of particular concern to lenders who may need to enforce their security interests against bankrupt security providers.

 

Implementing Regulations

 

Like the Old Mortgage Law, the New Mortgage Law leaves a number of key procedural matters to be addressed by the Implementing Regulations. These include public access rights to the register, the requirements for registering a security interest in the security register, and additional priority terms associated with certain classes of security interests or assets. Whether the popular and useful features of the previous movable registration regime will be continued under the New Mortgage Law will be clear only once the Implementing Regulations have been issued.

 

Status of registered security in EMCR

 

Unfortunately, the New Mortgage Law makes no references to the security registered on the EMCR or the legal status of the same. The New Mortgage Law provides that any regulations, resolutions and decisions implemented under the Old Mortgage Law shall continue (until replaced by the Implementing Regulations), to the extent they do not conflict with the provisions of the New Mortgage Law. Combined with the fact that the Old Mortgage Law has been repealed in its entirety, this means that there is currently some uncertainty regarding the rights of a secured party which holds a registered security interest on the EMCR, in accordance with the Old Mortgage Law. In particular, it is not clear how the Courts would treat an application under the Old Mortgage Law (which has been repealed) to enforce a security interest registered on the EMCR. This issue needs to be urgently addressed, possibly through an amendment to the New Mortgage Law, providing recognition of the existing registered security rights under the Old Mortgage Law.

 

As a worst-case scenario, secured parties could find that their EMCR registered security interest does not give them any enforceability or other benefits under the Old Mortgage Law (e.g., as regards a security akin to a floating charge) or the New Mortgage Law. In this case the only option would be to enforce their contractual rights under the provisions of the relevant security agreements. This can cause additional complications for enforcement, particularly in the case of security agreements that are governed by foreign laws.

 

Actions by secured parties

 

In light of the above, parties with security interests registered on the EMCR should take urgent action, including:

 

  • Ensuring that the all security agreements are in compliance with their governing laws.

 

  • Remaining alert regarding further developments under the New Mortgage Law, particularly the issuance of the Implementing Regulations, so as to understand the new requirements for registering a security interest and ensure that they register any security interest with the new security registry within the six months of the Implementing Regulations coming into force (as required under the New Mortgage Law).

 

  • Undertaking a thorough review of all security interests registered on the EMCR, to understand their enforcement risk exposure. ■

 

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We are continuing to monitor developments with the New Mortgage Law and will provide further updates in due course. Please feel free to contact us should you wish to discuss any of the issues raised in this InBrief. 

 

 

Recent Amendments to the Commercial Agency Law

As many will know, Federal Law 18 of 1981 (the Commercial Agency Law; or CAL) regulates agency, distributorship and franchise relationships in the UAE, regardless of the nomenclature used to describe them.  The CAL requires that all commercial agency agreements be registered with the UAE Ministry of Economy and further offers the distributor (termed an “agent” under the CAL) protection from termination (and a guarantee of exclusivity) once a commercial agency agreement is so registered in accordance with the CAL.

 

Until recently, it was the case that in order to be registered as a commercial agent under the CAL, the proposed agent had to be either a natural person holding UAE nationality, or a body corporate ultimately wholly owned by UAE nationals.

 

On 28 May 2020, UAE Federal Law 11 of 2020 (the CAL Amendment) introduced certain amendments to the CAL. Most notably, the CAL Amendment extends the types of legal persons that can be registered as commercial agents to include the following:

 

a) a public joint stock company incorporated in the UAE; and

 

b) a private company (for example, a limited liability company) wholly owned by a UAE public joint stock company.

 

The CAL Amendment provides that to the extent an application for registration of a commercial agency is submitted by an entity falling within either (a) or (b), the requirement under the CAL for a body corporate commercial agent to be wholly owned by UAE nationals will not apply. Instead, such an applicant can qualify for registration under the CAL provided its capital is ultimately owned at least 51% by UAE nationals.

 

Amongst the objectives of the CAL Amendment is to encourage established family owned trading businesses in the UAE to list on the UAE public markets, thereby improving the depth and breadth of the UAE equity capital markets. The CAL Amendment is therefore an important (and arguably revolutionary) change and removes a key impediment to commercial agents registered under the CAL from seeking access to outside equity through the UAE public markets.

 

The CAL Amendment contemplates the issuance of regulations to be issued by the UAE Ministry of Economy and thus we anticipate additional clarity to the UAE commercial agency regime in the near future.■

 

Repeal of UAE Boycott of Israel Law

Following the announcement of the Abraham Accord with Israel, President His Highness Sheikh Khalifa bin Zayed Al Nahyan issued Federal Decree Law 4 of 2020, repealing Federal Law 15 of 1972 (the Boycott Law).

 

Brief overview of the Boycott Law

 

Pursuant to the Boycott Law, the United Arab Emirates (UAE) joined the Arab League boycott of Israel (the Boycott).

 

Under the Boycott Law, the following activities were prohibited:

 

  • entering into any agreements, directly or indirectly, with individuals or bodies corporate in Israel or those having Israeli nationality; and

 

  • trading of any nature of goods produced in Israel, wholly or partially, or manufactured using any Israeli material.

 

The UAE Boycott Law applied to all companies incorporated or operating in the UAE (including companies in the free zones of the UAE).

 

The UAE Boycott Law implemented a primary, secondary and tertiary boycott of Israel. The terms “primary,” “secondary” and “tertiary” were not used in the UAE Boycott Law. However, the primary boycott was generally viewed as a boycott by the UAE against Israeli products, services, nationals and companies and on direct trade with Israel. The secondary boycott was generally viewed as a boycott against parties that do business with Israel (who are placed on a blacklist), and the tertiary boycott was generally viewed as a boycott of parties that do business with blacklisted parties.

 

The policy of the UAE with regard to the Boycott was formally amended pursuant to Cabinet Resolution 462/17M of 1995 dated 20 November 1995 (the Resolution). Through the Resolution, the UAE Federal Cabinet declared that the UAE would no longer enforce the secondary and tertiary aspects of the Boycott.

 

Repeal of the Boycott Law

 

The repeal of the Boycott law will allow individuals and companies in the UAE to enter into agreements with parties in Israel, to transact business and to import and trade in Israeli goods and products. ■

UAE Foreign Direct Investment Law vs GCC Customs Exemption

As reported in our inBrief of 15 April 2020, Federal Decree-Law 19 of 2018 on Foreign Direct Investment (the FDI Law) permits majority foreign investment in certain business sectors and activities. Although majority ownership is attractive, it is not the only factor that a potential foreign direct investor should consider. One additional factor is whether the proposed business would qualify for the 5% GCC customs duty exemption that is discussed below. Customs-exempt access to the larger GCC market could be a critical factor to the success of a business.

 

FDI Law

Any company incorporated under the FDI Law is subject to the restriction stated in Article 8(1) of the FDI Law.

 

Article 8(1) of the FDI Law states as follows:

 

Article 8 – Benefits offered to Foreign Direct Investment Projects

 

  • Foreign Direct Investment companies licensed hereunder shall be subject to the law on the treatment of national companies within the limits prescribed by the legislation in force in the United Arab Emirates and the international agreements to which the United Arab Emirates is party.

 

The legislation in force in the UAE and the international agreements to which the UAE is party would include the measures taken by the UAE pursuant to the GCC Economic Agreement and the GCC Common Customs Law. The GCC, formally known as the Cooperation Council of the Arab States of the Gulf, includes as members Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

 

Unified Economic Agreement 1981

 

Since the formation of the GCC in 1981, national treatment for goods produced in a GCC member state has been accorded by the other GCC member states only if certain ownership and value-added criteria are satisfied. Specifically, Article 3 of the Unified Economic Agreement 1981 states as follows:

 

1. For products of national origin to qualify as national manufactured products, the value-added ensuing from their production in Member States shall not be less than 40% of their final value as at the termination of the production phase. In addition, Member States citizens’ share in the ownership of the producing plant shall not be less than 51%.

 

2. Every item enjoying exemption hereby shall be accompanied by a certificate of origin duly authenticated by the appropriate government agency concerned.

(emphasis added)

 

This requirement that GCC citizens own no less than 51% of the manufacturing facility in question remains in effect today. Therefore, exports of a company formed under the FDI Law with non-GCC ownership in excess of 49% would not be eligible for national treatment when exported to another GCC member state.

 

Economic Agreement 2001

 

Although the Unified Economic Agreement 1981 was replaced by the Economic Agreement 2001, the national ownership requirement stated above was kept in effect. Article 1 of the Economic Agreement 2001 states as follows:

 

Article 1 – The Customs Union

 

Trade between the GCC member States will be conducted within the framework of a customs union that will be implemented no later than the first of January 2003. It shall include, at a minimum, the following: … 5. Goods produced in any Member State shall be accorded the same treatment as national products. 

(emphasis added)

 

However, the Economic Agreement 2001 preserved the earlier GCC ownership and value-added criteria. Specifically, Article 32 of the Economic Agreement 2001 stated as follows:

 

Article 32 – Precedence of the provisions of the Agreement

 

1. The provisions of this Agreement shall prevail if found in disagreement with local laws and regulations of the Member States.

 

2. This Agreement shall supersede the GCC Economic Agreement signed in 1981 AD (1402 AH), and the provisions contained herein shall supersede equivalent provisions set forth in bilateral agreements (between member states).

 

3. Until the GCC Customs Union is established, the provisions of Article 3 of the GCC Economic Agreement signed in 1981 AD (1402 AH) shall continue to be applied. The percentage of the added value provided for in said Article may be amended by a decision of the Financial and Economic Committee.

(emphasis added)

 

Common Customs Law of the GCC States

 

The foregoing requirements were not changed with the introduction of the GCC Customs Union, agreed in 2007 and implemented in the UAE pursuant to Federal Decree 85 of 2007 (the Common Customs Law). Article 9 of the Common Customs Law states as follows:

 

Goods entering the country shall be subject to the customs tax by virtue of the unified customs tariff and the determined fees, except for those exempted by virtue of the present law or under the Unified Economic Agreement among the countries of the Gulf Cooperation Council (GCC) or any other international agreement within the framework of the Council.

(emphasis added)

 

Thus, the Common Customs Law referred to the Economic Agreement 2001, which in turn referred to Article 3 of the Unified Economic Agreement 1981, which contained the familiar GCC ownership and value-added criteria.

 

Accordingly, formation of a company in the UAE under the FDI Law is not sufficient to grant the exports of that company Customs-free access to the rest of the GCC. Instead, the GCC ownership requirement stated in Article 3 of the Unified Economic Agreement 1981, meaning that products of a 100% foreign owned company would be ineligible for exemption of the 5% customs duty when shipped to other GCC member states. ■

DIFC – Innovation License

The Dubai International Financial Centre (DIFC) has recently launched a new type of license called an “Innovation License”. An Innovation License is available to technology and innovation start-ups for a select number of activities including technology, research and development and software houses. An Innovation License is not appropriate for start-ups who wish to conduct regulated financial activities for which a license from the Dubai Financial Services Authority is required.

 

Applicants will need to ensure compliance with all the laws of the DIFC as applicable to any other entity established in the DIFC.

 

The licensing fee for an Innovation License has been significantly subsidized to USD 1,500 per annum. As per the DIFC’s current policy, this subsidy in the licensing fee is available for the first four years and the standard licensing fee of USD 12,000 per annum shall apply thereafter.

 

A start-up will have the flexibility to lease an independent office or a co-working space/flexi desk. The number of visas which can be sponsored by the start-up will depend on the type and size of facility leased.■

 

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Afridi & Angell’s corporate department works with many DIFC companies and has extensive experience in advising such companies. Should you have any questions with respect to the innovation licence or more generally on DIFC companies, please contact one of the authors, Danielle Lobo (partner) or Saurbh Kothari (senior associate) or your usual Afridi & Angell contact.

Understanding rent to own schemes in Dubai

In the midst of the Covid-19 pandemic, Dubai continues to be a buyer-friendly property market. With property values remaining depressed and an oversupply of stock, it has been increasingly common for developers to offer incentives to potential buyers such as post-handover payment plans, DLD registration fee rebates, service charge freezes, and rent to own schemes.

 

In this inBrief, we discuss rent to own scheme and how buyers can protect themselves when entering into such schemes.

 

Rent to Own Scheme

 

Under a rent to own arrangement, the purchaser is permitted to occupy the property under a tenancy agreement with an option to purchase the property from the seller at the end of the term. If the purchaser chooses not to purchase the property, then the contract terminates at the end of the term just as a normal tenancy agreement would, subject to the purchaser forfeiting a prescribed amount (known as the option fee) and the rent paid. Given the risk of forfeiture, the purchaser should ensure that it carefully negotiates these amounts in the tenancy agreement.

 

During the rental term, the purchaser pays rent to the seller, and a portion of this rent is allocated toward payment of the purchase price with the balance being payable at the time the purchaser exercises the option to purchase the property.

 

The advantage of a rent to own scheme is that during the rental period the purchaser can save money to pay the balance of the purchase price or to arrange a mortgage. In addition, the purchaser does not have to pay the seller an initial large upfront deposit, as is the case in most deferred sales arrangements/post-handover payment plans. The purchaser will also have the benefit of the protections afforded to tenants under law just as in a normal tenancy agreement.

 

Buyer’s Protection – Dubai Land Department (DLD) Registration

 

The law requires all dispositions (i.e. sale, lease and mortgage) of real property in Dubai to be registered with the relevant authorities to be valid. If a disposition is not registered, then the law deems the disposition to be invalid and therefore unenforceable. A rent to own arrangement is a disposition of real property which is required to be registered under law.

 

The DLD maintains the registration system for such rent to own arrangements and it requires the following fees to be paid by the seller and the purchaser before registration will be accepted:

 

Fees to be paid by the seller (unless the contract requires the purchaser to pay these):

 

  • 2 per cent of the sale value;

 

  • AED10 knowledge fees; and

 

  • AED10 innovation fees.

 

Fees to be paid by the purchaser:

 

  • 2 per cent of the sale value and 0.25 per cent of the rental value

 

  • AED250 title deed issuance fee

 

  • AED100 fee for issuance of land map (AED250 if a villa or apartment)

 

  • AED40 knowledge fee at the rate of AED10 per fee

 

  • AED40 innovation fee at the rate of AED10 per fee

 

In addition, the Real Estate Registration Trustee will also charge the following fees:

 

  • if the sale value exceeds or is equal to AED500,000, then a fee of AED4,000 is payable; and

 

  • if the sale value is less than AED500,000, then a fee of AED2,000 is payable.

 

Conclusion

 

The Covid-19 pandemic has resulted in continued uncertainty in the real estate market in the UAE and worldwide. As a result, we expect that developers will continue to offer rent to own schemes in order to provide an affordable alternative to purchasing. ■

 

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If you require more detailed information, please do not hesitate to contact Shahram Safai. 

Underperforming real estate: Can REIT (funds) assist developers in the UAE?

During these unprecedented times, developers all over the world are actively looking for solutions to deal with underperforming real estate.

 

For developers in the United Arab Emirates (UAE), real estate investment funds (otherwise known as REITs) may offer a solution to the problem.

 

A REIT is a public or private investment fund which is established to invest a certain percentage (as stipulated by law) of its assets in real estate.

 

REITS are permitted onshore in the UAE under the Emirates Securities and Commodities Authority’s framework and in the freezones of the Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC).

 

In this InBrief we consider the main advantages of a REIT to a developer through:

 

a)     the developer establishing a REIT; or

 

b)    the developer entering into a joint venture with a REIT.

 

We will also highlight some of the key aspects of the law governing REITs in the UAE onshore and in the freezones of the DIFC and ADGM.

 

Option #1 – Developer establishes a REIT directly

 

For a developer, the main advantage of establishing a REIT is that the REIT will provide a source of funding to the developer which can in turn be used to develop other projects.

 

The developer achieves this by transferring its existing real estate assets into the REIT and then sells shares in the REIT to investors through initial offerings and follow on offers.

 

The developer is permitted to keep a certain percentage of the shares in the REIT – as such it does not have to sell the whole of its real estate assets to raise funds.

 

In addition, the developer will benefit from the appointment of professional experts to manage the assets of the REIT which in turn should improve the quality of the assets in the REIT.

 

Option #2 – Developer joint ventures with a REIT

 

In the UAE, it has been increasingly common to see developers joint venturing with local UAE land owners as a means of developing real estate. However, an alternative to this more traditional joint venture structure is for a developer to joint venture with a REIT.

 

From a developer’s perspective, a REIT is an advantageous joint venture partner as the REIT must strictly comply with the regulatory requirements in the UAE, and a REIT uses property management teams to professionally manage the real estate assets. Together, these provide for strong governance and enhanced transparency which in turn reduces the risk to a developer when considering a joint venture arrangement with a REIT. Such strong governance and enhanced transparency is also attractive to potential third party investors.

 

There are two main types of joint venture arrangements that a developer can enter into with a REIT.

 

The first is a joint venture between the REIT and the developer which has the purpose of constructing a project using funds obtained by the REIT. Under this model, the REIT secures funding through a public offering and then releases some of these funds in phases to fund the development costs of the joint venture partnership between the REIT and the developer to construct the project. Any unused funds from the public offering are usually invested by the REIT in conservative projects (i.e. ownership, leasing, management).

 

The second model is a sale and leaseback between a REIT and a developer. Here, the REIT purchases the underlying land to be developed from the developer and then leases the land back to the developer to construct the project. The developer gets the benefit of the sale proceeds which can be used to fund the construction of the project and the REIT gets the benefit of the income from the annual rental payments under the lease back.

 

The Law

 

In the UAE, there are three options for establishing a REIT: firstly, UAE onshore under the Emirates Securities and Commodities Authority’s framework;  secondly in the ADGM; and thirdly in the DIFC.

 

For REIT’s that are established onshore in the UAE (including onshore Dubai), the Emirates Securities and Commodities Authority’s framework is applicable. This is set out primarily in Administrative Decision 6/R.T of 2019 Concerning Real Estate.

 

Investment Fund Controls, and supplemented by Law 4 of 2000 on Emirates Securities and Commodities Authority and Cabinet Resolution 13 of 2000 Concerning the Regulations of the Functioning of the Emirates Securities and Commodities Authority. Under this framework, a REIT must be a public or private investment fund established to invest at least 75 per cent of its assets in real estate assets for construction, development or re-outfitting in preparation for sale, management, leasing or disposal. A REIT may establish or own real estate services companies, provided that its investment in the ownership of such companies and their subsidiaries does not exceed 20 per cent of the REIT’s total assets.

 

Under the ADGM framework, the Financial Services Regulatory Authority Fund Rules must be complied with. Under these rules, the REIT must be a public property fund which is primarily aimed at investments in income-generating real property; and must distribute at least 80 per cent of its audited annual net income to its unitholders.

 

To establish a REIT in the DIFC, the DIFC Investment Trust and REITS Rules Instrument 2006 must be complied with. These requirements include the following: an investment company or investment trust must be used as the fund vehicle; the REIT must be a public fund that is listed and traded on an authorised market institution; the REIT must be close ended; the REIT must distribute 80 per cent of its audited annual net income to unitholders; the REIT must not borrow beyond 70 per cent of net asset value; and the REIT may only invest up to 30 per cent of its total assets in property under development.

 

Conclusion

 

The Covid-19 pandemic will lead to continued uncertainty in the real estate market in the UAE and worldwide. Developers should be more aware than ever about the advantages of a REIT as an alternative source of funding. ■

Economic Substance Notification – Deadlines

The UAE has introduced Cabinet Resolution 31 of 2019 (as amended) (the Economic Substance Regulations) which apply to UAE onshore and free zone entities that undertake, and earn an income from, any of the Relevant Activities (listed below):

 

  • Banking Business

 

  • Insurance Business

 

  • Investment Fund Management Business

 

  • Shipping Business

 

  • Holding Company Business

 

  • Lease-Finance Business

 

  • Distribution & Service Centre Business

 

  • Headquarters Business

 

  • Intellectual Property Business

 

The Regulatory Authorities (as determined by Cabinet Resolution 58 of 2019) are now requesting the submission of Economic Substance Notifications in accordance with Article 8(1) of the Economic Substance Regulations on the part of entities that are required to do so under the Economic Substance Regulations.

 

The following are the filing requirements and deadlines that are released by some of the Regulatory Authorities.

 

 Who?   How?
The form must be submitted via:		  Deadline 
 Onshore Entities

UAE onshore entity undertaking any Relevant
Activity(ies)

 The Ministry of Economy’s website:
https://www.economy.gov.ae/English/
economic-substance/pages/regulations.aspx		  30 June 2020

Dubai Multi Commodities Centre (DMCC)All DMCC entities		  The DMCC entity’s DMCC Portal.  30 June 2020

Dubai Development Authority (DDA)DDA entities undertaking any Relevant Activity(ies)		  The DDA entity’s AXS Portal.  30 June 2020

Dubai International Financial Centre (DIFC)All DIFC entities		  The DIFC entity’s DIFC Portal.  30 June 2020

Abu Dhabi Global Market (ADGM)All ADGM entities with a financial year ending
31 December 2019		  Email to economicsubstance@adgm.com  30 June 2020

Jebel Ali Free Zone Authority (JAFZA)JAFZA entities undertaking any Relevant Activity(ies)		  Email to jafza.lease-license@jafza.ae  30 June 2020

Sharjah International Airport Free Zone (SAIF)All SAIF entities		  The SAIF Zone website:
https://portal.saif-zone.com/AppRecordMP.
aspx?bo=1165&EditMode=New&templateID
=16		  30 June 2020


Penalties

Entities that:

 

(a) fail to submit the Notification by the deadline set out above
or
(b) knowingly provide inaccurate information to the Regulatory Authority

 

shall be subject to an administrative penalty ranging between AED 10,000 to AED 50,000 in accordance with Article 11 of the Economic Substance Regulations. Furthermore, the entities shall be deemed to have not met the requirements under the Economic Substance Regulations.

 

With respect to DIFC entities, failure to submit the ESR notification shall also result in an additional penalty of USD 25,000 in accordance with Article 31 and Schedule 2 of the DIFC Operating Law 7 of 2018.

 

It is therefore prudent that UAE entities take a “substance over form” approach to carefully assess their businesses and see if they undertake, and earn any income, from any Relevant Activity. The fact that the commercial license of a UAE entity does not state a Relevant Activity does not automatically mean that the UAE entity is not undertaking any Relevant Activity.

 

Afridi & Angell is able to assist with the business assessments and the filing of Economic Substance Notification forms. ■