Author: afridi-angell

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. ■

Legal aspects of doing business in the Middle East

“Legal Aspects of Doing Business in the Middle East” provides comprehensive coverage on the requirements for doing business, prepared by local practitioners with expertise in business transactions. In this chapter, practical insights, commentary and analysis are offered on: regulation for business, forms of doing business, free zones, licensing of business by the Emirates, labour and immigration regulations and many needful topics you need to know for doing business in the UAE.

Recent measures implemented in Abu Dhabi in response to COVID-19

On 30 May 2020, the Abu Dhabi Media Office posted through Twitter that the Department of Government Support has eased restrictions on some activities and issued a set of guidelines for working from and visiting government entities in Abu Dhabi.

 

The guidelines below come into effect from today, 1 June 2020, and are limited to individuals between the ages of 12 and 60. All individuals must follow preventive measures including social distancing (ensuring two-metre distance from other individuals), wearing face masks and adhering to the daily National Disinfection Programme timing in Abu Dhabi (from 10:00 p.m. until 6:00 a.m. the following morning).

 

I.        Easing restrictions on some activities in Abu Dhabi

 

  • Capacity at malls and mall restaurants is increased to 40 percent.

 

  • Hotel beaches, museums and restaurants outside malls to reopen at 40 percent capacity.

 

  • Outdoor and singular sports activities including horseback riding, cycling, cricket, running, golf, tennis, and sailing will resume.

 

II.     Guidelines for working from and visiting government entities in Abu Dhabi

 

  • No more than 35 percent of office staff will be allowed to work in government offices.

 

  • Paperwork should be avoided.

 

  • Face masks and gloves are to be worn at all times.

 

  • Prayer rooms and shared areas are to remain closed.

 

  • Glass barriers must be installed to keep a distance between employees and customers.

 

  • Before leaving home, government employees in Abu Dhabi have been asked to take their temperature and avoid public transportation networks.

 

  • Once at work, their temperature will be taken again and a QR code scanned.

 

  • Employees who live with people who have tested positive for Covid-19, or who show symptoms, are exempt from having to return to offices, as are those who suffer from chronic underlying health conditions or who need to care for family members.

 

Restrictions on movement in and outside Abu Dhabi

 

Subsequently, on 31 May 2020, the Abu Dhabi Media Office posted restrictions announced by the Emergency, Crisis and Disaster Management Committee on movement in and outside the Emirate.

 

Movement between regions within Abu Dhabi (Abu Dhabi, Al Ain, and Al Dhafrah) as well as in and out of the Emirate of Abu Dhabi is banned for a period of one week starting tomorrow, 2 June 2020. The ban includes all residents including UAE nationals.

 

Exemptions from this movement restriction are available for employees of vital sectors, chronic disease patients visiting hospitals and the transportation of necessary goods.

 

Residents in each region are allowed to move within their region in line with the daily National Disinfection Programme timing in Abu Dhabi (from 10:00 p.m. until 6:00 a.m. the following morning). ■

 

Cram Down Financings in the Era of Covid-19

We are in unprecedented times. The Covid-19 pandemic has swept the globe like a tsunami and it continues to wreak havoc on countries, people and economies. The effects of the pandemic are evident now. For example, the US unemployment rate is presently at 14.7%. In the peak of the financial crisis of 2008, the unemployment rate was 10%. This rate is predicted to rise to 25% at the peak of the Covid-19 pandemic – equivalent to the unemployment rate of the US Depression of the 1930s!

 

Given the backdrop of the cataclysmic economic effects of the Covid-19 pandemic, it has also become increasingly harder to find willing investors for startup companies. Such a scenario will give rise to “cram down” financings. In such a cram down financing, only one or a few investors are willing to put any new money into a company. However, such money usually comes with a much lower valuation for the company (down round) and forced conversions from luxurious preferred shares to plain vanilla common shares which generally punish non-participating shareholders who end up ‘crammed down’ to a small ownership stake of the company in common shares.

 

Generally, such a cram down financing involves a few controlling venture capital investors increasing their control and ownership stake at the expense of the crammed down remaining investors who did not participate in the financing. In such circumstances, courts have held that controlling venture capital investors must satisfy the “entire fairness test” by proving that the transaction was fair to the minority crammed down shareholders. This means that a controlling venture capital shareholder may have a fiduciary duty to minority shareholders.

 

In such circumstances, controlling venture capital investors should insist on a broadly worded indemnity from the company to protect them against potential claims by the minority shareholders based on the entire fairness test and breaches of fiduciary duty.

 

The Covid-19 pandemic has resulted in a significant shortage of venture capital financing for companies. Such shortage can result in unique investment opportunities for those venture capital investors who are willing to invest in such uncertain times. However, such opportunities can result in potential liabilities that may be so significant as to wholly undermine such investment unless specific investor protections are negotiated. ■

Post Eid al Fitr Reopening Guidelines and Easing of Movement Restrictions

On 26 May 2020, Dubai Economy published the “Post Eid al Fitr” reopening Guidelines which took effect from Wednesday 27 May 2020 and include updates to the protocols for the wholesale and retail trade including salons and barbershops as well as valet parking. The Guidelines also provide tailored reopening protocols for cinemas, kids salons, auction houses, outsourced government service centres, and various entertainment sectors.

 

The Guidelines include the following:

 

  • Offices in Dubai will be allowed to reopen with 50 percent of their headcount capacity.

 

  • Salons and barbershops will be allowed to reopen with 50 percent of their staff and customer capacity.

 

  • Malls and retails outlets will be allowed to increase their staffing and customer occupancy levels from the current 30 percent to 70 percent and they will be allowed to remain open from 6:00 a.m. until 10:00 p.m.

 

  • The Dubai Metro will operate from 7:00 a.m. until midnight from Sunday to Thursday and from 10:00 a.m. until midnight on Fridays.

 

  • Intracity buses will now operate from 6:00 a.m. until 11:00 p.m., with essential trips (to hospitals only) permitted on these buses between 11:00 p.m. and 6:00 a.m.

 

  • Intercity buses will continue to be suspended until further notice.

 

All individuals must follow preventive measures including social distancing (ensuring two-metre distance from other individuals) and wearing face masks.

 

On 27 May 2020 the Crown Prince of Dubai and Chairman of the Executive Council announced that 50 percent of all Dubai government employees will resume working from their offices today, Sunday 31 May 2020, and the remaining will do so on 14 June 2020.

 

Return to work of private sector employees will be implemented in accordance with the reopening Guidelines as discussed above, with 100 percent private sector employees’ return to work pending further announcement.

 

The UAE also announced on Friday 29 May 2020 that starting from Saturday 30 May 2020 the daily National Disinfection Programme across the UAE except in Dubai will begin at 10:00 p.m. until 6:00 a.m. the following morning. In Dubai, timing of the sterilisation programme was changed on 27 May 2020 and runs from 11:00 p.m. until 6:00 a.m. the following morning. ■