Author: afridi-angell

Enforcement of UAE Judgments in India – Update

The UAE has treaties with several countries for judicial co-operation and the mutual recognition and enforcement of judgments. These include Tunisia, the GCC countries, Algeria, France, Jordan, Egypt, Syria, Armenia, China, Sudan and Pakistan.

 

On 25 October 1999, the UAE entered into such a treaty with the Republic of India, via the Agreement on Juridical and Judicial Cooperation in Civil and Commercial Matters for the Service of Summons, Judicial Documents, Judicial Commissions, Execution of Judgments and Arbitral Awards. Notwithstanding this treaty, parties had experienced difficulty in enforcing a UAE judgment in India due to the Central Government of India not issuing a notification pursuant to Section 44A of the Code of Civil Procedure of India (CPC). Section 44A (Execution of decrees passed by Courts in reciprocating territory) requires the Central Government of India to issue a notification in the Official Gazette declaring the UAE as a reciprocating territory.

 

According to a secondary source, a district court in one of the States in India recently dismissed a petition for the enforcement of a Dubai judgment on the grounds that the notification required under Section 44A of the CPC had not been made.

 

To remedy this problem, the Indian Ministry of Law and Justice, issued a notification in the Gazette of India on 17 January 2020 declaring the UAE to be a reciprocating territory for the purposes of Section 44A of the CPC. Following this notification, a judgment passed by a UAE court will be viewed as a judgment from a reciprocating territory, and will remove an obstacle in enforcing UAE judgments in India. ■

 

DIFC Workplace Savings Scheme (with effect from 1 February 2020)

On 14 January 2020, the Employment Law Amendment Law (DIFC Law 4 of 2020) and the Employment Regulations (the Amendment) were enacted. The Amendment introduces a new mandatory workplace savings scheme, which replaces the current end-of-service gratuity regime. The new scheme commences on 1 February 2020.

 

Effect of the Amendment 

 

The main consequence of the Amendment is that:

 

  • End-of-service gratuity benefits (EOSB) of employees will accrue until 31 January 2020 then stop accruing thereafter.
  • From 1 February 2020, employers must make monthly mandatory contributions into a professionally managed and regulated savings plan (Qualifying Scheme) for the benefit of their employees.

 

The monthly mandatory contributions into the Qualifying Scheme must be at least:

 

  • 5.83 percent of the employee’s basic salary for the first five years of service; and
  • 8.33 percent of the employee’s basic salary for each additional year of service,

 

provided that the basic salary is not less than 50 percent of the employee’s total monthly compensation.

 

 

Who Does This Apply To? 

 

DIFC-based employers and employees (with the exceptions listed below). This includes employees under a DIFC visa that are seconded outside of the DIFC.

 

The Qualifying Scheme does not apply to DIFC-based:

 

a) employees registered with the GPSSA (typically, UAE and GCC nationals);

b) employees of the DIFC Authority, or other local or federal government entities;

c) employees seconded to a DIFC entity from other regions;

d) entities that are exempted from the application of DIFC Law 2 of 2019 (the Employment Law) by the President of the DIFC;

e) employees serving a notice period on 1 February 2020;

f) employees under a fixed term contract expiring on or before 1 May 2020; and

g) equity partners of DIFC entities.

 

DEWS Plan

 

The default Qualifying Scheme is the DIFC Employee Workplace Savings (DEWS) Plan.

 

Employers wishing to enroll in an alternative Qualifying Scheme must apply for and obtain a Certificate of Compliance from the DIFC Authority.

 

Voluntary Contributions

 

An employee can make monthly voluntary contributions to the Qualifying Scheme by written request to their employer. Their employer will then deduct the agreed amount from the employee’s total monthly compensation and transfer the same into the Qualifying Scheme each month.

 

Employee’s Entitlement under the Amendment 

 

At termination of employment (End Date), the employee shall be paid:

 

  • their EOSB accrued until 31 January 2020 (see comments in the section below); and
  • all the mandatory contributions from 1 February 2020 to the End Date,

unless the employee opts to defer receipt of the above to a later date.

 

End of Service Benefits

 

Employees can choose to transfer their existing EOSB to a Qualifying Scheme. This choice would change the amount they receive at their End Date.

 

Fines

 

Employers that fail to make the monthly mandatory contributions, do not transfer EOSB to a Qualifying Scheme as per the employee’s request, or do not have a Certificate of Compliance (if enrolled in an alternative Qualifying Scheme) shall be subject to a maximum fine of USD 2,000 per contravention for each employee.

 

Any agreements between the employer and employee against participating in a Qualifying Scheme or to pay contributions less than the amount stipulated above shall be null, void and unenforceable.

 

Immediate Administrative Tasks for DIFC Entities

 

DIFC entities should be mindful of their immediate administrative tasks now applicable as a result of the Amendment, which include:

 

  • appointing a DEWS Plan signatory through their DIFC portal;
  • having in place an internal system to calculate each of their employees’ contributions and ensure that monthly contributions are made on time;
  • obtaining written consent of employees as to whether to transfer their EOSB to a Qualifying Scheme or not;
  • registering with the DEWS Plan or applying for a Certificate of Compliance, if they wish to enroll in an alternative Qualifying Scheme;
  • enrolling current, eligible employees to a Qualifying Scheme by 31 March 2020, and new, eligible employees before the expiry of two months following their respective employment date.
  • informing their eligible employees of their rights under the applicable Qualifying Scheme; and
  • making monthly contributions (both mandatory and, if applicable, voluntary) of employees as per the rules of the applicable Qualifying Scheme. ■

Venture Capital Investment in the UAE: Market and Regulatory Overview

A Q&A guide to venture capital law in the United Arab Emirates.

 

The Q&A gives a high level overview of the venture capital market; tax incentives; fund structures; fund formation and regulation; investor protection; founder and employee incentivization and exits.

Slightly more clarity: Economic Substance Regulations in the DIFC

The DIFC has provided slightly more clarity as to how UAE Cabinet Decision 31 of 2019 (the Economic Substance Regulations, or ESR) will apply within Dubai’s financial free zone. Helpful as the guidance is, significant questions remain.

 

The DIFC held a presentation on 17 December to discuss the Economic Substance Regulations. The first point of note was that all businesses in the DIFC must file an ESR notification by 31 March 2020. The content of this notification is set out in the Economic Substance Regulations themselves. There are three components to the notification.

 

1. The business must declare whether or not it is engaged in one of the nine “Related Activities” set out in the Economic Substance Regulations;

 

2. If it does conduct one of the Related Activities, the business must indicate whether any of its income from such activity is subject to any sort of tax outside of the UAE; and

 

3. The dates of the business’s financial year.

 

The notification requirement will apply to financial service providers regulated by the DFSA, and also to all other non-regulated businesses, including DIFC branches of businesses that may be making similar notifications outside of the DIFC. Any entity registered with the DIFC’s Registrar of Companies will need to file these notifications. The format of the notification has yet to be decided, but it was suggested that the UAE’s Ministry of Finance (being the “Competent Authority” pursuant to the Economic Substance Regulations) will be standardizing the forms for ESR notifications and reports.

 

The second point of note is the DIFC’s Registrar of Companies will be the “Regulatory Authority” in the DIFC. Expectations (based on the wording of Cabinet Decision 58 of 2019) were that the DFSA would be the Regulatory Authority in the DIFC. There was a suggestion that the Registrar of Companies may delegate some of its responsibilities to the DFSA, but for the time being it appears that the Registrar will fulfill this important role. (It is the Regulatory Authority which decides if a business has met the economic substance requirements, and if not, reports the business to the Ministry of Finance.)

 

The DIFC made it very clear in their presentation that they would be adopting a “substance over form” approach when considering whether a business was conducting one or more of the Related Activities. This was a welcome clarification, as some market commentators had been suggesting that businesses would only be caught by the Economic Substance Regulations if their commercial license specifically mentioned one (or more) of the nine Related Activities.

 

The presentation ended with a Q&A session. This revealed that significant areas of uncertainty and concern remain. Of particular concern to businesses in the DIFC was whether all financial service providers would be considered to be undertaking a Related Activity. There was a suggestion that the DIFC and the DFSA would jointly host a further presentation in the new year to answer some of those questions.

 

Practical next steps

 

All businesses in the DIFC should diarise 31 March 2020 and note their obligation to file a notification with the Registrar of Companies by that date. In order to make that notification they will need to determine if they are undertaking a Related Activity. If they are undertaking a Related Activity, and deriving income from it, they will then need to file an ESR report. The ESR report must demonstrate that they meet the economic substance thresholds. Failure to meet these thresholds may result in significant fines and/or suspension of licenses. Any business with concerns about meeting such thresholds will have several months to take remedial action, as most businesses conducting a Related Activity in the DIFC will have until the end of 2020 before they need to make their first ESR report. Afridi & Angell is able to advise clients on the Economic Substance Regulations, although general uncertainty remains regarding the approach the Registrar of Companies will take when considering (a) the scope of the specific Related Activities and (b) what needs to be done to meet the economic substance thresholds. ■

The use of experts in the UAE Municipal Courts: Seven things you need to know

1. There is a high possibility that you will have to present your case to an expert: Although the appointment of experts is more likely in disputes involving technical issues (e.g. maritime disputes, construction disputes, etc.), it is increasingly common for the UAE courts to refer disputes which, on the face of it do not require expert assistance, to experts. The courts have the power to do so in terms of Article 69 of the Federal Evidence Law (No. 10 of 1992 as amended) which provides that a court may delegate to one or more experts when necessary. Article 69 does not set out any criteria to be satisfied in exercising this power. The most frequent appointment is of accounting experts.

 

2. It is likely to be a pivotal stage of litigation: In the clear majority of cases, the courts adopt the conclusions of the expert, even though the expert’s report is not binding on the court. However, Article 90(2) of the Federal Evidence Law provides that if the court issues a judgment which contradicts the findings of the expert, the court must state the reasons why it disagrees with the expert’s findings. It is therefore important to ensure that your case is properly pleaded and understood by the expert.

 

3. You may object, on certain limited grounds, to the appointment of a person as an expert: A party may object to an expert if there is a reason to believe that he/she cannot perform his/her duties impartially, if he/she is related by blood or by law to one of the parties up to the fourth degree, is a proxy to one of them in his/her personal affairs, a guardian or tutor or working for one of the parties, or if he/she or his/her spouse is in actual litigation with one of the parties in the case or with his/her spouse. An objection must be filed within a week of the order appointing the expert.

 

4. Experts have wide discretion to carry out their functions: The order appointing an expert will set out a mandate for the expert, and will vest the expert with the authority and powers required to carry out his tasks, e.g. to visit the premises of the parties, examine documents, and hear witnesses without administering an oath to them. Parties can take the opportunity to ask the expert to require their opponents to produce certain documents, which is useful as document production in the courts is very limited.

 

5. You have an uphill task ahead of you if the expert does not give you a favourable report, but all is not lost: The parties are given an opportunity to comment on the expert’s report before the court issues judgment. A party may also request the court to refer the matter to a different expert, or a panel of experts, or an expert at the Ruler’s Court, although such requests are rarely granted. The court, on its own initiative or upon request of a party, may order the expert to be present in court to be questioned, although such orders are also rare.  Pursuant to Court Circular 4/2018 issued by the Dubai courts, parties are permitted to submit reports prepared by an expert for consideration by the judge. The privately appointed expert must be accredited by the courts, and his report should not criticize the court-appointed expert’s report (even though there may be disagreement regarding the findings).

 

6. An expert could be criminally liable if he provides a report that he knows to be false, or gives a false interpretation of facts: Article 257 of the UAE Penal Code (Federal Law No. 3 of 1987 as amended) provides for a sentence of imprisonment between one and five years. In practice however these are difficult allegations to prove.

 

7. An expert’s report may assist a party to obtain provisional relief: The UAE courts have the power to grant provisional relief pursuant to applications made without notice to the defendant. Such relief is sought primarily under the provisions of Article 252 of the UAE Civil Procedure Code or the Federal Maritime law. These discretionary orders are granted on the basis of documentary evidence filed by the applicant, and having a report from an expert accredited by the court can sometimes improve the odds of obtaining an order from the court. ■

Off-Plan Construction Delays: Options for Resolution in Dubai

By and large the Dubai offplan real estate market is well regulated and developers complete construction by the “anticipated completion date” as set out in the Sale and Purchase Agreement, albeit often subject to the contractual right to extend such date for a further 12 months. In addition, purchasers can take comfort that the Real Estate Registration Agency (RERA) actively monitors the progress of construction works for each off-plan project in Dubai, and in most cases a copy of RERA’s audit report can be obtained from the Dubai Land Department’s website.

 

However,  amid  a  sluggish  real  estate  market  and  global  economy,  there  have  been  instances  of construction delays of some off-plan projects as developers face cash flow issues.

 

It is important that purchasers are aware of their rights in order to address these challenges in the event that they find themselves facing such delays.

 

In this inBrief we discuss the ramifications under law of such delays, and what a purchaser can do in the event a dispute.

 

The Law

 

A purchaser may apply to court to terminate the contractual relationship between the purchaser and the developer in the circumstances set out in Article 20 of Executive Council Resolution 6 of 2010. In the context of construction delays, the relevant circumstances are as follows: “any other cases that may require termination of the agreement in accordance with general principles of law.”

 

In addition, the Article 246 of the Civil Code requires that: “(1) The contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith. (2) The contract shall not be restricted to an obligation upon the contracting party to do that which is expressly contained in it, but shall also embrace that which is appurtenant to it by virtue of the law, custom, and the nature of the disposition.”

 

Practically,  a  purchaser  should  attempt  to  resolve such  dispute  with a  developer  amicably  by lodging a complaint with RERA, failing which the purchaser can consider bringing court or arbitration proceedings (as the case may be) to enforce its rights.

 

Dispute resolution: Court, Arbitration

 

RERA:  In the event a purchaser experiences construction delays, a complaint can be lodged with RERA. It is important to make RERA aware of any construction delays as, pursuant to Article 23 of Executive Council Resolution 6 of 2010, RERA has the power to cancel a project in cases of serious delay, including: “if it is proven to RERA that the developer has no intention of implementing the project” or “if the developer fails to implement the project due to gross negligence”.

 

Where a project is cancelled by RERA, the developer must refund all payments received from the purchaser pursuant to the procedures and provisions stipulated in Law 8 of 2007.

 

Arbitration:  In the event of construction delays and if filing a complaint with RERA does not render results then the purchaser should look to the dispute resolution mechanism in the SPA, which is most commonly arbitration.

 

However,  a  purchaser  will  need  to  seek  legal  advice  as  to  the  strength  of  its  arbitration  claim, particularly as the SPA will often permit the developer to extend the “anticipated completion date” for a further 12 months, or excuse certain construction delays as events of force majeure.

 

Arbitration is beneficial as it is usually faster than court; it is private; and specialist arbitrators can be used to accurately determine a matter. In Dubai the most popular arbitration venues are before the Dubai Chamber of Commerce  and  Industry  (DIAC)  or  the  Dubai  International  Financial  Centre/London  Court  of International Arbitration (DIFC/LCIA) Centre.

 

Court:  If there is no arbitration clause contained in the SPA, then the purchaser must file its case with the Dubai courts. Again, a purchaser will need to seek legal advice as to the strength of the claim.

 

Proceedings are started by filing a claim in the relevant court office on payment of the required court fee. On application by the claimant, payment of court fees can be deferred in exceptional cases. The court fee depends on the value of the claim, and in Dubai has a maximum cap of AED 40,000. This fee is payable either on an application for provisional relief, or on filing the main lawsuit.

 

The claim must meet procedural requirements, include the names and addresses of the parties to the action, and include details of the claim. Documents in support of the claim are usually annexed to the claim and must be translated into Arabic. The court issues a summons with a hearing date endorsed on it for service on the defendant, with a copy of the claim and any supporting documents filed by the claimant.

 

Once an answer has been filed, the trial is adjourned for the claimant to respond. Further adjournments are given so that memoranda can be filed by the parties. Once the court believes that the case has been sufficiently pleaded, it reserves the matter for judgment. The entire proceeding is based on written submissions supported by documentary evidence. The court usually appoints an expert to assist it and usually accepts the expert’s report.

 

Conclusion

 

Further instances of construction delays with respect to some off-plan projects are likely to occur as developers face increasing cash flow issues amid a sluggish real estate market and global economy. Purchasers should be more aware than ever of their legal rights, potential remedies and developers’ responsibilities. ■

Regulatory Authorities to Regulate Relevant Activities in Accordance with Economic Substance Regulations Announced

Further to our previous inBrief dated 7 July 2019, which discussed UAE Cabinet Resolution 31 of 2019 Concerning Economic Substance Regulations (the UAE Economic Substance Regulations or the Regulations), and inBrief dated 10 October 2019, which discussed the Guidance on UAE Economic Substance Regulations issued by the UAE Ministry of Finance, Cabinet Decision No. 58 of 2019 has now designated the regulatory authorities (the Regulatory Authorities) to regulate compliance with the UAE Economic Substance Regulations.

 

Background

 

Under the Regulations, a Licensee engaged in any one of the nine Relevant Activities listed therein must meet an Economic Substance Test in relation to each Relevant Activity carried on by such Licensee. This includes but is not limited to demonstrating that its State Core Income-Generating Activities are carried out in the UAE.

 

The Regulations contemplated that a yet-to-be designated Regulatory Authority (the Regulatory Authority under the Regulations is different from the Competent Authority) would regulate compliance with the Regulations. The Regulations read as if there would be a single Regulatory Authority for the entire UAE; however, the Guidance on Economic Substance Regulations, in certain places, contemplated the possibility of more than one Regulatory Authority.

 

Cabinet Decision No. 58 of 2019 has appointed a number of different authorities as the Regulatory Authority, depending on the nine Relevant Activities and where these Relevant Activities are undertaken.

 

The concerned Regulatory Authorities are as follows:

 

Relevant Activity           Regulatory Authority  
 

Banking Activities

  

– UAE Central Bank for banking activities regulated by the Bank.
– Competent authority in the Financial Free Zone for banking activities exercised in the latter.

 
 

Insurance Business

  

– Insurance Authority for the insurance business regulated by the Insurance Authority.
– Competent authority in the Free Zone for the insurance activities exercised in the latter.
– Competent authority in the Financial Free Zone for the insurance activities exercised in the latter.

 
 

Investment Funds Management

  

– Securities and Commodities Authority (SCA) for the investment funds management regulated by the SCA.
– Competent authority in the Free Zone for the activities of investment funds management exercised in the latter.
– Competent authority in the Financial Free Zone for the activities of investment funds management exercised in the latter.

 
 

Financial Leasing Activities

  

– UAE Central Bank for the financial leasing activities regulated by the bank.
– Competent authority in the Free Zone for the financial leasing activities exercised in the latter.
– Competent authority in the Financial Free Zone for the financial leasing activities exercised in the latter.

 
 

Headquarters Activities

  

– Ministry of Economy for the headquarters’ works and activities regulated by the Ministry.
– Competent authority in the Free Zone for the headquarters activities exercised in the latter.
– Competent authority in the Financial Free Zone for the headquarters activities exercised in the latter.

 
 

Shipping Activities

  

– Ministry of Economy for the shipping activities regulated by the Ministry.
– Competent authority in the Free Zone for the shipping activities exercised in the latter.
– Competent authority in the Financial Free Zone for the shipping activities exercised in the latter.

 
 

Holding Company Activities

  

– Ministry of Economy for the holding company activities regulated by the Ministry.
– Competent authority in the Free Zone for the holding company activities exercised in the latter.
– Competent authority in the Financial Free Zone for the holding company activities exercised in the latter.

 
 

Intellectual Property Activities

  

– Ministry of Economy for the intellectual property activities regulated by the Ministry.
– Competent authority in the Free Zone for the intellectual property activities exercised in the latter.
– Competent authority in the Financial Free Zone for the intellectual property activities exercised in the latter.

 
 

Distribution and Services Centres

  

– Ministry of Economy for the distribution and services centres activities regulated by the Ministry.
– Competent authority in the Free Zone for the distribution and services centres activities exercised in the latter.
– Competent authority in the Financial Free Zone for the distribution and services centres activities exercised in the latter.

Going Forward

 

The appointment of the Regulatory Authorities means that businesses licensed in the UAE should fast track an assessment to determine if they are subject to the UAE Economic Substance Regulations. It remains to be seen what approach such Regulatory Authorities will take in enforcing the UAE Economic Substance Regulations. ■

Emirates Development Bank Appointed to Maintain Register of Finance Leases

Introduction

 

Pursuant to UAE Federal Cabinet Resolution No. 56 of 2019, Emirates Development Bank has been appointed to maintain the register of finance lease contracts created pursuant to UAE Federal Law No. 8 of 2018 on Finance Lease (the Finance Lease Law or the Law).

 

Background

 

The Finance Lease Law was promulgated in December 2018. This Law creates a register (the Register) pursuant to which “Finance Lease Contracts” shall be registered. A Finance Lease is defined in the Law as:  “A relationship whereby the Lessor acquires Leased Property for leasing purposes and, under a separate contract, leases such property to the Lessee for a specific period in accordance with the provisions hereof and offers the Lessee the option to own the Leased Property pursuant to the provisions hereof.” 1

 

Leased Property under the Law includes both personal and real property.2

 

In order for a lease to constitute a Finance Lease within the meaning of the Law it must include a rent-to-own option. A lease without an option to purchase would not fall within the scope of the Law. Whether intended or not, this requirement will have the practical effect of excluding a considerable number of leasing arrangements commonly practiced in the UAE from the scope of the Law. Also, whether intended or not, the Law will apply to Ijarah contracts used in Islamic financing whereby the purchase of property is facilitated by the lender purchasing the property and leasing it back to the customer on a lease-to-own basis.

 

The appointment of Emirates Development Bank to maintain the Register is a logical choice given that Emirates Development Bank already maintains the Emirates Movables Collateral Registry (EMCR) established pursuant to Federal Law No. 20 of 2016 on the Mortgage of Movable Property to Secure Debt.

 

UAE Federal Cabinet Resolution No. 56 of 2019 was published in the UAE Federal Gazette in August of 2019. As of the date of this inBrief, registration is not yet possible. Emirates Development Bank has not made public the timetable for launching the Register but this is expected in the near future.

 

Compliance Requirements and Further Legislation

 

The Finance Lease Law states that the Central Bank shall enact licensing regulations governing licensing the practice of Finance Lease activity in the UAE and may further license branches of foreign finance lease companies.3  The Central Bank has not yet issued such regulations. Guidance from the Central Bank in this regard is critical given that (i) Article 2(1) of the Law stipulates that Finance Lease activity may not be practiced in the UAE unless and until the Lessor has obtained a license to that effect from the Central Bank and (ii) Article 2(2) states that any Finance Lease concluded with a person unlicensed by the Central Bank shall be deemed null and void. Similarly, Article 3 of the Law stipulates that a Finance Lease contract must be registered in the Register, otherwise such contract shall be deemed null and void. The deadline for complying with the licensing and registration requirements under the Law is 31 December 2019.4

 

Given the draconian consequences of non-compliance, and in light of the fact that (i) the compliance deadline is approximately 10 weeks away, (ii) the Register has not yet been launched, and (iii) the Central Bank has not issued the licensing regulations contemplated by the Law, the question arises as to whether extensions will be granted. This remains to be seen. Other, somewhat less critical, legislation is also pending.

 

The Law contemplates Special Accounting Standards relating to Finance Leases to be created by resolution of the Minister of Finance, which resolution has not yet been issued.

 

Article 35 of the Law specifies a fine not exceeding AED 500,000 for violations of the Law but further contemplates that the Cabinet will issue a resolution specifying the amount of the fine prescribed for each violation. Cabinet Resolution No. 56 of 2019 did not address this issue. Accordingly, a further Cabinet resolution specifying the amount of such fines is awaited.

 

Article 37 of the Law contemplates a resolution of the Minister of Justice designating certain employees as judicial officers and vesting them with the authority to establish whatever is done in contravention of the Law. Such resolution has not yet been issued.

 

Conclusion

 

The appointment of Emirates Development Bank to maintain the Register is a positive development in the implementation of the Finance Lease Law. Further legislation contemplated by the Law is eagerly awaited by all parties affected by the Law, as is the launch of the Register. This includes finance lease companies that will need to obtain licenses from the Central Bank and lessors that are required to register existing Finance Lease Contracts by 31 December 2019. ■

 

*****
1 See Article 1 of the Finance Lease Law.
2 The Finance Lease Law defines Leased Property as: “Each personal or real property which is useful to the usufructuary and is subject of the Finance Lease, inter alia, the on-plan subdivided real estate units that may be subject of legal dispositions in accordance with the provisions of legislation in force.”
3 See Article 2(4) of the Finance Lease Law.
4 The Finance Lease Law was published in the Official Gazette on 31 December 2018 and came into effect the following day. Article 38 of the Law provides for (i) a one year grace period from the effective date of the Law for companies practicing Finance Leasing to obtain a license from the Central Bank and (ii) a one year grace period for Lessors to register Finance Leases in the Register.

EU Removes UAE from Tax Blacklist

The European Union (EU) has removed the UAE from the EU’s blacklist of non-cooperative jurisdictions for tax purposes.

 

The EU Blacklist

 

The EU maintains a blacklist of non-cooperative jurisdictions for tax purposes. The EU has published criteria on tax transparency, fair taxation and implementation of anti-BEPS measures that EU Member States undertake to promote.1  BEPS refers to domestic tax base erosion and profit shifting due to multinational enterprises exploiting gaps and mismatches between different countries’ tax systems. Under the OECD/G20 Inclusive Framework on BEPS, over 130 countries are collaborating to put an end to tax avoidance strategies that exploit gaps and mismatches in tax rules to avoid paying tax. The EU has been active in trying to combat such tax avoidance not just in the EU itself but internationally and the blacklist is a key pillar of such efforts.

 

Brief History

 

Several jurisdictions that were either on the EU blacklist or at risk of being blacklisted responded by introducing legislation requiring entities established in such jurisdictions to demonstrate economic substance in the jurisdiction of establishment. The UAE had committed to enact legislation of this nature by 31 December 2018 but did not meet this deadline. On 12 March 2019, the EU placed the UAE on the blacklist.

 

In an apparent response to the UAE being blacklisted, the UAE Cabinet issued Cabinet Resolution 31 of 2019 Concerning Economic Substance Regulations (the UAE Economic Substance Regulations or the Regulations) which came into effect on 30 April 2019. On 11 September 2019, pursuant to Article 6(6) of the Regulations, the UAE Ministry of Finance issued Guidance2  on the Regulations.

 

The EU updates the blacklist periodically and on 10 October 2019 an EU press release announced that the UAE has been removed the blacklist.

 

Going Forward

 

The EU Code of Conduct Group monitors compliance with the EU’s criteria so the UAE’s removal from the blacklist is not necessarily the end of the story. A detailed discussion of the UAE Economic Substance Regulations is beyond the scope of this Legal Alert (for more information on these Regulations see Afridi & Angell’s inBrief articles dated 7 July 2019 and 10 October 2019). However, one issue to highlight is that the Regulations contemplate a further UAE Cabinet Resolution designating a Regulatory Authority3  to regulate compliance with the Regulations. The Regulatory Authority has not yet been designated. As such, the regulatory regime under which the Regulations will be enforced is not yet complete.

 

The appointment of the Regulatory Authority and the approach such Regulatory Authority will take in enforcing the UAE Economic Substance Regulations is a future development that warrants monitoring by any businesses that are potentially subject to the Regulations. ■

 

*****
1 See Council of the European Union, Outcome of Proceedings dated 5 December 2017. The Criteria on tax transparency, fair taxation and implementation of anti-BEPS measures that EU Member States undertake to promote are set out in Annex V thereto.
2 Ministerial Decision No. 215 of 2019 on the Issuance of Directives for the Implementation of the Provisions of Cabinet Decision No. 31 of 2019 Concerning Economic Substance Requirements.
3 The Guidance issued by the Ministry of Finance on 11 September 2019 raises the possibility that there could be more than one Regulatory Authority.