Author: afridi-angell

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.

UAE Ministry of Finance issues guidance on Economic Substance Regulations

A previous inBrief dated 7 July 2019 discussed UAE Cabinet Resolution 31 of 2019 Concerning Economic Substance Regulations (the UAE Economic Substance Regulations or the Regulations).

 

The UAE Economic Substance Regulations designated the UAE Ministry of Finance as the Competent Authority. One of the responsibilities assigned to the Competent Authority under the Regulations is the issuance of guidance on how the Economic Substance Test (as defined in the Regulations and discussed below) may be met for the purposes of complying with the Regulations. The Ministry of Finance issued such guidance (the Guidance)1 on 11 September 2019.

 

Article 2.2 of the Guidance explains that the Regulations were issued pursuant to the global standard set by the OECD Forum on Harmful Tax Practices (FHTP), which requires companies to have substantial activities in a jurisdiction and also taking into account the standards developed by the European Union (EU), specifically the code of conduct developed by the EU Code of Conduct Group (a group responsible for the EU’s taxation policy).

 

Economic Substance Test

 

Under the Regulations, a Licensee (as defined below) engaged in a Relevant Activity (see the nine activities listed in bullet points below) 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 activities that constitute State Core Income-Generating Activities vary for each of the nine Relevant Activities to which the Regulations apply. Such Relevant Activities are:

 

  • Banking Businesses
  • Insurance Businesses
  • Investment Fund Management
  • Lease-Finance Businesses
  • Headquarters Businesses
  • Shipping Businesses
  • Holding Company Businesses
  • Intellectual Property Businesses
  • Distribution and Service Center Businesses

 

This inBrief highlights thirteen topics covered in the Guidance that may be of interest to businesses affected by the UAE Economic Substance Regulations.

 

1. More than one Regulatory Authority?

 

The Regulations contemplate that a yet-to-be designated Regulatory Authority (the Regulatory Authority under the Regulations is different from the Competent Authority) will regulate compliance with the Regulations. The Regulations read as if there will be a single Regulatory Authority for the entire UAE. However, the Guidance, in certain places, contemplates the possibility of more than one Regulatory Authority which raises the question as to whether the Regulatory Authority may be different in each Emirate?

 

A Cabinet Resolution appointing the Regulatory Authority (or Authorities) is awaited. For stylistic purposes, the remainder of this inBrief will assume a single Regulatory Authority.

 

2. Clarification regarding definition of Licensee

 

The Regulations apply to Licensees. Article 1 of the Regulations defines a Licensee as “any natural or juridical person licensed by the competent licensing authorit/(ies) in the UAE, to carry out a Relevant Activity in the UAE including a Free Zone and a Financial Free Zone.” The Guidance clarifies that every Licensee “that carries on a Relevant Activity and derives an income therefrom in the UAE, including a Free Zone or a Financial Free Zone must meet the Economic Substance Test.” This implies that a Licensee that does not derive any income from a Relevant Activity carried out in the UAE would not be required to meet the Economic Substance Test.

 

3. Majority-owned government owned companies exempt

 

Under Article 3(2) of the Regulations, the Regulations do not apply to any commercial company (as defined in Article 1 of the UAE Commercial Companies Law2) in which the UAE Federal Government, the Government of any Emirate, or any governmental authority or body of any of them has any direct or indirect ownership in its share capital. By contrast, Article 3.2 of the Guidance states that the Regulations do not apply to any commercial company with at least 51% direct or indirect governmental ownership. An EU document indicates that the change to the 51% threshold was made to accommodate concerns of the EU Code of Conduct Group that exempting companies with any government ownership created a risk of circumvention of the substance requirements.

 

4. Filing requirements commence with effect from 1 January 2020

 

Under Article 8(1) of the Regulations, a Licensee shall notify the Regulatory Authority annually of the following:

 

“(a) Whether or not it is carrying on a Relevant Activity.

 

 (b) If the Licensee is carrying on a Relevant Activity, whether or not all or any part of the Licensee’s gross income in relation to the Relevant Activity is subject to tax in a jurisdiction outside of the State; in all cases such Licensee shall provide the Regulatory Authority with all information and documentation   required to be submitted by it pursuant to this Resolution or any further guidance or decision issued pursuant to this Resolution.

 

 (c) The date of the end of its Financial Year.”

 

Under Article 8(2) of the Regulations, the foregoing annual filing shall be made at the time specified by the Regulatory Authority and in the manner approved by the Regulatory Authority. As noted above, the Regulatory Authority has not yet been identified. However, Article 4.2 of the Guidance clarifies that such filing must be made with effect from 1 January 2020. This suggests the Competent Authority believes (or assumes) that the Regulatory Authority will be appointed before 1 January 2020.

 

5. List of core activities in the Regulations is not exhaustive

 

The Regulations require a Licensee to demonstrate that it conducts its State Core Income-Generating Activities in the UAE. Article 5 of the Regulations identifies, for each Relevant Activity, certain activities that must be carried out in the UAE.

 

Article 4.3(a) of the Guidance explains that the list set out in Article 5 of the Regulations “is not exhaustive” and that the list “includes the activities listed but is not limited to them.” The Guidance further explains that the general principle is that the activities listed in Article 5 of the Regulations “are regarded to be the most important activities that a Licensee carrying out a Relevant Activity is expected to be carrying on in the UAE.”

 

6. Directed and managed in the UAE

 

One of the requirements of meeting the Economic Substance Test, under Article 6(2)(b) of the Regulations,  is that a Licensee must be directed and managed in the UAE in relation to its Relevant Activity. Article 4.3(b) of the Guidance explains that the aim is to ensure that there are an adequate number of board meetings held and attended in the UAE. Article 4.3(b) of the Guidance further explains that:

 

“A determination as to whether an adequate number of meetings are held and attended in the UAE will be dependent on the level of Relevant Activity being carried out by a Licensee. It is expected that it must be at least one (1) meeting held in a Financial Year in the UAE. Consideration must also be given to meeting requirements prescribed under the applicable law regulating the Licensee or as may be stipulated in the constitutional documents of the Licensee.”

 

Additional requirements highlighted in Article 4.3(b) of the Guidance include:

 

  • meetings shall be recorded in written minutes and signed by attendees and such minutes are kept in the UAE;
  • quorum for such meetings shall be met and those attendees are physically present in the UAE;
  • directors shall have the necessary knowledge and expertise to discharge their duties; and
  • the minutes of board meetings must refer to all the relevant decisions taken and must be signed by directors physically present.

 

7. Meaning of “adequate” and “appropriate”

 

The Regulations use the undefined term “adequate” in several places. For example, “adequate number of qualified full-time employees”, “adequate level of expenditure”. In addition, the Guidance uses the terms “adequate” and “appropriate” several times. Article 4.3(g) of the Guidance explains that businesses vary in size and therefor the employees, expenditures and premises which are adequate or appropriate for a large or medium sized business may not be adequate or appropriate for a small business and that the Regulations are not intended to impose requirements to engage employees or incur expenditures beyond what is actually required by a business.

 

What is adequate or appropriate for each Licensee will be dependent on the nature and level of Relevant Activity being carried out by such Licensee. But a Licensee should maintain sufficient records to demonstrate the adequacy and appropriateness of the resources utilized and the expenditures incurred.

 

Article 4.3(g) also explains that the requirement for adequate employees is aimed at ensuring that employees carrying out a Relevant Activity are suitably qualified to do so.

 

8. Outsourcing

 

The Regulations permit the use of the third party service providers to satisfy certain requirements of the Economic Substance Test. Article 4.3(h) of the Guidance explains certain criteria that the third party service providers must meet including, by way of example, having adequate activities, employees, expenditures and premises in the UAE. Article 4.3(h) of the Guidance contains further elaboration and explanation of requirements for outsourcing that is not discussed herein but may be of interest to businesses subject to the Regulations who use third party service providers.

 

Article 4.3(h)5 of the Guidance explains that a Licensee who uses a third party service provider must demonstrate to the Regulatory Authority that outsourcing is not being done with the objective of circumventing compliance with the Economic Substance Test. This is perhaps one topic on which the Guidance may have created more potential confusion than clarification. It is not clear under what circumstances outsourcing would be deemed to be circumventing compliance.

 

9. Holding company business

 

Under Article 6(4) of the Regulations, a Holding Company Business that derives its income solely from dividends and capital gains is subject to reduced substance requirements. Such Licensee must satisfy only two criteria:

 

  • compliance with requirements to submit any documents, records or information to the relevant Regulatory Authority; and
  • maintaining adequate employees and holding and managing for the Holding Company Business.

 

Article 5.1 of the Guidance explains that Holding Company Businesses that undertake a Relevant Activity and derive income from such activity other than solely receiving income from equity interests do not benefit from this exemption and must meet the full substance requirements of the Economic Substance Test. The Guidance further explains that:

 

“A Licensee which owns other forms of assets (e.g. bonds, government securities, interest in real property) will clearly not be a ‘pure equity holding’ entity (even if it also owns equity participations) and will not be treated as carrying on holding business.”3

 

Moreover:

 

“Because it is possible for a Licensee to carry on more than one Relevant Activity, the fact that the Licensee is a ‘pure equity holding entity’ does not preclude the possibility that it may carry on one or more other relevant activities, in which case the CIGA [Core Income Generating Activities] shall be those associated with the income generated.”

 

10. Headquarters business

 

Article 5.2 of the Guidance explains that whether an entity carries on a headquarters business for the purposes of the Regulations is entirely dependent on the services it provides to other group companies and is not dependent on its position in the group structure.

 

11. High risk intellectual property activity

 

The Regulations identify certain activities relating to Intellectual Property Business as high risk and set out additional conditions that a Licensee carrying out such activities must satisfy. Article 5(3) of the Guidance explains that because income derived from intellectual property assets activity poses a greater risk of artificial profit shifting as compared to income from non-IP related activity, there is a presumption under the Regulations that a Licensee who carries out such activities is not complying with the Economic Substance Test. The burden is placed on the Licensee to rebut this presumption by providing sufficient evidence “demonstrating that the Licensee does and historically has exercised a high degree of control over the development, exploitation, maintenance, enhancement and protection of the Intellectual Property Asset by an adequate number of full-time employees, with the necessary qualifications, who permanently reside and perform their activities in the UAE.”

 

12. Businesses should retain records for at least six years

 

Under Article 7(1) of the Regulations, the Regulatory Authority may make a determination that a Licensee has not met the Economic Substance Test no later than six (6) years from the end of the Financial Year to which the determination relates. Article 4.4 of the Guidance explains that while the Regulations do not prescribe a set period for the retention of information by a Licensee, it is advisable to retain information relevant to evidencing compliance for a period of at least six (6) years.

 

13. Disclosure to overseas regulators

 

Article 9 of the Regulations addresses the exchange of information with foreign regulators. Article 9(3) states:

 

“Upon receipt by the Competent Authority of notification containing information that a Licensee has not met the Economic Substance Test for a Financial Year from a Regulatory Authority pursuant to the above Clause 2, the Competent Authority shall, pursuant to an international agreement, treaty or similar international arrangement to which the State is a party, provide the information relating to such Licensee to – 

 

(a) the Foreign Competent Authority of the country or territory in which resides the parent company, the ultimate parent company, and the Ultimate Beneficial Owner of the Licensee. 

 

(b) If the Licensee is incorporated outside the State, the Foreign Competent Authority of the country or territory in which the Licensee is incorporated.”

 

Article 6.4 of the Guidance explains that the Competent Authority shall provide information to the Foreign Competent Authority:

 

  • if a Licensee fails to meet the requirements under the Regulations for a specific Financial Year; or

 

  • the Licensee carries out a High Risk IP business.

 

UAE removed from European Union Tax Blacklist

 

The UAE Economic Substance Regulations were enacted after the UAE had been put on EU’s blacklist of non-cooperative jurisdictions for tax purposes. On 10 October 2019, the EU issued a press release announcing that the UAE has been removed the blacklist. This topic is covered in more detail in Afridi & Angell’s Legal Alert dated 10 October 2019.

 

Next steps

 

All businesses in the UAE should make an assessment as to whether they are subject to UAE Economic Substance Regulations and those that are subject to the Regulations should begin initiating steps to ensure compliance with the Regulations. While the Regulatory Authority has not yet been appointed, the Guidance states that reporting requirements will commence on 1 January 2020 so it is anticipated that the Regulatory Authority will be appointed before year end. It would be prudent to start taking steps to comply with the Regulations as soon as possible. ■

 

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1 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.

 

2 UAE Federal Law No. 2 of 2015, as amended.

 

3 The phrase “will not be treated as carrying on holding business” is potentially confusing. Read in the context of the entirety of Article 5.1 of the Guidance, we interpret this to mean that a Licensee owning other forms of assets such as bonds, securities, etc., would not be able to qualify for the reduced substance requirement under Article 6(4) of the Regulations. We do not interpret this phrase to mean ownership of other assets would automatically result in a company not being a holding company.

Sudan – new era

On 11 April 2019, President Omar al-Bashir of Sudan stepped down, ending almost three decades in power. A Transitional Military Council (TMC) was formed to pave the way for civilian rule. TMC and the Forces of Freedom and Change (FFC) opposition coalition have reached a final agreement on the rule of the transitional period of 39 months. The agreement provides for the formation of a sovereign council, cabinet and legislative council. After the transitional period, Sudan is to become a democracy.

 

US Sanctions

 

In January 2017, the Obama administration took steps to lift certain US sanctions, unfreeze assets and remove financial sanctions against Sudan. A full lifting of US sanctions is expected in the short term given the recent occurrences in Sudan. Sudan has significant untapped opportunities which include its strategic location, significant mineral resources, a population of more than 40 million, a favourable climate and some of the most fertile land in the region. Indeed, Sudan has the potential to be one of the best economic success stories of our time.

 

Opportunities

 

Sudan offers multiple investment opportunities:

 

  • Natural Resources/Mining: Sudan has always been known for its abundant natural resources, especially gold, oil, gas, chrome, manganese, zinc, aluminum, cobalt, and nickel. Gold production in Sudan reached 22.3 tons in 2016, ranking as one of the top producers in Africa.

 

  • Agriculture: With the majestic Nile river running through it, Sudan has more than 150 million hectares of arable land. The climate is suitable for all types of crops, and water irrigation is readily available and/or natural. Sudan specialises in cereal production (sorghum, millet, wheat, corn and rice), crops (cotton, sugar, peanuts, sesame, and gum Arabic), and tropical fruit and vegetables.

 

  • Livestock: Sudan is highly regarded in both the Middle East and Africa with regards to its livestock and animal resources. Sudan has national animal resources, which include cattle, camels, sheep, goats, poultry, horses, and an annual stock of more than 110,000 tons of fish.

 

  • Transport: As Africa’s third-largest country and bordering seven countries, Sudan offers great opportunities for investment in the transport sector. The weakness in the improvement of the transport network remains one of the greatest constraints to the economy.

 

  • Industry: Investment opportunities in the industry sector in Sudan include the following sub-sectors: agro-processing, food, spinning and textiles, leather, chemicals, pharmaceuticals, oil and soap, engineering, building materials and refractories, and printing and packing.

 

Given its recent move towards democracy, Sudan is an emerging market offering access to one of the few internationally untouched markets. ■

Dubai: Changes to the fines that can be applied by the Public Prosecutors’ Department

The Public Prosecutors’ Department in Dubai has the power to impose fines with respect to certain criminal misdemeanors and offences[i] without being required to refer the matter to a Court of Law. Such fines are issued under a Penal Order. This power stems from Dubai Law No. 1 of 2017, which authorises the Attorney General of Dubai to prescribe the offences and the corresponding fines which may be the subject of a Penal Order. On 1 October 2019 the Attorney General of Dubai issued Resolution No. 119 of 2019 (the Resolution) amending certain fines that could earlier be imposed under Penal Orders, and adding misdemeanors and offences which may be the subject of a Penal Order.  

 

The following fines are amended:

 

 

Misdemeanor or Offence Previous Fine Current Fine
Intentionally disturbing another through means of  telecommunication AED 5,000 AED 3,000
Publicly attributing to another person an incident susceptible of making the other person subject to punishment or exposing the other person to contempt AED 2,000 AED 5,000
Publicly disgracing the honour of another person AED 2,000 AED 3,000
Committing libel or slander over the telephone (which includes text, email, and other electronic messaging) AED 2,000 AED 3,000

 

 

The following misdemeanors and offences may now be punished under a Penal Order:

 

 

Misdemeanor or Offence Fine
Burning or causing to be burned any object belonging to a third party AED 3,000
Consuming food and beverages publicly during fasting hours of Ramadan AED 2,000
Compelling, inciting or assisting with publicly consuming food and beverages during the daytime of Ramadan AED 2,000 with closure of shop (where applicable)
Violating an order for closure of shop AED 3,000
Causing physical injury to another by fault (i.e. not by accident) AED 1,000
Using a car or a motorcycle without the authorisation or consent of its owner AED 1,000
Destroying any movable or immovable property belonging to another person AED 1,000
Wrongfully destroying a tree, crops or any plants belonging to another person AED 2,000
Harassing or torturing a domestic or tamed animal belonging to another person AED 1,000
Wrongfully injuring any animal or cattle belonging to another person AED   500
Staying illegally in the country for up to 90 days AED 1,000
Not obtaining a residency visa for a child during the legally prescribed time period AED 1,000
Assisting another to illegally stay in the country AED 1,000
Driving a vehicle in violation of an order preventing the person from driving AED 3,000
Driving a vehicle without a valid license AED 3,000
Removing the number plate of a vehicle without permission to use it on another vehicle AED 2,000
Failure to stop after causing a vehicle accident AED 2,000
Refusing to provide name or address to a police officer AED 1,000

 

[i] Under the UAE Penal Code, ‘Misdemeanors’ are crimes that are punishable by a fine, diyah and/or a term of imprisonment not exceeding three years. ’Offences’ are crimes that are punishable by a fine or by detention for a period not exceeding ten days.

Law 6 of 2019: on the ownership of common property in the Emirate of Dubai

What’s happened?

 

After much media coverage regarding the potential change in the law concerning properties owned in common in Dubai, Law 6 of 2019 was introduced on 4 September 2019 (the New Law).

 

The New Law is an important development for Dubai as most real estate is held by way of property owned in common. That is, a real estate development that has been subdivided into apartments, offices, retail units and/or common areas.

 

We expect that the New Law will have a positive impact on the real estate market in Dubai as increasingly disputes under the Previous Law (including those between unit owners and association managers) were effecting property values.

 

The New Law repeals Law 27 of 2007 Concerning Ownership of Jointly Owned Property in the Emirate of Dubai (the Previous Law). However, developers, management companies and owners committees have been given a six month transition period from 4 September to comply with the New Law.

 

In this InBrief we look at the major changes that will impact owners of units in Dubai.

 

New management system

 

Under the Previous Law all owners of units automatically became members of the owners association of their building when they purchased their unit. The owners association, through its board, was then entrusted with the management, operation, maintenance and repair of the common areas of the building, and they could delegate these responsibilities to an association manager to perform.

 

The New Law replaces this management system with a three tiered system set out in Article 18 as follows:

 

First Category – Major Projects:

 

For real estate projects that are considered to be major projects by the Director General of the Dubai Land Department (DLD), the New Law provides that the developer shall now be responsible for the management, operation, maintenance and repair of their common parts and the utility services (Article 18(a)(1)). The developer may appoint a management company to carry out these responsibilities on its behalf (Article 18(c)). The management company must be approved by the Real Estate Regulatory Agency (RERA) (Article 2).

 

An owners’ committee must be formed for each Major Project with its members selected by RERA which shall not exceed nine members (Article 18(a)(1)). The functions of the owners committee are set out in Article 24 and include:

 

  • verifying that the management company manages the common parts;
  • reviewing the annual budgets for the maintenance of the common property and making recommendations; and
  • receiving complaints from owners and submitting them to RERA if the management company fails to address them within 14 days of being notified.

If the developer is found to be incompetent or unable to manage the common property under this first category in a manner that ensures their sustainability and serviceability, the Executive Director of RERA may appoint a specialised management company to manage and operate the common property (Article 37).

 

Second Category: Hotel Projects:

 

For real estate projects that are licensed for use as a hotel establishment, the New Law provides that the developer shall appoint a hotel project management company approved by RERA to manage the common parts (Article 18(a)(2)).

 

If the hotel project management company wishes, an owners’ committee may be formed for each Hotel Project with its members selected by RERA which shall not exceed nine members. However, Article 18(a)(2) provides that even if an owners’ committee is formed, it is not entitled to interfere in the management of the hotel project or the common areas thereof.

 

If the hotel project management company is found to be incompetent or unable to manage the common property under this second category in a manner that ensures their sustainability and serviceability, the Executive Director of RERA may appoint a specialised management company to manage and operate the common property (Article 37).

 

Third Category: Real estate projects other than the major projects and hotel projects:

 

The common parts in these projects shall be managed by specialised management companies, which shall be selected and engaged by RERA in accordance with the controls and regulations set by a decision to be issued by the Director General in this regard (Article 18(a)(3).

 

An owners’ committee must be formed for each real estate project with its members selected by RERA which shall not exceed nine members (Article 18(a)(3)). The functions of the owners committee are set out in Article 24 and include:

 

  • verifying that the management company manages the common parts;
  • reviewing the annual budgets for the maintenance of the common property and making recommendations;
  • receiving complaints from owners and submitting them to RERA if the management company fails to address them within 14 days of being notified; and
  • importantly, this owners committee has the power to request RERA to replace the management company and provide RERA with advice on the selection and appointment of the new management company (Article 24(5)).

 

If RERA finds that the management company is incompetent, inefficient or unable to manage the common property under this third category RERA shall appoint an alternative management company to manage the common property (Article 38).

 

Obligations of Master Developer

 

The Master Developer is required to manage and maintain the common facilities in the Master Project through a written agreement with a management company that has been approved by RERA (Article 19).

 

If the master developer is found to be incompetent or unable to manage the common property in a manner that ensures their sustainability and serviceability, the Executive Director of RERA may appoint a specialised management company to manage and operate the common property (Article 37).

 

Responsibility of Developer to rectify defects for ten years (Article 40)

 

Similar to the Previous Law, the Developer is still under an obligation to:

 

  • repair or correct any defects in the structural parts of the common property for a period of ten years from the date of the certificate of completion for the project; and
  • repair or replace defective fixtures in the common property for a period of one year from the date of handing over the unit to the owner. Fixtures are defined as including mechanical and electrical works, sanitary fittings, sewerage and others.

Removal of JOPD – New bylaws / building management system

 

Under the Previous Law, a Jointly Owned Property Declaration was required to be registered with RERA which governed the use of the common areas and units, and set out the duties and obligations of the owners, occupiers, and the developer.

 

The New Law has now removed the concept of a Jointly Owned Property Declaration and replaced it with the following: the “bylaws of the complex”, the “bylaws” and the “building management system”.

 

Bylaws of the complex

 

The bylaws of the complex are defined in Article 2 as “the terms and conditions governing the development and operation of the master project and the common properties and common facilities therein, including the planning and construction standards of the complex.”

 

Bylaws

 

The bylaws are defined in Article 2 as “the rules and provisions governing the owners’ committee, which shall be established and adopted in accordance with the provisions of this Law.”

 

The building management system

 

Prior to selling any units, the developer must establish a building management system for major projects and hotel projects which must be approved by RERA (Article 20).

 

The building management system is defined as “The document prepared in accordance with the regulations issued by the Department and recorded in the Common Property Register, which state the procedures for maintenance of the common parts, and the percentage of owners’ contribution in the costs related thereto, including the equipment and services existing in any part of another building”.

 

Legal effect of bylaws, bylaws of the complex and building management statement

 

These documents all form part of the title deed and must be complied with by every occupant, owner, owners committee and the developer of the project (Article 6).

 

Filing requirements

 

The developer must prepare and file the bylaws and the bylaws of the complex within 60 days from the date of the certificate of completion for the project.

 

However, the building management system shall not be filed by the developer – instead it will be filed by RERA.

 

Service charges 

 

Similar to the Previous Law, owners are required to pay to the management body his share of the service charge to cover the expenses of the management and maintenance of the common parts (Article 25(a)).

 

However, the management body may not collect any service charges unless they have obtained the prior approval of RERA to the budget allocated for the service charge (Article 27). RERA will appoint a legal auditing officer accredited by it for this purpose (Article 27).

 

Utilisation charges

 

For prefabricated, under construction buildings or vacant land plots, the Master Developer may collect a utilisation charge from the owner or sub-developer of such land, subject to the approval of RERA.

 

New common property register

 

A new “common property register” shall be established by the DLD which shall contain the following (Article 4):

 

1. “Land plots owned by the developers, on which the common properties shall be constructed;
2. units allocated for independent ownership in the common property sold by the developers, and the names of the owners of these units;
3. members of the owners’ committee;
4. building management system;
5. plans;
6. management body;
7. management contracts of the common property or the common parts;
8. area of common parts and private common parts and their percentage out of the area of units in the common property; and
9. areas owned by the developer in the common property.”

 

New dispute resolution mechanism

 

The Rental Dispute Settlement Centre in the Emirate of Dubai shall have exclusive jurisdiction to hear and settle all disputes and differences relating to the rights and obligations stipulated in the New Law, in accordance with the rules and procedures of the Rental Dispute Settlement Centre. ■

The private equity, venture capital, and start-up ecosystem in the UAE: recent developments

In the lead up to the Expo 2020, the UAE government has taken a number of measures to promote economic diversification, foster growth, and stimulate the region’s innovation environment. The government’s push to develop the private equity, venture capital, and start-up eco-system is a central component of this agenda. In this inBrief we summarize the recent developments implemented in the UAE that enhance the ease of doing business for private equity and venture capital funds as well as start-up companies.

 

New Regime for Fund Establishment and Management

 

Over the last three years, the UAE Securities and Commodities Authority (SCA) has issued two important laws concerning the regulation of private equity and venture capital funds in the UAE. They are, (1) SCA Board of Directors’ Chairman Decision No. (9/R.M) of 2016 and (2) SCA Administrative Decision No. (3/R.T) of 2017. Some of the key provisions of these laws include:

 

  • establishing local mutual funds and marketing and promoting of foreign funds to investors in the UAE;
  • conferring corporate personality on the fund and limitation of investor liability; and
  • defining “Venture Capital Fund” as well as the conditions for venture capital funds to satisfy.

 

Despite these positive laws, onshore funds tend to be uncommon in the UAE due to foreign ownership restrictions and regulatory requirements imposed by the SCA. Consequently, many private equity and venture capital funds are established in the economic free zones of the Dubai International Financial Centre (DIFC) and Abu Dhabi  Global Market (ADGM) (collectively, the Financial Free Zones), which are regulated respectively by the Dubai Financial Services Authority (DFSA) and the Financial Services Regulatory Authority (FSRA) (collectively the Offshore Regulators).

 

The Financial Free Zones permit fund managers located both within and outside the Financial Free Zones to establish funds within the Financial Free Zones through a range of fund vehicles that include investment companies, investment partnerships, and investment trust structures. The fund managers based in the Financial Free Zones also have the flexibility to establish and manage funds outside the Financial Free Zones. Firms authorised or licensed by the respective Offshore Regulators can also promote and sell both domestic and foreign funds in or from the Financial Free Zones. In addition, the SCA and the Financial Free Zones have recently begun implementing a passporting regime that will allow for the mutual promotion and oversight of domestic funds established in these respective jurisdictions.

 

Also, the Financial Free Zones have taken several steps to create a favourable regulatory environment for private equity and venture capital funds. For example, they apply a risk-based regulatory approach for their funds regime that includes exempt funds (which are funds available for professional clients) and qualified investor funds, which have less stringent requirements than exempt funds and are specifically targeted at sophisticated investors such as high net worth individuals and family offices. In addition, the FSRA has introduced a risk-proportionate regulatory framework for managers of venture capital funds, which among other things, exempts venture capital fund managers from base capital or expenditure-based capital requirements.

 

New Trends 

 

Several recent legislative developments have also collectively provided more opportunities for funds and regulators have sought to stimulate disruptive industries. For example, each of the DIFC and the ADGM established a FinTech regulatory sandbox to create a progressive regulatory environment for the growth of the FinTech industry in the UAE.

 

In addition, the new pledge law enables pledgees to perfect their security interest over movable assets. This law will substantially enhance and create certainty in commercial lending. As a result, start-ups lacking immovable property will find it easier to avail bank financing by pledging movable assets such as their receivables, raw materials, or future assets.

 

Finally, the UAE’s new bankruptcy law introduces a regime that allows for protection and reorganisation of distressed businesses. It offers some protection for issuers of dishonoured cheques for the duration of any preventive composition or restructuring procedure. In addition, the new law provides debtors with the ability to raise new finance during the preventive composition or restructuring process, with court approval. Together, these changes provide entrepreneurs with further confidence to take calculated risks and comfort banks/investors with exposure to such investments.

 

* * * *

The above positive changes will result in the establishment of new funds and attract more entrepreneurs and investors to the UAE. Ultimately, such policy reforms will cement the UAE’s position as the private equity, venture capital, and the start-up hub of the Middle East. ■

Three Years On: The Bankruptcy Regime in the United Arab Emirates

As we approach the third anniversary of the implementation of the Bankruptcy Law, Charles Laubach and Rahat Dar take a look at the current insolvency framework available in the UAE (including in the two financial free zones: Dubai international Financial Centre at the Abu Dhabi Global Market, each of which has adopted its own insolvency rules) to consider whether the aspirations underpinning the Bankruptcy Law have been realised.

SCA issues guidelines for financial institutions on anti-money laundering

The past year has been a busy one for AML compliance in the UAE.

 

In October 2018, Federal Decree-Law 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organizations (AML Law) came into force. It contained features recommended by the Financial Action Task Force (FATF), and brought UAE laws in line with international AML standards.

 

The AML Law was followed by the implementing regulations in January 2019, which have helped bring further clarity to the intended operation of the AML Law. The Implementing Regulations were issued on 28 January 2019 pursuant to Cabinet Resolution 10 of 2019 (AML Regulations).

 

In May 2019, the UAE Securities and Commodities Authority (the SCA) promulgated guidelines for financial institutions on Anti- Money Laundering and Combating the Financing of Terrorism and Illegal Organisations (the AML Guidelines).

 

The AML Guidelines, resulting from a joint effort among the supervisory authorities of the UAE, set out the minimum expectations of the supervisory authorities regarding the factors that should be taken into consideration by financial institutions when identifying, assessing, and mitigating the risks of money-laundering, financing of terrorism, and financing of illegal organisations.

 

Do the AML Guidelines form part of the law?

 

The AML Guidelines do not constitute regulations or legislation. They are intended to be read together with the AML Law and Regulations as well as all other relevant Cabinet Resolutions and regulatory rulings currently in force in the UAE and the free zones. The AML Guidelines are not a replacement or substitution for any existing legal requirements or statutory obligations. The SCA has made it clear that, in the event of an inconsistency between the AML Guidelines and any legal or regulatory framework in place in the UAE, it is the latter that will prevail.

 

Who do the guidelines apply to?

 

As a starting point (with exceptions noted throughout the guidelines), the AML Guidelines apply to all financial institutions, and their directors, managers and employees, established or operating in the UAE or the UAE’s free zones, that establish or maintain business relationships with customers or engage in any of the financial activities or transactions or trade or business activities outlined in the AML Regulations.

 

Specifically, they are applicable to all such natural and legal persons in the following categories:

 

• banks, finance institutions, exchange houses, money service businesses (including monetary value transfer services);

• insurance companies, agencies, and brokers;

• securities and commodities brokers, dealers, advisors, investment managers; and

• other financial institutions not mentioned above.

 

The AML Guidelines define a financial institution as any person who conducts one or more financial activities or operations for or on behalf of a customer. The term business relationship is defined as any ongoing commercial or financial relationship established between financial institutions or designated non-financial businesses and professions (DNFBPs) and their customers in relation to activities or services provided by them.

 

What is contained in the AML Guidelines?

 

The AML Guidelines are organised into five parts, which consist of the following:

 

1. Part 1 – Overview: This includes background information of the UAE’s AML legislative and strategy framework including key provisions of the law and regulations affecting financial institutions;

 

2. Part 2 – Identification and assessment of money laundering and financing of terrorism risks;

 

3. Part 3 – Mitigation of money laundering and financing of terrorism risks;

 

4. Part 4 – AML and anti-terrorism financing (ATF) compliance administration and reporting requirements, including guidance on governance, suspicious transaction reporting and record keeping; and

 

5. Part 5 – Appendices including a glossary of terms and links to relevant portals.

 

The AML Guidelines have been prepared such that, where sufficiently clear guidance is provided in the AML Law and AML Regulations, no additional guidance is provided in the AML Guidelines. However, where the AML Law or AML Regulations do not specifically cover a topic but such topic is addressed implicitly or by reference to international practices, the AML Guidelines seek to provide guidance to bring some clarity to their intended application in the UAE.

 

How do the AML Guidelines interact with guidance from other supervisory authorities?

 

The AML Guidelines address some inconsistencies that may arise from the legal and regulatory framework currently in place, from previous laws or regulations, or from differences in regulatory requirements between the various supervisory authorities in the UAE. The AML Guidelines recommend, however, that for any unaddressed inconsistences between supervisory authorities, financial institutions should contact their relevant supervisory authority.

 

It appears that with the introduction of the AML Guidelines, other supervisory authorities may begin publishing guidelines of their own relating to AML and ATF compliance.

 

For example, on 30 June 2019, the Dubai Multi Commodities Centre (the DMCC) published its AML and ATF guidelines for financial institutions and DNFBPs. The DMCC’s guidelines are presented as the DMCC’s own interpretation of the AML Law and thus are not mandatory rules or regulations for entities operating in the DMCC. Rather, the DMCC makes it clear that it is the responsibility of all entities to review the AML Law and AML Regulations and determine the impact on their own business.

 

On 7 July 2019, the UAE Minister of Justice promulgated a number of resolutions introducing AML and ATF initiatives. The initiatives include:

 

• establishing a section for AML and ATF;

• issuing AML and ATF procedures for lawyers, notaries and independent legal professionals;

• establishing a Committee for managing frozen, seized and confiscated funds;

• issuing procedures dealing with situations where persons listed on the local terrorism lists use frozen funds;

• issuing guidance on the grievance mechanism for persons disputing listing on the local terrorism lists; and

• issuing procedures and conditions for requesting international judicial cooperation on the sharing of the proceeds of crime.

 

Conclusion

 

While not legally binding, the advent of AML and ATF guidance from the various supervisory authorities of the UAE is a welcome step for businesses in the UAE. It will allow entities subject to the AML Law and AML Regulations to understand how supervisory authorities may construe their obligations and to take the recommended practical steps to ensure they are in compliance with their obligations pursuant to the AML Law. ■

 

Proposed new DIFC data protection law

The DIFC Authority has proposed the enactment of legislation (the Proposed Law) to replace its current Data Protection Law, DIFC Law 1 of 2007 (as amended) (the Current Law).

 

The Proposed Law is the subject of Consultation Paper 6 of 2019, which is presently posted on the DIFC website for public comments to be provided by 18 August 2019.

 

The intention behind the Proposed Law is to align the Current Law with the General Data Protection Regulation (GDPR), to reflect the latest technology, privacy and security law developments, and adapt the same to the unique requirements of the DIFC. As GDPR has international application and has become the de facto global standard for data privacy, the Proposed Law is expected to provide consistency and familiarity for businesses in the DIFC that operate on an international scale.

 

Some noteworthy aspects of the Proposed Law are as follows:

 

1. Data Subject Rights. In addition to the right to access, rectify and erase personal data and the right to object to Processing which exist under the Current Law, there are new rights introduced in the Proposed Law that are as follows:

 

– right to withdraw consent to processing of personal data (Processing);

– right to the restriction of Processing;

– right to know the recipients of the personal data;

– right to data portability (i.e., right of a Data Subject to receive its personal data from a Controller in a structured, commonly used and machine-readable format);

– right to not be subject to automated decision making (including profiling) which produces legal effects concerning, or significantly affects, the Data Subject. Examples of automated decision making include online credit applications and online recruitment tools; and

– right to non-discrimination against a Data Subject for exercising any of the Data Subject rights.

 

Controllers must make available a minimum of two methods (e.g., by phone, email or online form) by which the Data Subject can contact the Controller to exercise any of the Data Subject rights. Such methods should not be onerous.

 

2. Apportionment of liability between Controllers and Processors. The Proposed Law (like the Current Law) stipulates that if a Data Subject suffers material or non-material damage by reason of any contravention of the Proposed Law, it will be entitled to compensation.

 

Unlike the Current Law, the Proposed Law stipulates when the Controller and the Processor are held liable for the damages caused.

 

– A Controller involved in Processing which infringes the Proposed Law shall be liable for damages caused.

– Processors will be liable where it has not complied with the obligations specifically directed to Processors or where it has acted outside or contrary to the lawful instructions of the Controller.

– Where multiple Controller(s) or Processor(s) are involved in the Processing and where each is responsible for any damage caused by the Processing, each shall be held jointly and severally liable for the entire damage.

 

3. Information to be provided to Data Subjects. The Proposed Law has increased the number of items of information to be submitted to the Data Subjects when personal data is collected. The information that must also be provided to the Data Subjects includes (among others):

 

– contact details of the Data Protection Officer (if applicable);

– reference to the appropriate safeguards in the event personal data is transferred to a third country or international organisation;

– the existence of the Data Subject’s right to withdraw consent to the Processing;

– clarification of the legitimate interest or compliance obligations (for which the personal data is being collected);

– recipients of the personal data; and

– any other information to guarantee fair and transparent Processing vis-à-vis the Data Subject, which include (among others):

 the period of which the personal data will be stored;

 existence of the other Data Subject rights (set out in point 1 above) as well as the right to lodge a complaint with the Commissioner of Data Protection (the Commissioner); and

 whether Processing will restrict or prevent the Data Subject from exercising any of the Data Subject rights.

 

The Proposed Law also specifies that the information must be provided to the Data Subject in writing, including where appropriate by electronic means.

 

4. Consent to Processing. Controllers must be mindful of the requirements in the Proposed Law to ensure that consent to Processing has been obtained from the Data Subject. Consent under the Proposed Law means clear and unambiguous consent after clear disclosure of every purpose for which the personal data will be collected, processed and used.

 

5. Requirements for Legitimate and Lawful Processing. The Proposed Law continues the Current Law’s requirement for Legitimate Processing (now re-phrased as “Legitimate and Lawful” Processing under the Proposed Law). Personal data must still be processed fairly and transparently vis-à-vis the Data Subject, be limited to the purpose for which it is collected, and must also be accurate (requiring that it be updated via erasure or rectification without undue delay, where necessary).

 

The Proposed Law additionally requires that:

 

– it would not suffice that Controllers are processing personal data in accordance with the Proposed Law; Controllers would also need to demonstrate such compliance (including to the Commissioner); and

– personal data must now be kept secure and protected against unauthorised or unlawful Processing and against loss, destruction or damage using appropriate technical or organisational measures.

 

6. Legitimate Interests. “Legitimate interest” remains one of the grounds under which personal data can be collected. “Legitimate Interests” continue to remain undefined;  however, the Proposed Law does introduce two situations which are considered as a “legitimate interest”:

 

– transferring personal data within a group of undertakings for internal administrative purposes; and

– processing personal data as strictly necessary and proportionate to ensure network and information security, and to prevent fraud.

 

The Proposed Law also introduces restrictions on the use of “legitimate interests” as grounds for Processing. Public authorities cannot rely on such grounds to collect personal data. Furthermore, Controllers who wish to rely on this basis must conduct a careful assessment as to whether a Data Subject can reasonably expect at the time and context to the collection of personal data.

 

7. Organisational measures to be put in place for DIFC entities. Certain documents and measures would need to be put in place by DIFC entities:

 

– technical and organisational measures that ensure personal data is processed in accordance with the Proposed Law and protect the Data Subject’s personal data;

– a written data protection policy proportionate to the processing activities;

– a policy and process for securely and  permanently deleting personal data;

– a written record in electronic format of the Processing activities; and

– a written contract in compliance with the Proposed Law (i) between a Controller and a Processor, (ii) between Controllers, and (iii) between a Processor and a sub-Processor. If Processing activity is commenced without such agreement, they would be in breach under the Proposed Law.

 

In addition, a DIFC entity transferring personal data to a jurisdiction that lacks an adequate level of protection must take appropriate safeguards. For a discussion of these appropriate safeguards, see point 10, below.

 

8. High Risk Processing Activities. The Proposed Law introduces the concept of “High Risk Processing Activities,” which is Processing where one or more of the following applies:

 

– new technologies are being deployed which may increase the risk to Data Subjects or render it more difficult for Data Subjects to exercise their rights; or

– a considerable amount of personal data will be Processed where such Processing is likely to result in a high risk to the Data Subject (on account of the sensitivity of the Personal Data); or

– the Processing will involve a systematic and extensive evaluation of personal aspects relating to natural persons (such as profiling), on which decisions are based to produce legal effects on, or significantly affect, the natural person; or

– a non-trivial amount of Special Categories of Personal Data (currently called “Sensitive Personal Data” under the Current Law) is to be Processed.

 

There are additional obligations that arise for DIFC entities carrying on such activities. These include (among others):

 

– the appointment of a Data Protection Officer (to assist the Controller and Processor  in monitoring the compliance with the Proposed Law); and

– submission of assessments to the Commissioner (namely the Annual Assessment and Data Protection Impact Assessments).

 

9. Cessation of Processing. The Proposed Law introduces rules on when the Controller must cease the Processing and how personal data must be handled thenceforth.

 

Where the basis for Processing ceases to exist or the Controller is required to cease Processing via the exercise of Data Subject rights, the Controller is required to ensure that personal data is securely and permanently deleted, or where this is not possible, archived in a manner such that the data is “put beyond further use.” The exception to this rule is where such personal data is necessary for the establishment or defense of legal claims, or to be retained in accordance with applicable laws.

 

“Put beyond further use” means that:

 

– the Controller must not use the personal data to inform any decision in relation to the Data Subject or in a manner that affects the Data Subject in any way;

– no party (other than the Controller) has access to the personal data;

– personal data is protected by appropriate technical and organisational security; and

– the Controller has in place a strategy for the permanent deletion of personal data, if or when this becomes possible.

 

10. Transferring personal data to a jurisdiction lacking an adequate level of protection. Unlike in the Current Law, the Commissioner no longer grants a permit or written authorisation to transfer personal data to such jurisdiction. The Proposed Law provides an updated list of conditions, one of which must be satisfied in order to transfer personal data to such jurisdiction:

 

– appropriate safeguards must be put in place, which must be in one of the following forms (among others):

 

 a code of conduct (approved by the Commissioner) together with binding enforceable commitments of the Controller to apply the appropriate safeguards;

 a certification mechanism (approved by the Commissioner) together with binding enforceable commitments of the Controller to apply the appropriate safeguards;

 a legally binding and enforceable instrument;

 data protection procedures and policies applicable to Group entities, (referred to “Binding Corporate Rules” in the Proposed Law), which may be approved by the Commissioner (but is not mandatory).

 

– one of the specific derogations listed in the Proposed Law apply. Such derogations are substantially similar to the transfer conditions set out in the Current Law. This includes (among others) the transfer is necessary for the performance of a contract or public interest, or that the Data Subject consented to the transfer.

– the transfer satisfies the conditions of “limited circumstances,” which is that it is a one-time transfer that concerns only a limited number of Data Subjects, is necessary on the grounds of legitimate interests, and where the Controller has provided suitable safeguards with respect to the protection of personal data. In this situation, the Controller must inform the Commissioner of this transfer.

 

11. Transferring personal data to a governmental authority outside of DIFC. The Proposed Law introduces guidelines that must be followed in order for the Controllers to disclose and transfer personal data, outside the DIFC, to a governmental authority (the Requesting Authority). Controllers must:

 

– exercise reasonable caution and diligence to determine the validity and proportionality of the request for personal data;

– ensure that any disclosure of personal data is made solely for the purpose of meeting the objectives identified;

– assess the impact of the proposed transfer in light of the potential risks to the Data Subject’s rights;

– implement measures to minimize such risks; and

– where possible, obtain appropriate and written assurances from the Requesting Authority that it will respect the rights and freedoms of the Data Subjects.

 

Failing any of the above, the Controller should not disclose or transfer personal data to the Requesting Authority.

 

12. Rectification and erasure notification. Controllers must notify each recipient to whom the personal data is disclosed when personal data is rectified, erased or subject to restricted processing.

 

13. Personal Data Breach. This is a new feature in the Proposed Law. If there is a Personal Data Breach that compromises a Data Subject’s confidentiality, security or privacy, the Controller must notify the breach to the Commissioner. When the Personal Data Breach is likely to result in high risk to the Data Subject’s confidentiality, security or privacy, the Controller must also communicate the Personal Data Breach to the Data Subjects. ■