Shahram Safai, Partner and Anna White, Associate at Afridi & Angell assess the impact of the changes to Dubai’s Interim Property Registration Law which were announced in November.
Author: afridi-angell
Dawn raids: do you have a policy in place, and is it fit for purpose?
The term “dawn raid” refers to an unanticipated visit to commercial premises by a regulatory authority. Examples of this could include a squad of policemen entering a warehouse, a team from a financial-services regulator checking trading records at a bank, or an official from the UAE Ministry of Human Resources and Emiratisation entering your office to check the work permits of all employees present there (an increasingly common practice).
If your business is subject to a dawn raid, it generally means something has already gone wrong. Regulators only have limited resources, and they typically don’t engage in random inspections. If they are visiting you there is almost certainly a good reason for it. How you handle the raid itself will have a significant impact on the discussions and negotiations that are sure to follow.
A calm, professional and pragmatic interaction with the regulators will serve your organisation much better than a disorganised and panicked response. Having a written policy in place provides your team with a script to follow, and prevents inappropriate behaviour by untrained staff. Unfortunately, dawn-raid policies used in other parts of the world are often fatally flawed when reviewed in the context of the UAE.
All dawn-raid policies should include training of your receptionists, with specific directions for the contact people who must be immediately informed of the raid. These might include the manager of the office, the compliance officer (if any) and the organisation’s lawyers (internal and/or external). The receptionists will almost certainly be the first people that the regulators come into contact with.
The organisation’s lead representative should then attempt to agree an approach with the raiding authority. The aim is to allow the search to take place in a manner which minimises the inevitable disruption to normal business activity. If possible, you will also want to agree the extent of the search and to place limits on the types of materials that the raiding authority can inspect. Much will rely upon the charm and negotiating ability of your lead representative at this stage. Many regulators will resist efforts to curtail the scope of the inspection.
The policy should document the fact that, in the event of a raid, documents must not be destroyed or amended. Normal document-destruction procedures should be suspended. An ill-guided attempt to hide evidence from inspectors will make a bad situation much worse. The policy should also specify that all employees receive regular training on this point. In the event that someone does destroy a document, it may help the organisation if you can point to the policy and the training and thereby state that you had told employees not to do this.
The policy should also include a communications plan. This would deal with both internal communication to employees, plus external communication to the general media, other industry regulators, and competitors. Employees will need to be reminded that they should keep details of the investigation confidential. The amount of detail disclosed externally needs to be carefully considered. Too little information suggests that the company is trying to hide a problem. Too much (or too early) will prejudice your ability to reach a negotiated settlement with the regulator.
The reason that dawn-raid policies from other parts of the world are fatally flawed when used in a UAE context is due to the concept of legal privilege. The concept of legal privilege is engrained in many legal systems, and is often seen as a fundamental principle of justice. It grants a protection from disclosing evidence. A key issue in dawn raids in other parts of the world is therefore identifying which documents are protected by legal privilege, and therefore need not be disclosed to regulators. A client must be confident that his discussions with his lawyer are confidential. This means that all correspondence between a client and his lawyer (in many parts of the world) is protected by legal privilege.
The situation is somewhat different in the UAE. Lawyers owe a duty of confidentiality to their client, but this falls short of being legal privilege, which is a right enjoyed by the client. In the context of a UAE dawn raid, you risk antagonising a regulator (and increasing the disruption to the business) if you attempt to argue that certain documents need not be disclosed as they are protected by legal privilege. There is a danger of this happening if you adopt a dawn-raid policy developed overseas and do not amend it to accord with local conditions. Please contact us if you would like us to review your dawn-raid policies, or to assist you in developing a new policy. ■
Cap restored on Abu Dhabi Court fees
Abu Dhabi has put an end to a four-year experiment – widely viewed as unsuccessful – with uncapped court fees.
Prior to 2013, court fees in Abu Dhabi were calculated as a percentage of the amount in controversy, subject to a cap of AED 20,000. But Abu Dhabi Law 6 of 2013 introduced a new formula of 3% of the amount in controversy without any cap. This imposed significant costs on claimants, even taking into account the power of the courts to charge fees to the losing party. Resort to the courts was deterred, even for an action such as the enforcement of an arbitral award where the role of the courts was restricted.
This has now been remedied by Abu Dhabi Law 13 of 2017, which repealed Law 6 of 2013. Law 13 of 2017 provides for a court fee of 5% of the amount in controversy, provided that the fee shall be not less than AED 100 and not more than AED 40,000. The formula is the same for appellate fees, but with a maximum fee of AED 10,000. For a lawsuit of indeterminate value, a fixed fee will be charged initially depending on the type of case, with the balance of the fee to be calculated following pronouncement of judgment on the basis of the amount of the award using the normally-applicable formula.
Law 13 of 2017 also sets a cap of AED 10,000 for fees for additional electronic services provided by the Abu Dhabi Judicial Department. ■
Blockchain and Crypto Currencies, Lexis Middle East Law
Blockchain technology is attracting the attention of Governments, business people, and consumers. The headline-grabbing cryptocurrency, ‘Bitcoin’, is the best-known application, but the implications and potential uses of Blockchain technology and, more broadly, distributed ledger technology (DLT), are much broader than Bitcoin and other cryptocurrencies.
DIFC special purpose companies and exempt activities: a special purpose
The special purpose company (SPC) regime in the Dubai International Financial Centre (the DIFC) offers a vehicle that is convenient for use in many types of corporate finance transactions. A DIFC SPC is relatively quick and easy to establish and inexpensive to maintain on an ongoing basis as compared to a DIFC company limited by shares.
All SPCs are governed by and subject to the DIFC Special Purpose Company Regulations (the SPCoR). Importantly, the SPCoR stipulates that an SPC can only be used for an “Exempt Activity”. In summary, the SPCoR requires that an SPC be used only where some form of financing, debt or capital markets transaction is contemplated.
Those that seek to use an SPC in their corporate structures must take this limitation into account. The DIFC Registrar of Companies is granted the right to review the status of a DIFC SPC, and to revoke the privileges and exemptions granted to an SPC by the SPCoR, should an SPC undertake any activity which is not an Exempt Activity. Specifically, this means that an SPC should not be used merely as a holding company, where there is no genuine financing element that would qualify as an Exempt Activity under the SPCoR. We are aware that the DIFC authorities have recently stepped up enforcement activity in an effort to ensure that all SPCs are adhering to the restrictions set forth in the SPCoR in letter and spirit. This approach could affect the viability of using an SPC as a mere holding vehicle in new structures, and could also affect existing structures if the DIFC authorities choose to examine the stated versus actual activities of existing SPCs. ■
UAE VAT executive regulation update: free zone guidance
The UAE Ministry of Finance has announced the Executive Regulation for the Federal Decree-Law No. (8) of 2017 on Value Added Tax (UAE VAT Legislation) at a Cabinet meeting on 7 November 2017, headed by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE, Ruler of Dubai.
It is expected that the Executive Regulation to UAE VAT Legislation will be released this week in draft form on both the UAE Ministry of Finance’s website (www.mof.gov.ae) and the Federal Tax Authority’s website (www.tax.gov.ae).
The Executive Regulation operates in conjunction with, and provides substantive details to many operative provisions within the UAE VAT Legislation. As such, the UAE VAT Legislation, Executive Regulation and relevant UAE Cabinet decisions are required to be read together for a practical application of UAE VAT law.
In this multi-part inBrief, we will disseminate the most significant provisions for which the release of the draft Executive Regulation has provided additional legislative and procedural detail for the application of VAT within the UAE.
Operative clarifications in a number of specific areas have now been provided in the Executive Regulation, amongst which the most important and anticipated is the intended application of UAE VAT regime with respect to Free Zone entities.
Designated Zones
The Executive Regulation does not specifically prescribe treatment to UAE Free Zone entities or references the term Free Zone, as not all Free Zones will attract the same treatment.
Rather the Executive Regulation introduces a new term, Designated Zone, which is defined by the Executive Regulation as:
Any area specified by a decision of the Cabinet upon the recommendation of the Minister, as a Designated Zone for the purpose of the Decree-Law.
Therefore, as a Designated Zone will be specified by a decision of the UAE Cabinet and such decision has not been published in the UAE Federal Gazette the situation remains that there is no comprehensive guidance on whether a specific Free Zone entity would fall under the Designated Zone VAT provisions, or if they would be treated as a regular onshore entity for UAE VAT purposes.
The operative provisions of the Executive Regulations pertaining to Designated Zone entities however do allow us to provide some certainty to a large number of Free Zone entities.
A Question of Physical Segregation
A Designated Zone specified within a future UAE Cabinet decision will be treated as being outside of the UAE and of the GCC for VAT purposes subject to three conditions.
The Designated Zone is required to be a specific fenced area with security measures and Customs controls in place to monitor entry and exit of individuals and the movement of goods to and from the area. A Designated Zone will also have internal procedures regarding the method of keeping, storing and processing of the goods within the Designated Zone, and the operator of the Designated Zone shall comply with the procedures set by the Federal Tax Authority (FTA). These specific procedures are at this time unknown.
If a Designated Zone fails to maintain the required conditions above, it will cease to be treated for UAE VAT purposes as being outside of the UAE/GCC.
It is apparent that the UAE has chosen to align the concept of a Designated Zone with existing bonded customs procedures both as a concession to compliance (as entities currently trading within such bonded Free Zones would be familiar with the imposition of Customs Duties) and also as a simplification measure (as such areas already have the physical and procedural infrastructure in place to control the flow of goods within a fenced geographic area).
From the required Designated Zone conditions above, a large number of forty five Free Zones within the UAE will not satisfy the physical segregation requirements in order to qualify as a Designated Zone, and thus entities incorporated within these Free Zones will be subject to the same VAT operative provisions as all other onshore entities within the UAE.
Bonded Free Zones
Free Zones such as Dubai Airport Free Zone, Jebel Ali Free Zone, Sharjah Airport International Free Zone, Hamriya Free Zone, Ras Al Khaimah Free Trade Zone, and Fujairah Free Zone currently have geographic segregation, security and customs controls in place and hence have the ability to be scheduled as a Designated Zone in a future UAE Cabinet decision.
Imports of goods from outside the UAE into Designated Zones will not be treated as imported into the UAE and thus will not be liable for UAE VAT until such a time when a supply of goods is made from within the Designated Zone to another person to be used by them, or consumed by the owner within the Designated Zone.
Acquisition of goods within a Designated Zone for incorporation into another unconsumed good located within the same Designated Zone will not be subject to UAE VAT.
Goods may also be transferred between Designated Zones without being subject to tax if the goods are not used or altered during the transfer process, and the transfer is undertaken in accordance with the rules for customs suspension per GCC Common Customs Law. The FTA may require a guarantee equivalent to the tax liability of the goods to be transferred in case the conditions for the transfer of goods between Designated Zones are not met.
The movement or supply of goods into a Designated Zone from within the UAE will not be considered an export of such goods from the UAE, and as such will not receive zero-rating which an export outside of the GCC would receive.
Service Entities
A large number of entities operating in bonded Free Zones that may qualify to be Designated Zones would provide services as their primary taxable supplies. The Executive Regulation provides that the place of supply of services is considered to be within the UAE if the place of supply is within the Designated Zone and in effect, aligns the VAT treatment of service entities operating within Designated Zones to similar onshore entities within the UAE.
Conclusion
The draft of the Executive Regulation to the UAE VAT Legislation in respect of Free Zone entities confirmed our view of the expected UAE VAT treatment of Free Zone entities insofar that it would be harmonious to all other onshore UAE entities. Although a number of Cabinet decisions are still to be released pertaining to the implementation of the UAE VAT regime, most Free Zone entities now have reasonable certainty to their UAE VAT outlook. Free Zone entities that have delayed planning or registration for the implementation of UAE VAT on 1 January 2018 have a highly compressed timeline in which to make important internal procedural and operational changes.
The general alignment of UAE VAT and Customs Duty in regard to the definition, operation and compliance of Designated Zones provides some familiarity in changing times to Free Zone entities already operating within the bonded goods warehouse regime, which will reduce administrative compliance overhead to importers and exporters of physical goods.
Please stay tuned for our next installment of this multi-part inBrief as we further disseminate the most significant provisions for which the release of the draft Executive Regulation has provided additional legislative and procedural detail for the application of VAT within the UAE. ■
UAE Excise Tax: What you need to know! The Oath
Afridi & Angell offers a primer on the new excise tax regime in the UAE,
focusing on the key provisions of the law, its impact and on what to expect
from the region.
The right to be forgotten
Afridi & Angell has recently successfully assisted two individuals in becoming forgotten. Put another way, we were able to convince the Dubai Financial Services Authority (the DFSA) that the names of the individuals should be removed from public documents available on the DFSA website. These included published regulatory actions (in the form of enforceable undertakings) and DFSA media releases.
The individuals had been associated with a regulated company in the Dubai International Financial Centre (the DIFC). The company had operated in the DIFC for several years, but in 2008 had the unhappy distinction of becoming the first business in the DIFC to be essentially closed down by the DFSA as a result of various regulatory concerns.
Afridi & Angell assisted the company throughout the DFSA investigation and enforcement process. We also assisted in the negotiation of the enforceable undertakings eventually provided by various individuals in late 2008.
The precise terms of the undertakings varied amongst the individuals, but included obligations such as the payment of fines to the DFSA, and the need to refrain from undertaking any sort of licensed activity in the DIFC for a period of time.
In the years following 2008 the individuals complied with the terms of their undertakings, and following the closure of the business, most left the UAE. Such is the nature of the internet, however, that details of the problems in the business, and of the roles of the individuals, followed them wherever they went, and for years afterwards.
The fact that the individuals were still suffering negative consequences in 2017, nearly a decade after the incidents that led to the DFSA’s regulatory concerns, prompted the individuals to seek a solution. The negative consequences included social stigma, such as when one of the individuals attempted to enroll his child in a new school, and found that the application was suspended until he could provide the principal with the details regarding the events in 2008. There were also more significant financial consequences, such as when one of the individuals failed to secure a particular professional position in part due to concerns over the 2008 events.
By virtue of being on the DFSA website, the undertakings and media releases were public documents.
These ongoing negative consequences were not proportional to the areas of concern that led to the giving of the undertakings in 2008. For this reason, we asked that the DFSA consider removing the undertakings from the DFSA’s website. As an alternative, we asked that the DFSA consider replacing the undertakings with a redacted version in which the individuals’ names were not disclosed.
Many countries have legislation aimed at the rehabilitation of offenders. Such legislation typically enables some criminal convictions to be ignored after a rehabilitation period. The intention is to prevent people from being punished indefinitely because of a relatively minor offence in their past. Here in the UAE there is a process by which some convicted criminals can apply to the police for their records to be sealed.
In addition to the widespread rehabilitation-of-offenders legislation, the “Right to Erasure” or the “Right to be Forgotten” is a developing legal concept in a number of jurisdictions. The nature of the internet means that information remains readily accessible for far longer than has been the historic norm. It is encouraging to see that the DFSA is willing to take notice of the evolving jurisprudence in this area. ■
VAT Registration in the UAE has Commenced
The United Arab Emirates (UAE) Federal Tax Authority (FTA) has commenced accepting registrations for Value Added Tax (VAT) through its online portal.
Registrations are currently being accepted on a voluntary basis by entities that satisfy the following registration criteria:
- Any business resident in the Gulf Cooperation Council (GCC) making supplies of goods or services in the UAE with a turnover subject to VAT of more than AED 375,000 in the last 12 months, or an expected turnover of more than AED 375,000 in the next 30 days (i.e. entities with mandatory registration requirements).
- Any business resident in the GCC making supplies of goods or services in the UAE with a turnover or expenses subject to VAT of more than AED 187,500 in the last 12 months, or an expected turnover or expenses of more than AED 187,500 in the next 30 days (i.e. entities who can voluntarily register).
- Any business resident outside of the GCC that expects to make supplies of goods or services within the UAE that does not have another entity to account for the VAT liability in the UAE on their behalf (there is no registration threshold for non-established taxable entities).
Businesses that satisfy mandatory registration requirements will need to ensure they are registered prior to 1 January 2018, whilst for businesses under the AED 375,000 threshold, registration at this time is purely voluntary.
For entities that have previously registered for Excise Tax with the FTA and already hold a Tax Registration Number (TRN), registration for vat registration UAE will still be required as a different TRN will be issued for their VAT registration.
Article 15 of the VAT Decree Law No. (8) of 2017 provides an exception to registration if an entity only supplies zero-rated supplies. A VAT registration application must still be completed through the FTA portal, however by answering ‘Yes’ to the question ‘Are you applying for an exception from VAT registration’, the applicant will have satisfied any mandatory requirements from a registration perspective.
It is relevant to note that although the VAT registration has commenced, the Executive Regulation and the Cabinet Decision in relation to the VAT Decree Law No. (8) of 2017, that are likely to contain many relevant operative provisions, are yet to be issued.
VAT Grouping
Each GCC country is provided the choice by the Common VAT Agreement of the States of the GCC to adopt VAT groups. VAT grouping law is domestic, meaning only local entities are allowed to be VAT-grouped together. There is no cross border VAT group concept, as not every country may elect to adopt VAT grouping.
Article 14 of the VAT Decree Law No. (8) of 2017 provides for two or more legal persons resident in the UAE that are conducting business to apply for VAT registration as a Tax Group.
VAT groups will be allowed where one person or one company controls the others. The applicant will need to explain and provide evidence of legal commercial control in order to form a VAT group.
In the UAE it is common to have multiple branches of the same entity registered in different emirates. From a legal and a VAT perspective they are not different entities. There is no VAT accounting needed when moving goods and services between branches as there is no supply to a different entity.
VAT grouping provides quasi branch treatment to entities with common control. VAT grouping is by election. For instance, in a scenario of 100 companies with common legal control, a differing number of companies could be placed in a VAT group based on operational and business priorities, although each company can only be part of one VAT group.
By grouping VAT payers with refund entities, VAT liabilities can be offset, possibly reducing cash flow implications created by the imposition of VAT. However, there appears to be the choice of not establishing any VAT groups and proceeding with individual VAT registrations. If the FTA perceives abuse of the grouping provisions in any situation (e.g. not grouping multiple entities to stay under registration thresholds) then the FTA has the power to refuse VAT grouping or remove entities from a group.
Once a VAT group has been successfully created, only one TRN number will be issued to the group and one VAT return will be required to be filed, resulting in a simplification of VAT administration.
Members of a VAT group become jointly and severally liable for each other’s VAT liabilities and can ignore transactions between entities within the group for VAT purposes.
VAT Registration Process
The FTA estimates that the registration process should take approximately 15-20 minutes to complete. However, this estimate is predicated on the applicant having all the relevant information compiled at the time of making the application. During the application process, various documents (listed in the table below) relating to the taxpayer’s entity will be requested to be lodged on the portal. Soft copies of the relevant documents should be available before commencing the registration process.
Once an application has been submitted with the FTA for processing, it will be assessed to ensure the applicant satisfies all requirements to be eligible for a VAT registration. The FTA may require additional information for certain applications, and they will contact the applicant for clarification before the application is allowed to progress. Applications will be rejected if the FTA does not believe that all registration requirements are met. Once an application has been approved by the FTA, a TRN for VAT purposes will be issued. This will allow the registered entity to submit VAT returns, along with paying any VAT liability due. ■
| Individual Person | Incorporated Entities (e.g. a Civil Company, a Sole Establishment, or a Limited Liability Company) | Non Corporate Entities (e.g. a Partnership, Trust, Charity, etc) | Government Entity |
| Trade License(s) | Trade License(s) | Trade License(s) | Law or decree of establishment |
| Emirates ID | Certificate of Incorporation (Free Zone Companies) | Certificate of Incorporation (if applicable) | Contact Information |
| Passport ID Page | Certificate of Incorporation (if applicable) | Club or Association Registration | Bank Account Details |
| Partnership Agreement (if applicable) | Articles of Association/Partnership Agreement (if applicable) | Contact Information | Customs Details (if applicable) |
| Contact Information | Contact Information | Bank Account Details | Authorized Signatory Documents |
| Bank Account Details | Bank Account Details | Financial Statements | |
| Financial Statements | Financial Statements | Customs Details (if applicable) | |
| Customs Details (if applicable) | Customs Details (if applicable) | Authorized Signatory Documents | |
| Authorized Signatory Documents | Passport and Emirates ID of manager, owner and senior management | ||
| Passport and Emirates ID of manager, owner and senior management |
Source: Federal Tax Authority website (www.tax.gov.ae) article by Afridi & Angell
Opportunities in Dubai’s healthcare sector
Dubai is the fastest growing healthcare market within the GCC and is becoming an increasingly attractive sector for investors. In this inBrief article we explain the key drivers behind this growth and set out the options available to investors wishing to enter the Dubai healthcare market.
Growth
The growth in Dubai’s healthcare market has largely been due to the following three key drivers:
1. Government support through the implementation of the Dubai Healthcare Strategy 2016-2021 (the Healthcare Strategy);
2. an under supply of medical centers, clinics and hospitals; and
3. an increasing demand for healthcare facilities due to population growth.
Under the Healthcare Strategy, Dubai is embarking on 15 strategic programs which will in turn generate significant opportunities for investors.
Of particular interest to investors will be Dubai’s medical tourism program which focuses on the promotion of the development of medical tourism in Dubai and positioning Dubai as a global health tourism destination.
In addition, under the Healthcare Strategy, the governance framework of Dubai’s healthcare sector is to be transformed and improved making it easier for investors to navigate. Currently, the healthcare sector is regulated by a number of government bodies, including the Ministry of Health and Prevention, the Insurance Authority and the Dubai Health Authority.
The government also aims to increase the level of healthcare in Dubai to ensure that international best practices are met. For example it is targeting 4.8 hospital beds per 1000 (rather than the current 2.1) which means Dubai is expected to see approximately seven hospitals built in the next eight years.
Options for Investors to Enter the Market
Public Private Partnerships: Pursuant to Dubai Law 22 of 2015 an investor may propose a public private partnership (PPP) with the government to build, finance and operate healthcare facilities. If accepted by the government, the government may directly contract with the investor without going to public tender for the project. The law permits a range of PPP models to be used, including concession agreements, build-operate-transfer, build-own-operate-transfer, build-transfer-operate, and manage and operate contracts.
Acquiring land and buildings: In Dubai, a foreign investor can acquire freehold title and long term leases of up to 99 years in designated areas in Dubai or in the free zones which can be used to build healthcare facilities with the requisite approvals. An owner or long-term lessor may also lease the land (or build then lease the land and buildings) to an operator in order to predictably monetize the investment.
Corporate investment or acquisition: The main factors for foreign investors to consider when investing in the healthcare sector in Dubai are the risk of litigation, the protection of intellectual property rights (for example, patents and any know-how concerning clinical processes and procedures), and the ongoing retention of quality medical professionals after the investment. Investors must also be aware that there are ownership restrictions for healthcare facilities. A foreign investor may only own a maximum of 49% of the share capital of a UAE limited liability company (being the most common form of body corporate used for such investment), with the remaining 51% being held by a UAE national (or a body corporate wholly owned by UAE nationals). A number of approvals must also be sought from the relevant authorities, including the Dubai Health Authority, which relate to both the licensing of the facility operator and approval of the facility design at each stage of design and construction. ■