Author: afridi-angell

VAT and excise tax

The UAE has issued substantive law on Value Added Tax (VAT) and Excise Tax.

 

Federal decree law No.8 of 2017 deals with VAT.  The imposition of VAT will commence in the UAE from 1 January 2018 at a rate of 5%.  The VAT law provides a framework for implementation of VAT in the UAE.  Many operative provisions specific to the UAE are not incorporated in the VAT law and instead will be disseminated in both the Executive Regulation and the Cabinet Decision to be issued in relation to the VAT law.  Once issued, we will receive guidance on a number of areas which currently remain unlegislated.  In the meantime, this inBrief deals with the provisions of the VAT law and information otherwise available in the public domain.

 

Tax Registration

 

Registration is mandatory for any taxable person/business if the total value of its taxable supplies made within the UAE exceeds the mandatory registration threshold of AED 375,000 over the previous 12 months period or, if it is anticipated that the taxable supplies will exceed the threshold in the next 30 days.

 

Voluntary registration is available for taxable persons/businesses that do not meet the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500 subject to the same taxable supply tests above.

 

A taxable supply refers to a supply of goods or services made by a business in the UAE that may be taxed at a rate of either 5% or 0%.  Reverse charged supplies and imports are also taken into consideration for this purpose, if a supply of such imported goods and services would be taxable if it were made in the UAE.

 

Entities which are not based in the UAE but provide goods or services in the UAE are also required to apply for registration if they meet the threshold requirements. Registrations will commence in the fourth quarter of 2017 via the Federal Tax Authority (the FTA) website.

 

Exempt and Zero Rated Items

 

The supply by a taxpayer of either an Exempt or Zero Rated good or service will result in no imposition of VAT on that transaction. Although the result of both categories of supply seems identical, these terms are not to be used interchangeably.

 

The key distinguishing feature between the two supplies is that a supplier of a Zero Rated good or service will be able to claim a refund on any VAT paid on their purchases (input tax) whilst a supplier of an Exempt good or service will be unable to recover any VAT paid on their purchases.

 

VAT law provides a list of Zero Rated and Exempt supplies. The list includes:

 

Zero Rated Supplies

 

  • Exports of goods and services outside the GCC;
  • International transportation and related services;
  • Supplies of certain sea, air and land means of transportation (such as aircraft and ships);
  • Certain investment grade precious metals of at least 99% purity (e.g. gold, silver and platinum);
  • New residential properties that are supplied for the first time within 3 years of their construction;
  • Supply of certain education services, and supply of relevant goods and services;
  • Supply of certain healthcare services and supply of relevant goods and services;
  • Supply of crude oil and natural gas.

 

Exempt Supplies

 

  • Certain financial services including sharia compliant products;
  • Residential properties (save those which are zero rated);
  • Bare land;
  • Local passenger transport.

 

Tax Grouping

 

VAT law provides for tax grouping which allows companies with common control and / or ownership to be combined together into one entity for the purposes of VAT. Only one VAT registration number will be issued to the group and a combined VAT return will be required to be filed for the group, resulting in a simplification of VAT administration.

 

Members of a VAT group become jointly and severally liable for each other’s VAT liabilities and no VAT will be payable on transactions among entities within the group.

 

VAT Interactions within the GCC

 

Generally a VAT registered customer must account for VAT paid in respect of purchases however certain transactions between entities within the GCC will be subject to VAT by Reverse Charge.

 

The concept of reverse charging VAT allows the simplification of transactions within a single market (i.e. GCC states). The Reverse Charge removes the obligation to account for the VAT on a sale from the supplier, and places it on the customer. It is a concessional relief measure to assist the FTA with its administration so that foreign businesses do not need to register for VAT.

 

When a transaction is subject to Reverse Charge, and if your customer in another GCC country is VAT registered, then you will not be required to charge local VAT.

 

The customer will Reverse Charge VAT (i.e. account for VAT on your behalf) on their VAT return in their GCC country whilst simultaneously claim a VAT refund for the VAT paid on the purchase on the same return (if appropriate).

 

For the vendor it will effectively result in a Zero Rated transaction, with full entitlement to a refund of any VAT paid locally and no further obligation to account for the transaction.

 

If a GCC customer is not VAT registered (e.g. a private consumer) then reverse charging does not occur and UAE VAT would be charged until the vendor exceeded the AED 375,000 registration threshold in that GCC jurisdiction, at which time VAT registration would be required.

 

Note that for the purposes of a single market (GCC) VAT treatment, only those countries will be taken into account that have implemented VAT at the relevant time; the non-implementing countries would be treated like any other foreign country.

 

Application of VAT in UAE Free Zones

 

VAT law does not provide guidance to the application of VAT within any of the free zones in the UAE.  It is expected that the Executive Regulation to the VAT law will specify the tax treatment of free zone entities.

 

VAT Compliance

 

Registered entities will be required to maintain records for at least a five year period.

 

Tax invoices issued are required to be denominated in Arab Emirate Dirhams (AED) and if a currency conversion is required to AED, only approved rates scheduled on the UAE Central Bank website may be used.

 

VAT returns will be required to be completed with summary level data and filed online via the FTA portal. Reporting of Emirate level sales data will be required, summarized per Emirate. This statistical information is important for each Emirate, as revenue from the implementation of VAT will be distributed between the Federal Government and each Emirate. All communications with the FTA will also be facilitated online via the same portal.

 

The VAT law provides for penalties (imprisonment and/or fines) for contravention of the provisions of the VAT law. Penalty rates have not been set and will be specified by Cabinet Decision. Late returns and errors on VAT returns will be penalized on a tax liability due basis, whilst compliance failures (e.g. persistent non lodgment of VAT returns) will be penalized on a fixed penalty per infraction.

 

Excise Tax

 

Federal decree law No.7 of 2017 deals with Excise Tax and became effective in the UAE as of 1 October 2017.  A reasonably high rate of tax on a limited number of goods is imposed by way of an excise tax.  This includes a 50% excise on carbonated drinks and a 100% excise on energy drinks and tobacco products.  It is clear from the items on which excise has been applied that it is a tax to change social behavior by discouraging consumption of such products.

 

Conclusion

 

The introduction of Excise and Valued Added Taxation are likely to change the way business is conducted and administratively maintained in the UAE and the GCC.  This is a paradigm shift in a region which was largely free of taxation and the associated tax infrastructure. Although the rate of VAT imposition is set at a low 5% initially, and as such its effect economically will not be severe, the development and eventual maturity of a tax regime will have a much more pronounced effect on the economy and businesses alike. ■

New ministerial decision brings clarity to private joint stock companies

The private joint stock company is one of the forms of company contemplated by UAE Federal Law No. 2 of 2015 concerning commercial companies (the Companies Law). The UAE Federal Ministry of Economy has now promulgated Ministerial Decision No. 539 of 2017 (the Ministerial Decision) which was issued on 29 May 2017 and is now in force, and expressly abrogates Ministerial Decision No. 370 of 2009 on the Register of Shares of Private Joint Stock Companies (and all other contradictory decisions and circulars). The Ministerial Decision brings much awaited clarity on the process for setting up and operating a private joint stock company (a PJSC).

 

 

Unlike the provisions in the Companies Law concerning public joint stock companies, which are relatively more detailed, the provisions relating to PJSCs are general in nature and provide little by way of detailed guidance. Notably, article 265 of the Companies Law provides that save for those concerning public subscription, all provisions concerning public joint stock companies shall apply to PJSCs. It will be of interest to see how the authorities and the courts will reconcile article 265 with the detailed guidance contained in the Ministerial Decision, much of which addresses the same content as the relevant provisions of the Companies Law.
The Ministerial Decision is extensive and brings welcome clarity to many issues, and anyone owning, managing, acting as director of, or advising a PJSC should read it in full.  For example, it deals with the following:
Board of directors: guidance as to the process and preconditions for an appointment to the board of a PJSC. For example, any person wishing to be appointed to the board of a PJSC must submit an acknowledgment that he shall abide by the Companies Law, any supplementary legislation thereto and the provisions of the company’s memorandum and articles of association.  It also deals with conflicts of interests, related party transactions and director remuneration, and clear permission for participation in meetings by electronic means (previously subject to approval of the “Authority” per article 156 of the Companies Law),  among other things.
Capital: guidance on issued versus authorized share capital, share premiums, treasury shares and pre-emptive rights of shareholders and various exceptions to such rights.
Employee share schemes: article 226 of the Companies Law contemplated the issuance of guidance to detail the methods by which a company could implement an employee share scheme. This guidance is contained in the Ministerial Decision (see articles 45 through 47 of the Ministerial Decision). Notably, directors are not permitted to participate in such a scheme and any shares held for the purposes of an award to employees shall not carry any right to vote or otherwise receive distributions from the company, until such time as such shares are transferred to an employee under the terms of the company’s share scheme.
The Ministerial Decision may be a sign of further detail to come.  Guidance on issues concerning the Companies Law is anticipated and will assist in further developing the corporate governance landscape in the United Arab Emirates. As an example, we expect further guidance on the form of memorandum and articles of association to be used for PJSCs (as alluded to in article 3 of the Ministerial Decision). In addition, article 5 of the Companies Law contemplates the issuance of guidance concerning the ability of a free zone entity to conduct business in the United Arab Emirates, but outside the relevant free zone. All guidance that helps clarify issues concerning the Companies Law will be welcomed. ■

 

Be VAT ready – tax procedures law is already here!

It has already been in the public domain for a while that VAT will be applicable in the UAE (and the GCC) from the beginning of 2018. Under the VAT regime, businesses will be collecting taxes on behalf of the government and will file tax returns accordingly. Although the tax is collected at each stage of value addition, the burden of tax falls only on the end consumer. For all the other stages, one can claim a refund. For this reason VAT is called ‘consumption tax’.

 

Various statutory and administrative actions are being taken for the timely and effective implementation of VAT. Following the establishment of the Federal Tax Authority (the Authority) under Federal Law No. 13 of 2016, the much awaited Tax Procedures Law has been issued as Federal Law No. 7 of 2017. The Tax Procedures Law establishes the framework for federal taxes administration in the UAE. Details will be added by executive regulations to be issued to supplement the Tax Procedures Law.

 

All the persons conducting any business or profession in the UAE are required to maintain accounting records. While the Tax Procedures Law defines a “Person” and a “Business” very broadly, note that in the context of VAT, persons and businesses subject to VAT will be specified in the substantive law which is yet to be issued. All taxable persons are required to register with the Authority to obtain a Tax Registration Number (TRN). The TRN is required to be quoted in all correspondence with the Authority. Tax returns are required to be filed in Arabic, however the Authority may permit filing in another language provided the person agrees to provide the Arabic copies when requested by the Authority.

 

The Tax Procedures Law creates a regime for registration of tax agents with the Authority. A registered tax agent can represent any person before the Authority and assist the person to file tax returns. To practise the profession, a person must be enrolled in the Register maintained by the Authority for such purpose, and the person shall also be licensed for this purpose by the Ministry of Economy and the competent local authority.

 

The Authority has been given wide powers of audit. A tax audit may be conducted at the Authority’s office or at the place of business of the person subject to the tax audit or any other place where such person carries on business, stores goods or keeps records. Ordinarily a five days prior notice is required to be given for a tax audit. However, on specified serious grounds, the Authority can conduct a tax audit without prior notice. To protect the rights of a tax assessee, a tax audit without notice requires prior written approval of the Director General of the Authority. In addition, approval of the Public Prosecutor is required if the audit is to take place at the assessee’s residence. An assessee also has a right to know the identity of the persons conducting a tax audit, ask for approvals for tax audit, obtain copies of any originals impounded by the Authority and attend the tax audit. The Authority also has the power to assess tax and administrative penalties. Tax evasion and related conduct is a criminal offence. Any penalty does not relinquish the requirement of paying the unpaid tax.

 

The Tax Procedures Law establishes a Tax Disputes Resolution Committee to decide disputes regarding the calculation and payment of tax. The Committee’s decision shall be final if the amount of the tax and administrative penalties does not exceed AED 100,000.

 

The Authority’s officers are bound by strict confidentiality obligations in relation to the information they obtain during a tax audit. Unless a tax evasion is proven, the Authority cannot conduct a tax audit after the lapse of a period of five years. The burden of proof for accuracy of a Tax Return lies on the person filing the return, and for tax evasion it lies on the Authority. VAT will come into force on 1 January 2018. Any business that is required to be registered for VAT and charge VAT from 1 January 2018 must be registered prior to that date.

 

The promulgation of the Tax Procedures Law is a significant step forward in the implementation of VAT in the UAE. Given the penal sanctions under the Tax Procedures Law, it is in the interest of all potential tax assessees to prepare early to comply with VAT. ■

 

Doing business in Sudan: investment opportunities

Sudan is one of the largest and most geographically diverse states in Africa, split into two countries in July 2011 after the people of the south voted for independence. It borders Egypt, Libya, Chad, the Central African Republic, South Sudan, Ethiopia and Eritrea. Sudan is also a country of great economic potential: a strategic location, gold reserves, oil & gas fields, other mineral resources, a favourable climate, as well as excellent irrigation and soil conditions.

 

Lifting of US Sanctions

 

In 1997, US president Bill Clinton imposed comprehensive trade sanctions against Sudan and blocked the assets of the Sudanese government. In January 2017, the Obama administration took steps to lift such sanctions, unfreeze assets and remove financial sanctions. The Trump administration appears to be continuing such lifting of sanctions. A full lifting of sanctions is expected to occur in the middle of July.

 

Investment Law

 

Sudan’s National Investment Encouragement Act (the Act) of 2013 promotes foreign direct investment and prohibits discrimination against foreigners in investments. The Act defines three types of investment projects: national, strategic and state. Sudan has put in place an open investment legislative framework with several laws and regulations that are modern and based on best practices. The Act also establishes the National Investment Council, chaired by the President of Sudan. The focus and objective of this council is to facilitate investment in all sectors of the Sudanese economy. The Act allows foreign and domestic private entities to establish and own business enterprises and to repatriate capital and profits.

 

Investment 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 specializes 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. The most important animal products in Sudan are milk, meat, poultry, skins, fur and wool.

 

• 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 transport network remains one of the greatest constraints to the economy.

 

• Industry: Investment opportunities in industry 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.

 

Conclusion

 

Given the recent lifting of a majority of sanctions and with the impending lifting of the remaining sanctions, Sudan offers unique investment opportunities and a welcoming business climate for the natural resources/mining industry, the agricultural industry, the livestock industry as well as others. Sudan is an emerging investment opportunity, offering access to one of the few internationally untouched markets. ■

 

Centre for Amicable Settlement of Disputes can no longer mediate disputes when a bank is a party to such dispute

The Centre for Amicable Settlement of Disputes (the “Centre”) was established by Dubai Law No. 16 of 2009 and is entrusted with the task of attempting to mediate disputes, prior to such disputes being referred to court. The Centre is affiliated with the Dubai Courts and the mediators appointed in the Centre act under the supervision of a judge. If the parties reach a settlement, such a settlement must be recorded in writing, signed by the parties and attested by a judge. Such settlement agreement is legally enforceable and is equivalent to an executive instrument which may be directly enforced through the Execution Courts. In the event no settlement is reached between the parties, the case is referred to court.

 

The Centre acquires jurisdiction over a dispute either on the application of a party to a dispute or when the dispute relates to a subject specified in Dubai Law No. 16 of 2009 to be a dispute that must be first reviewed by the Centre prior to the dispute being referred to court. However, there are certain disputes that the Centre does not have jurisdiction over (such as Labour disputes, disputes relating to personal status, summary and interim orders and actions, actions to which the Government of Dubai is a party, etc.).

 

A party to a dispute may opt to refer a dispute to the Centre under the following circumstances:

 

1. If a party (or parties) to a dispute request that the dispute be referred to the Centre;

 

2. On the request of all parties to a dispute which is pending before the Dubai Court of First Instance, Commercial Courts or Real Estate Courts (regardless of the value of the suit), upon the approval of the chief judge of the circuit;

 

3. On the request of a party for the appointment of an expert.

 

The following disputes are disputes that must be reviewed first by the Centre prior to the case being referred to court:

 

1. Division of undivided property;

 

2. If the value of the debt in the dispute does not exceed AED 100,000.

 

Prior to Administrative Decision No. 1 of 2017, all disputes to which a bank was party had to be first referred to the Centre. Such disputes were rarely, if ever, settled and the dispute resolution process was merely prolonged unnecessarily. However, consequent to Administrative Decision No. 1 of 2017, the Centre no longer has jurisdiction over any dispute to which a bank is a party. The significance of this amendment is that no dispute that a bank is a party to can be referred to the Centre, even for the limited purpose of appointing an expert to opine on a matter. Therefore, all disputes where a bank is a party must be referred directly to court. ■

New decree on mortgaging granted lands in Dubai

On 11 January 2017, Dubai Decree No. 31/2016 On Mortgaging Granted Lands in Dubai was issued (Decree).

 

The Decree permits the holder of “granted land” to mortgage such land subject to certain conditions. It is expected that the Decree will stimulate growth in Dubai by enabling developers, who hold granted land, to obtain finance for their projects by mortgaging the granted land.

 

The Director General of the Dubai Land Department (DLD), Sultan Butti Bin Merjren, has said that the Decree is a key legislative initiative that will have a positive impact on the real estate market.

 

What Is “Granted Land”?

 

“Granted land” is land which has been gifted by the Ruler of Dubai to a UAE national, at no cost, for:

 

• commercial or industrial purposes; or

 

• residential purposes.

 

Granting land in this manner furthers Dubai’s leadership vision of ensuring a dignified life for its citizens by enabling commercial and industrial assets to be developed, as well as homes to be built.

 

Granted land is not freehold land and is subject to various restrictions. For example, granted land cannot be disposed of unless:

 

• the UAE national obtains special permission from the Ruler of Dubai; or

 

• in case of commercial and industrial land, the UAE national converts their granted title to freehold upon payment of a fee and in accordance with Decree No. 4 of 2010 on Regulating Ownership of Land Granted for Industrial and Commercial Purposes in Dubai.

 

Key Features of the New Decree

 

The Decree permits a holder of granted land to mortgage that land under the following conditions:

 

• if the granted land is residential, the monies arising from the mortgage must be invested in maintaining, expanding, constructing or replacing the building;

 

• if the granted land is commercial or industrial, the monies arising from the mortgage must be invested to achieve the purposes of the original grant; and

 

• the mortgage must be registered with the DLD.

 

The DLD can only register a mortgage over granted land if:

 

• the borrowed amount will be used to achieve the purpose for which the land was granted; and

 

• the mortgagor has a construction license issued by a competent authority.

 

If a mortgagor defaults, the Decree provides mortgagees with a legal right to sell the granted land at public auction (and under the supervision of the DLD) provided that 30 days’ notice is given to the mortgagor to rectify the default.

 

All disputes relating to mortgages over granted land are to be heard through the Civil Court.

 

What Changes Compared to the Old Rules?

 

The Decree follows previous Orders and Instructions in relation to mortgaging granted land as set out below.

 

• Instructions issued on 20 September 1994 from the Ruler of Dubai – By these instructions, all mortgages over granted land were strictly prohibited, and any mortgage made in violation of this instruction was considered absolutely null and void.

 

• Order issued on 14 May 1996 from the Ruler of Dubai – By this order, granted land (whether residential or commercial) could be validly mortgaged.

 

• Instructions issued on 5 June 1996 from the Ruler of Dubai – By these instructions, a mortgage over granted land could only be registered at the DLD if:

 

o the DLD had verified that:

 

 the amount of the mortgage was used for the construction of a building on the granted land; and

 

 payment of the mortgage funds had been made in such a way that ensured the mortgage was used for its intended purpose;

 

o the mortgagor had a building license for the commercial development; and

 

o the mortgagor had obtained a no-objection letter from the Ruler of Dubai permitting the mortgage of the granted land.

 

It is important to note that the Decree provides that all prior regulatory measures that are inconsistent with the Decree’s provisions will be repealed, including the above.

 

Why Is the Decree Important?

 

It is expected that the Decree will stimulate growth in Dubai by:

 

• enabling developers, who hold granted land, to obtain finance for their projects by mortgaging the granted land; and

 

• encouraging banks to lend against granted land by providing them with:

 

o a legal right to sell the granted land at public auction (and under the supervision of the DLD) if the mortgagor defaults; and

 

o a dispute resolution process.

 

However, it is likely that further regulations will need to be issued to govern the implementation of the new Decree. ■

Companies law compliance

The new Commercial Companies Law was enacted as Federal Law No. 2 of 2015. It gave existing companies until 1 July 2016 to achieve compliance with its terms. Article 374 provides that a further one-year extension could be granted by Resolution of the Cabinet, and such an extension was in fact granted. Article 374 also provides that a company that fails to achieve compliance shall be deemed dissolved.

 

 

Many companies set about amending their constitutive documents (Contracts of Establishment for limited liability companies and Memoranda and Articles of Association for joint stock companies) to achieve compliance with the new requirements. Shareholders of limited liability companies were assisted somewhat by Ministerial Resolution No. 272 of 2016, which specified which provisions of the Commercial Companies Law on joint stock companies would also apply to limited liability companies.

 

 

A new resolution of the Minister of Economy, Ministerial Resolution No. 694 of 2016, now provides further relief. It states that Contracts of Establishment of existing limited liability companies that are not amended by the deadline shall be deemed amended to the extent necessary to achieve compliance. One could question whether the Commercial Companies Law gave the Ministry the power to grant this relief from compliance. Executive measures cannot modify legislative measures absent enabling legislation. Nevertheless, the practical result is that such companies no longer face the prospect of dissolution, fines or other sanctions for failure to comply.

 

 

The new measure applies to general partnerships and limited partnerships as well as limited liability companies. It does not apply to the other forms of companies that exist under the Commercial Companies Law, the private joint stock company and the public joint stock company.

 

 

Although sanctions relief is welcome, some uncertainty remains, and not only because of the inherent limitations on executive power noted above. The parties to a Contract of Establishment that is deemed amended could still be unsure of where they stand. The Contract of Establishment will no longer mean what it says, and an authoritative determination of its actual meaning may be elusive. Although major substantive problems would seem unlikely, it is not ideal for a corporate document not to mean what it says.

 

 

In contrast, the companies that have amended their Contracts of Establishment do not face this ambiguity. Their amended documents would have been notarized and filed with the authorities, making it unlikely that the new Resolution would impose further amendments.

 

 

To illustrate the issues that might arise, the new Commercial Companies Law requires that a register of shareholders be maintained by the company, including such particulars as the full name, nationality, date of birth and place of residence of each shareholder. The date of birth was not previously required. Even a company that does not amend its constitutive documents should amend its register of shareholders so as to include this new information.

 

 

As a further example, the new law slightly changes the requirements for exercise of preemption rights when a share transfer is contemplated. When a shareholder in an LLC wishes to sell its shares, it must first make an offer on the same terms to the other shareholders, or alternatively obtain a waiver of the preemption right from the other shareholders. In the event of a dispute over the price, the new Commercial Companies Law requires that the price be determined by one or more experts nominated by the Competent Authority in the relevant Emirate. The previous Commercial Companies Law (and many constitutive documents of companies formed in the UAE) provided that this value would be determined by the company auditor. An expert appointed by the Competent Authority will now play that role, whether or not the underlying constitutive documents are amended.

 

 

The new Commercial Companies Law contains an express prohibition against a manager of a limited liability company acting as manager of a competing enterprise without the consent of the company. This exposes a manager to liability even if the prohibition is not stated in the constitutive documents of the company.

 

 

As a final example, a shareholder in a limited liability company is now able to pledge its shares. However, this is possible to the extent that the constitutive documents enable the same. It is unlikely that a provision to this effect would be deemed included in the company’s constitutive documents by virtue of the new Resolution.

 

 

The new Resolution was published in Issue No. 612 of the UAE Federal Official Gazette dated 28 February 2017, and it took effect on 1 March 2017. ■

New UAE funds regime

The UAE has embarked on an ambitious undertaking by introducing new business friendly mutual funds regulations to stimulate the UAE funds industry and provide the foundation for a more developed regional funds regime in the Gulf Cooperation Council (the “GCC”). The mutual funds industry can facilitate the gathering of monies for investment in various sectors across the UAE and Middle Eastern economies through funds that are established in the UAE, as well as foreign funds that are registered and promoted in the jurisdiction.

 

The Emirates Securities and Commodities Authority (“SCA”) has recently issued the following new regulations governing the registration, licensing, and promotion of mutual funds in the UAE (the “Fund Regulations”):

 

1. SCA Board Decision No. 9 of 2016 regulating mutual funds;

 

2. SCA Board Decision No. 10 of 2016 setting out fees related to mutual funds;

 

3. SCA Administrative Decision No. 49 of 2016 regulating exchange traded funds (“ETFs”);

 

4. SCA Administrative Decision No. 52 of 2016 regulating cash investment funds;

 

5. SCA Administrative Decision No. 1 of 2017 regulating real estate investment trusts (“REITs”);

 

6. SCA Administrative Decision No. 2 of 2017 regulating private ownership funds;

 

7. SCA Administrative Decision No. 3 of 2017 regulating venture capital funds; and

 

8. SCA Board Decision No. 3 of 2017 regulating promotion and arranging activities.

 

The Fund Regulations constitute the new UAE fund regime regarding onshore local funds and foreign funds that are marketed in the UAE (outside of its financial free zones).  Such regulations replace SCA Board of Directors Decision No. 37 of 2012 concerning the regulations on mutual funds (the “2012 Regulations”).

 

In addition to revamping the primary mutual fund law that applies to all UAE funds, the Fund Regulations set out additional obligations and key exemptions for certain funds, including REITs, ETFs, private equity funds, and venture capital funds.  This marks a significant change from the 2012 Regulations, which failed to differentiate between varying types of local funds, and should encourage fund managers and other sponsors to establish funds in the UAE.

 

Mutual Funds

 

As with the 2012 Regulations, the Fund Regulations apply to all mutual funds and parties that are “related” to mutual funds.

 

A “mutual fund” is defined as a financial pool engaged in the activity of accumulating investors’ assets for the purpose of investment against the issue of fund units of equal value. SCA interprets this definition broadly.

 

Corporate Structure

 

A local mutual fund must be established by an eligible sponsor, which includes companies licensed by SCA “in the area of securities” or to manage funds, local and foreign banks licensed by the UAE Central Bank, and UAE branches of foreign companies licensed by an International Organization of Securities Commissions regulator and having an operating history of at least five years.  The sponsor must contribute a minimum share capital of AED 5,000,000 and cannot own more than 30% of the fund units.

 

While UAE Law No. 2 of 2015 (the “Companies Law”) contemplates local funds having corporate personality, it does not prescribe a specific form for funds.  As with the previous regime, a UAE fund is established through the contractual relationship between the sponsor and its investors, and each investor will have a balance sheet entry in the accounts of the fund administrator (which must meet comparable eligibility requirements as those of the sponsor).

 

The Fund Regulations provide that the contractual relationship will benefit from limited liability (i.e. up to the amount invested) and impose certain conditions related to the fund units (e.g. preventing pledging assets of the fund to satisfy third party debts and allocation of units by heirs or creditors).  Furthermore, a fund sponsor is only required to obtain SCA approval to establish a local fund; accordingly, there is no need to obtain a separate operating license for the fund with any economic department in accordance with the Companies Law.

 

Types of Local Funds

 

The Fund Regulations provide for (or otherwise contemplate) the following types of funds:

 

• public and private funds;

 

• master/feeder funds and umbrella fund/sub-funds;

 

• open ended and closed ended funds; and

 

• specialty funds, including Islamic funds, REITs, venture capital funds, private equity funds, ETFs, and cash investment/money market funds.

 

The provisions related to these funds are based on the Undertakings for Collective Investment in Transferable Securities (UCITS) model, which creates a harmonized regulatory regime that permits funds to be sold to any investor in the European Union.  While the GCC states have not adopted a comparable framework, it appears that the Fund Regulations have been prepared with this possibility in mind. ■

 

* * *

 

The new Fund Regulations mark the beginning of a new chapter in the UAE funds regime and should contribute to the growth of the UAE and the broader region by fostering more efficient and transparent investment structures.