A Q&A guide to arbitration law and practice in the United Arab Emirates.
The country-specific Q&A guide provides a structured overview of the key practical issues concerning arbitration in this jurisdiction, including any mandatory provisions and default rules applicable under local law,confidentiality, local courts’ willingness to assist arbitration, enforcement of awards and the available remedies, both final and interim.
In our eleventh year of writing the UAE chapter of The Energy Regulation and Markets Review, COVID-19, now in its third year, continued to create challenges in 2021 and the early part of 2022. It has produced a domino effect, resulting in a reduction in investments, relative delays in projects and a cascade of other obstructions confronting the energy sector in the UAE. However, the focus of the UAE has remained on its strength in mass generating electricity from renewable energy sources.
The UAE has long been at the centre of technological developments and is now using innovative technology in the power sector, which was reflected in its overall ranking at 33 on the World Energy Council’s Energy Trilemma Index in 2021.
The UAE is geared up for and appears to be on track to deliver its Energy Strategy 2050, which was launched in 2017. Backed by impressive technology, the country is well equipped to meet ever increasing energy demands and to create smart and efficient energy production and use. Energy efficiency remains very much at the top of the UAE’s energy agenda.
In addition to the focus on the energy sector at home, the UAE is also collaborating with and investing in other countries.
Last year we had reported that the Federal Tax Authority (the FTA) has started to impose penalties on entities that have failed to submit their economic substance notifications by the set deadline of 30 June 2020 for the financial period ended on 31 December 2019, and the economic substance reports by the set deadline of 31 December 2020 for the financial period ended on 31 December 2019.
The FTA has now started imposing penalties on entities that had conducted a relevant activity but failed to meet the economic substance test (for example, by failing to demonstrate that the relevant activity was directed and managed in the UAE) for the financial period ended on 31 December 2019. Pursuant to the Cabinet of Ministers Resolution 57 of 2020 concerning the Economic Substance Requirements (Decision), the FTA is imposing a penalty of AED 50,000 for failing to meet the economic substance test. If a licensee commits the same offence in the following year, the FTA can impose a penalty of AED 400,000.
Article 17 of the Decision provides that a licensee may appeal against a penalty by filing an appeal to the FTA.
A licensee conducting a relevant activity (as per the Decision) is annually required to file a notification within six months from the end of the relevant financial period, and an economic substance report within 12 months from the end of the relevant financial period.
For a licensee whose financial year ended on 31 December 2021, the deadline to file a notification is 30 June 2022, and the deadline to file an economic substance report will be 31 December 2022. The notification and/or the economic substance report is required to be filed on the Ministry of Finance’s portal:
(www.mof.gov.ae/en/StrategicPartnerships/Pages/ESR.aspx).
Additional information on Economic Substance Requirements can also be found on the Ministry of Finance’s website.
A Q&A multi-jurisdictional guide to shareholders’ rights in private and public companies law in the United Arab Emirates. This Q&A gives an overview of types of limited companies and shares, general shareholders’ rights, general meeting of shareholders (calling a general meeting; voting; shareholders’ rights relating to general meetings), shareholders’ rights against directors, shareholders’ rights against the company’s auditors, disclosure of information to shareholders, shareholders’ agreements, dividends, financing and share interests, share transfers and exit, material transactions, insolvency and corporate groups.
Significant changes to dispute resolution in labour and employment came into force earlier this year. Chatura Randeniya and Mevan Bandara of Afridi & Angell explain what this means for employers and employees.
A multi-jurisdictional guide which covers the prevailing conditions in the banking industry in 2021 and the first half of 2022, and highlights some of the more significant legal developments and trends during that period.
Wealth and estate planning that make use of so-called offshore trust structures are popular. Such structures are useful for many reasons, including to support individuals and families who are seeking a change in residency, and to offer longevity, predictability and security that is not always available in one’s home country. They can more readily adapt to beneficiaries in different and changing jurisdictions, and in the right circumstances they can offer tax efficiencies. If you have determined that an offshore structure is right for you, you will find that there are many offshore jurisdictions that could potentially be suitable for your needs. This inBrief looks at how to go about evaluating and selecting the right jurisdiction for your structure.
A brief summary of some of the factors you should take into account follows:
– A zero-tax environment. Many jurisdictions offer this.
– Reputability. This is really a colloquial catch-all for how well the jurisdiction adopts and implements FATF guidelines, OECD (and US) tax and reporting rules, transparency and level of cooperativeness of local government and courts, among other things. The international reputation is not a matter of perception, but much more importantly, it is a matter of how willing other professionals and financial service providers will be to deal with entities formed in that jurisdiction.
– Regulatory compliance. This is related to reputability. A jurisdiction that is compliance-focused will be more readily welcomed by banks, investment managers, insurers, land and asset registries, and others that will interact with the entity you establish. In this context, compliance refers essentially to thorough disclosure of beneficial ownership and processes to keep it up to date and verifiable, and accessible to legitimate government inquiry (not to the public, necessarily).
– Quality of service providers. Offshore structures such as trusts can only function properly if they are serviced by qualified, experienced, reliable service providers, in particular trust companies acting as trustees (others include accountants, lawyers, private bankers, investment managers, and insurance advisors). It is of great benefit to establish a trust in a jurisdiction with a mature market of well-established service providers.
– The legal environment. Offshore jurisdictions tend to have well-developed laws regulating their trust industry, and many have developed issue-specific specializations. Depending on your priorities and what you wish to achieve with your trust, you may be better served by one jurisdiction or another. For instance, the Cook Islands have a relatively strong position protecting Cook Islands trusts against foreign claims. The British Virgin Islands offer a special regime for so-called VISTA trusts[1], which have advantages when the trust acts as a holding vehicle for shares in an underlying company, especially where the underlying investments are relatively high risk. The Cayman Islands have a special regime for so-called STAR trusts, which allow for non-charitable purpose trusts, useful for creating “orphan” structures, for example. There are other examples, and many other uses for VISTA and STAR trusts[2].
– The courts. This is really part of the legal environment, but it deserves a separate mention. The track record of the courts in upholding the local laws, and their ability to address trust-related claims in a manner that is sophisticated and predictable is an important factor.
– Privacy. This is also part of the legal environment but deserves a separate mention too. Robust, modern privacy laws are important to ensure that your sensitive personal and financial information is not misused or disclosed to third parties or the public or potential bad actors. It is worth clarifying that “privacy” does not mean “secrecy”, and that any reputable jurisdiction will have detailed beneficial ownership disclosure requirements, and will have international reporting obligations and exchange-of-information treaties, including among tax authorities. The purpose of an offshore structure is not to conceal information from governmental authorities who have a legitimate interest. This was the case decades ago and is the source of negative stereotyping of offshore jurisdictions which continues in the media to this day, ignoring the enormous reforms in transparency, regulation and international disclosure that have occurred over the years.
– Political stability. A long track record of peace and good order and rule of law is critical. Trusts for wealth and estate planning purposes are often intended to last for many years, over multiple generations.
– Cost. The cost of establishing and ongoing maintenance of the trust or other structure is a legitimate focus, of course, but in our view is not the primary driver. The other factors listed above are more important, and, the cost tends to be relatively similar across the board, with limited exceptions.
In our view, among the factors listed above, by far the most important factors to focus on are the legal environment and the quality of trust service providers. The legal environment is important because the objectives for the trust may be better served by the laws of one jurisdiction or another. The quality of trust service providers is important not only for the reasons summarized above but also because a good service provider brings with it its own standards and safeguards around privacy (and the IT infrastructure and culture of compliance that goes with that), often at a level higher than that required by local laws.
A good service provider will also attract qualified personnel, will be responsive, service-oriented, and will be helpful and capable whenever new demands arise.
If you have identified jurisdictions that are reputable, and which have a legal environment that supports your needs, and which have quality service providers available, you can consider some of the softer tie-breaker considerations, such as time zone for ease of communication, and physical accessibility in the event you wish to personally visit from time to time to meet your trustees or other providers.
During the planning phase, it can be useful to weigh the pros and cons of different jurisdictions for a number of reasons. Good planning sometimes entails utilizing a structure with elements in multiple jurisdictions (a private investment company owned by a trust, each in different jurisdictions, for example); and, it can be helpful to consider an alternate jurisdiction in case you wish to re-domicile your trust (most offshore trusts are portable from one jurisdiction to another, if the trust deed allows for it).
The above is not intended to be a definitive list, and specific factual context must always be taken into account. The factors set out above should usually present a reasonable starting point.
If you are considering an offshore trust structure or have questions about whether it may be suitable for you, or which jurisdiction may suit your needs, please contact us and we will be happy to help. ■
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[1] Trusts created under the Virgin Islands Special Trust Act 2003 (as amended) (British Virgin Island)
[2] Trusts created under the Special Trusts (Alternative Regime) Law 1997 (Cayman Island)
A raft of new legislation has come into force bringing with it changes to UAE dispute resolution practices, in areas including labour and cheque disputes, and has altered the rules on remote hearings as Chatura Randeniya and Mevan Bandara explain.
The new year, 2022, will be the year in which cryptocurrencies gain more legitimacy worldwide through government regulation, oversight and further acceptance. Indeed, in December 2021, the Dubai World Trade Centre announced that it will become a crypto zone and a regulator for cryptocurrencies and other virtual assets – including digital assets, products, operators and exchanges. In September 2021, the country of El Salvador officially recognized Bitcoin as legal tender. Mexico has stated that it will have its own digital currency by 2024.
What is cryptocurrency?
Cryptocurrency is an electronic cash system, which removes the need for a centralized server (or bank) when a transaction is made. Instead of using a bank as intermediary, a transaction is communicated to and stored electronically simultaneously in multiple, geographically diverse computers (servers) at once. Such distributed, simultaneous notification and storage of such transaction on all these computers establishes that it is legitimate and prevents unauthorized changes later to such transaction. This is how blockchain technology works. A blockchain is a distributed database that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format. Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralized record of transactions. The innovation with a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party (i.e., a bank).
Why are cryptocurrencies popular?
One reason why crypto is so popular is because it doesn’t require too much effort or the involvement of third parties – only a computer.
Furthermore, many have predicted that cryptocurrencies will become the future primary currency in the world as they remove the need for banks from transactions and significantly reduces the cost of transactions.
Initial coin offerings
Much like in the physical world in which private companies go public by listing and selling their shares on public exchanges such as the New York Stock Exchange, cryptocurrencies have initial coin offerings. An initial coin offering is an event where a company sells a new cryptocurrency to raise money. Investors receive cryptocurrency in exchange for their financial contributions. In many ways, an initial coin offering is the cryptocurrency version of an initial public offering in the stock market. With the growth of the crypto industry, initial coin offerings have also increased in popularity.
NFTs
The new trend in the crypto industry is NFTs. A non-fungible token (NFT) is a unique and non-interchangeable unit of data stored on a blockchain (the Ethereum blockchain is one of the most popular for this purpose), a form of digital ledger. NFTs can be associated with reproducible digital files such as photos, videos, and audio. So NFTs can really be anything digital (such as drawings or music), but a lot of the current excitement is around using the tech to sell and trade digital art. This has very recently created a unique market of buyers and sellers for digital art.
Legal considerations
In the United Arab Emirates, the Securities and Commodities Authority’s Decision No. 23 of 2020 concerning Crypto Assets Activities Regulation. This regulation aims at regulating the offering, issuing, listing and trading of crypto assets in the UAE and related financial activities. The Central Bank has also issued the Retail Payment Services and Card Schemes Regulation regulating payment tokens.
The two financial free zones in the UAE are also becoming more active with respect to the crypto industry. The Dubai International Financial Centre has recently released the first part of a regulatory framework for digital tokens. The Abu Dhabi Global Market issued the Financial Services and Markets Regulations 2015 which regulates virtual assets.
The Dubai Virtual Assets Regulation Law
On March 11, 2022, the Dubai government issued the Dubai Virtual Assets Regulation Law (VAR Law). His Highness Sheikh Mohammed Al Maktoum said “We have established an independent authority to oversee the development of the best business environment in the world for virtual assets in terms of regulation, licensing and governance and in line with local and global financial systems”.
The VAR Law regulates virtual assets (which include Bitcoin) and virtual tokens (such as NFTs) via the Dubai Virtual Assets Regulatory Authority (VARA) at the Dubai World Trade Centre. VARA aims, among other things, to promote Dubai’s position as a regional and global destination in the field of virtual assets; contribute to attracting investments and companies operating in the filed of virtual assets; provide the necessary systems to protect investors and dealers in virtual assets; and set up the regulations, rules and standards necessary related to virtual assets. VARA will also organize, supervise and control the issuance and offering of virtual assets and virtual tokens (such as initial coin offerings).
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With the increased digitalization of business, the crypto industry, cryptocurrencies and other virtual assets are making their claim in the future of business. Regardless of the risks involved and the volatility, crypto is an undeniable trend which will be a challenge to the status quo. The VAR Law is the Emirate of Dubai’s pronouncement of its willingness to promote and compete in this new digital economy. ■
For those with sufficient assets, tax-driven relocations and changes in residency have become commonplace. They began to occur in earnest in the 1990s and have increased in popularity ever since. In the past 1-2 years in particular, the popularity of residency changes for tax reasons has seen a marked rise. This has been driven by several factors, which include: the steady reduction in other viable international tax planning strategies as the OECD continues to press aggressive reform, more mobile lifestyles brought about by COVID-19, and the expectation of an increased tax burden especially for the wealthy (also brought about by COVID-19, at least in part). In short, more people have begun to enjoy more mobility, and the comparative tax advantages of relocating have never been greater. As we have stated in prior inBriefs, for Canadians, changing their country of tax residency is almost certainly going to be the single most effective tax planning strategy they can adopt, with both immediate and long-term benefits.
The opportunity to attract such mobile, wealthy people is also very appealing to potential recipient countries, who stand to gain economically from an influx of wealthy immigrants. Competition for economically beneficial immigrants is high. Many countries have established residency programs and tax incentives specifically intended to attract economic immigrants. Some of the most popular destinations in recent years have included the UAE, Portugal, Greece and Italy, among many others including some Caribbean nations. The models adopted by these countries typically require the applicant to make an investment in the country, often in real estate, in exchange for medium- or long-term residency (and sometimes a path to citizenship over time), and access to a favourable tax regime. The amount of the investment varies greatly from country to country (from EUR 200,000 to EUR 3,000,000).[1] The favourable tax regime will be one of two models: the requirement for an annual lump-sum payment of tax irrespective of actual income each year (e.g., Italy, Switzerland), or, access to a low or no tax environment without the lump-sum in exchange for having made an initial investment (e.g., Portugal, Greece, UAE).
Deciding where to seek your new residency can be complex and should take into account many factors, not only taxation. There are publicly available resources which help you to evaluate potential destination countries according, breaking down some of the more relevant factors on a country-by-country basis, and even offering rankings of countries by popularity for their tax residency offerings.[2]
The conditions of residency and favourable tax treatment usually do not require significant “days in country”, so extensive travel is permitted, but you would need to avoid spending so many days in another country that you are deemed tax resident there as well. The residency status granted normally gives you and your family the ability to live, study, and work in the destination country (and, for EU destinations, these rights would apply anywhere in the Schengen region).
From a tax planning perspective, it is crucial to carefully evaluate your assets and your expected sources of income before settling on a destination for tax residency, and to obtain professional advice as to how your specific assets and income will be taxed there. There are always exceptions to the favourable tax treatment offered by each jurisdiction. For instance, some may provide that only passive income from foreign sources will enjoy low/no tax, and only if there is a double taxation treaty in place with the foreign source country (in which case, income from assets located in offshore jurisdictions may not qualify, nor income you generate if you are working in your new country of residence). Also, assets located in the country you are moving away from may continue to impose tax on income and gains on those assets, despite your non-residency.
As such, the change of residency journey will almost always include a restructuring of your assets, and planning your sources of income, in order to achieve the desired tax-efficient result. As part of the planning, it can often be helpful to make use of trusts in low/no tax jurisdictions as a vehicle in which to hold appreciating or income-producing investments. Distributions from trusts can generally be structured in a manner which attracts little or no tax, depending on whether the distribution is out of trust income or trust capital. International planning using trusts can be complex and requires cooperation among advisors in your new country of residence, your country of origin, the country in which the trust is established, and every country in which there is a beneficiary of the trust. Trust distributions to a beneficiary will be treated differently depending on where each beneficiary resides. However, despite some complexity in the planning phase, trusts remain by far the most popular wealth planning vehicle for good reason, as the benefits of their use can be significant. For example:
– Tax efficient distributions: payments from a trust to its beneficiaries can be managed so as to attract less overall taxation, or no taxation, if the trust has been planned and structured properly. This can include tax-free distributions to Canadian resident beneficiaries, if properly planned.
– Wealth accumulation: trusts in low/no tax jurisdictions often have very long lifespans, or are permitted to exist indefinitely. As such, they can accumulate investment gains with little or no tax over a long period, and can effectively preserve and grow capital. As such, capital can effectively be sheltered in the offshore trust indefinitely, with distributions made to beneficiaries as and when desired so that only those distributions are subject to tax when received (assuming the recipient is subject to tax).
– Transition of wealth: for the above reasons, it is often very advantageous to structure an inheritance through an offshore trust, where the capital can be better preserved, grown and distributed much more efficiently than if the inheritance were given directly to beneficiaries.
– Creditor protection: trusts have long been a popular vehicle for asset protection. Since the trust legally owns the assets, the settlor’s creditors cannot seize them (subject to some exceptions where there are concerns around defrauding creditors). And, since beneficiaries usually only have discretionary interests which are not vested, the creditors of the beneficiaries have nothing to seize either. Trusts are also a useful tool to keep wealth outside of the net of “family property” or similar definitions which determine what a spouse is entitled to upon separation, divorce or death.
– Flexibility and control: trusts are flexible enough to allow you to transfer legal title to assets and grant beneficiaries economic benefits to or from the assets, without transferring control over the assets. This flexibility to retain control can be useful for many reasons, including in situations where beneficiaries may not be ready to responsibly manage the assets, or, in the context of a family business, where you may not yet know which child or children will be involved in the business upon succession. Often of most interest to settlors is the ability to continue to control the management of the trust’s investments, rather than handing over control to a trustee and institutional investment manager.
– Estate planning benefits: trusts have a great many benefits in the context of an estate plan, including all of those noted above in this list, along with additional benefits such as the ability to place trust assets outside of the scope of a forced heirship regime, and the fact that trust assets will not be made subject to probate and estate administration procedures which are complex, time-consuming and sometimes expensive.
Once you have selected a destination and have considered how to structure your assets and income in order to achieve a tax-efficient result, you may also need to carefully plan your emigration from your current place of residency. For Canadian residents, there are tax consequences of ceasing to be a resident and there may be planning opportunities to reduce the impact upon your exit. Advance planning is especially important if you own shares in one or more private companies.
In light of the above, it is important that you select an experienced advisor who not only has local expertise along with an international network and capabilities, but who can also mobilize other professionals in your country and your new country of residence (and a suitable trust jurisdiction) in order to provide you with cohesive and complete advice. It is typical to require legal counsel and tax accountants in at least two countries, along with valuation experts and professional trustees, in order to provide complete advice on a tax-driven relocation.
If you would like to explore a change in residency and the potential tax advantages, please do not hesitate to contact us. ■
[See also our earlier inBrief dated 4 October 2021, “Planning for Non-residency – Doing it Right”]
[1] There are other paths to residency aside from investment in some countries, such as through employment or establishing a business. In the UAE, for example, you may establish a company for significantly less cost than the cost of investing in real estate, and arrange for the company to sponsor your UAE residency.
[2] For example, see the popular Henley & Partners indices and reports which rank investment immigration programs, and perceived quality of different residencies and citizenships: https://www.henleyglobal.com/publications
