Author: afridi-angell

New UAE Labour Law: In More Detail

As promised, this is a more detailed discussion of the new Labour Law, which takes effect on 2 February 2022. For an initial snapshot, see my inBrief dated 21 November 2021.

 

In that earlier inBrief, I discussed what I thought were the most significant departures from previous law, including the new rules on termination of contracts with notice, on end-of-service gratuity, on overtime, and on non-compete clauses. Some of those earlier remarks are further developed below.

 

However, since the Federal Government has now announced a switch to a Monday-Friday work week, I would like to start this inBrief with a discussion of the provisions of the work week that appear in the new Labour Law.

 

Work week

There has been much discussion in recent months about the UAE possibly moving to a Western work week, Monday to Friday, with eight working hours per day, and 40 working hours per week. Indeed, the public sector is moving in that direction, and it must be expected that the private sector will follow.

 

The new Labour Law opens the door but does not step through. The work week continues to be defined as eight hours per day, six days per week, and 48 hours per week. Friday is no longer designated as the official day of rest, and the Cabinet may add to the weekly day of rest — or change work hours — by Resolution. The new Law gives scope to employees who wish to work remotely, either within or outside the UAE, to reach mutual agreement with their employers on working hours.

 

An employee who works in excess of the daily or weekly threshold is entitled to compensation equal to Basic Salary plus 25%. The figure becomes Basic Salary plus 50% for overtime after 10 p.m. and before 4 a.m. For overtime on the weekly day(s) of rest or on an official holiday, the employee is entitled to a substitute rest day or compensation equal to Salary plus 50% of Basic Salary.

 

An employee may not be required to work more than five consecutive hours without a break, to work overtime in excess of two hours daily, to work in excess of 144 hours during a single three-week period, or to work on the day of rest for more than two consecutive weeks.

 

A private-sector employer who switches to the public sector work week in January 2022, one month before the new Labour Law takes effect, will have to treat the four Fridays that fall during the month of January as weekly days of rest. An employee who is required to work on a Friday (but not more than two consecutively) will be subject to the rules on overtime, meaning that the employee will be entitled to either another day during the week as the day of rest in lieu of Friday, or to payment of overtime compensation (Salary plus 50% of Basic Salary).

 

Coverage

Transition issues are presented not only by the work week but also by the coverage of the new Labour Law.

 

The Labour Law applies to employment in the private sector. This was the case under the 1980 statute and remains the case under the new statute. It continues to be the case that government employees; armed forces, police and security personnel; and domestic servants are outside the scope of the Labour Law. The earlier exemption for agricultural labourers has been discontinued. Moreover, as discussed below, it appears that the government service exemption has been narrowed.

 

The Labour Law continues to impose the requirement that any employer in the private sector must obtain a labour permit for each of its employees. Applying for a labour permit involves filing an original employment contract with the Ministry of Human Resources and Emiratisation. The two financial free zones of the UAE, the Abu Dhabi Global Market and the Dubai International Financial Centre, have their own stand-alone regulations that apply in lieu of the provisions of the Labour Law. The new Labour Law contains no specific exemptions for the ADGM and DIFC; however, the Federal statute that enabled the creation of these financial free zones contains a general exemption in respect of civil and commercial laws.

 

In contrast, the other free zones of the UAE are generally subject to the Labour Law, although many of them supplement the Labour Law with their own internal employment regulations. Employees in the free zones do not receive labour permits issued by the MOHRE, but instead are issued permits to work by the relevant free zone authorities.

 

The definition of the private sector has been expanded. It now includes companies, firms, establishments and any other entities owned by individuals in full or jointly with the Federal Government or the Government of one of the Emirates. It also includes a company or an establishment that is wholly owned by the Federal Government or by an Emirate Government, unless the law establishing the same makes it subject to the provisions of another law. This might cause a number of employers with government ownership to make adjustments. In practice, employees of many such employers are currently subject to Federal and Emirate-level Civil Service regulations. Such individuals are accordingly not required to obtain labour permits issued by the MOHRE. It appears that this will continue only for an employer existing under a special statute that also makes it subject to a law other than the Labour Law.

 

To be clear, this will not apply to employees of government authorities. However, this will be relevant to employers that have partial government ownership and to wholly government-owned companies and establishments that lack a statutory exemption.

 

Specified-term contracts

Yet further transition issues are presented by the requirement that all employment contracts be for specified terms.

 

Under the new Labour Law, an employment contract must be for a specified period of time not in excess of three years. Such a contract may be renewed. Employers are directed to replace existing unspecified term employment contracts with specified term employment contracts during a transition period of one year from the effective date of the new statute; such period may be extended by the Minister of Human Resources and Emiratisation. Even though unspecified term contracts are no longer acknowledged, there is no effective distinction between specified and unspecified term contracts as regards termination of services or end-of-service gratuity. This is a significant change from previous law.

 

Unspecified term contracts concluded under the old law may be terminated with at least 30 days’ written notice by either party, if the employee has served less than five years; 60 days’ written notice if the period of service is more than five years; and 90 days’ written notice if the period of service is more than ten years.

 

Employers are required to adjust their positions within one year of the 2 February 2022 effective date of the new Labour Law, including the replacement of unspecified term employment contracts with specified term employment contracts.

 

Labour permit is obligatory

In order to hire an employee, an employer must obtain a labour permit for the employee. Hiring an employee without a labour permit is an offense on the part of the employer. Working without a labour permit is an offense on the part of the employee. An employer who obtains a labour permit for a person who does not work for the employer is likewise guilty of committing an offense.

 

These are not new features of the landscape. However, these must be borne in mind given that the penalties imposed under the new Labour Law (discussed below) are significant. It must also be borne in mind that the labour permit requirement applies notwithstanding the abundance of new visa categories that have been made available, effectively decoupling employment from residency. A person holding one of these new visas must still also hold a labour permit in order to permissibly work in the UAE. Employers must bear this in mind when hiring persons whose visas they do not sponsor.

 

Discrimination

The new Labour Law contains a number of provisions prohibiting discrimination. There is a general prohibition on discrimination on the grounds of race, colour, sex, religion, ethnic origin or disability. The new Law also maintains a requirement that was introduced in 2019 that women shall receive the same salary as men for the same work or for work of equal value.

 

As before, it is still prohibited for an employer to charge an employee, directly or indirectly, any costs related to the employee’s recruitment or employment.

 

Full-time and part-time

The Labour Law contains an express recognition that employees may be hired on a full-time basis, on a part-time basis, or on the basis of temporary or flexible working hours. There are provisions on the assignment of jobs between employers and on the assignment of additional duties to employees, with detail to appear in Executive Regulations. These provisions appear to acknowledge developments in the field since the 1980 statute was enacted.

 

Probationary period

It is still the case that the parties may agree to a probationary period of up to six months. Either the employer or the employee may terminate the contract during the probationary period without providing a reason for such termination. In a departure from previous law, it is now a requirement that 14 days’ prior written notice of termination be given, and an employee who wishes to change employers during the probationary period must give one month’s prior written notice.

 

Under the previous Labour Law, a probationary period was never implied in a contract. Instead, it existed only when the underlying contract specifically stated the same. This appears to continue to be the case.

 

Forms of contract

As before, the Labour Law contemplates that the Executive Regulations under the Law will mandate a specified form of contract. It is expected that employers will continue to use multiple documents to set out the employment obligations of an employee. As before, care must be taken to ensure that the multiple items of documentation are all mutually consistent.

 

Employer obligations

The new Labour Law imposes a number of specific obligations on the employer. Of particular note, the employer may not retain the employee’s official documents or compel the employee to depart the UAE if services are terminated. The first part of this prohibition appears to be directed at the widespread practice of retention of employee passports. An employer is also required to provide training to its employees, in accordance with obligations that will be detailed in Executive Regulations. An employer is also required to bear the costs of its employees’ health care in accordance with laws in effect in the UAE; this currently means obtaining medical insurance coverage. An employer is required to put in place workplace rules, including rules on sanctions for employee misconduct. Further obligations may be imposed by Executive Regulations, by Cabinet Resolution, or by other laws in effect in the UAE.

 

Salary and Basic Salary

Under the previous Labour Law, there were three different concepts of Salary. One was Basic Salary, which was used for calculation of overtime and annual leave. Another concept was Salary, which was the total of all salary and other allowances and benefits provided by the employer to the employee in exchange for the employee’s performance of the employment obligations. These two concepts have been retained. Salary (also translated as Wage) is the all-inclusive term that covers everything received by the employee in respect of employment. The Basic Salary is only the cash component of this overall compensation package, to the exclusion of any benefits in kind or allowances in cash or in kind.

 

Under the previous Labour Law, a third type of salary also existed, which was the salary used for the calculation of the employee’s end-of-service gratuity. This figure was based upon the employee’s Salary minus any allowances and in-kind payments. This is not, and never was, the same as Basic Salary, inasmuch as some components of compensation were not excluded from this calculation. The most important non-excluded elements under the old Law were bonuses and commissions.

 

This has now been ended, inasmuch as the calculation of the employee’s end-of-service gratuity is now based only on the Basic Salary. However, as discussed below, it is based on the Basic Salary for a “Work Day,” a term to be defined by Executive Regulations.

 

Deductions from Salary

There are additional types of deductions that an employer may make from an employee’s Salary, and the overall limits have been increased. Deductions from Salary have been maintained but modified for:

– recovery of advance payments, with the cap increased from 10% of each Salary payment to 20%;

– savings and pension plans and insurance, provided they be pursuant to the laws in effect in the UAE;

– provident funds, provided that the same is approved by the MOHRE;

– social projects and services, provided that the employee consents in writing and that the same is approved by the MOHRE;

– fines imposed under the employer’s workplace rules, provided that the MOHRE has approved such workplace rules and provided that the deduction not exceed 5% of each Salary payment;

– payment of a debt pursuant to a court order up to one quarter of Salary (but now this one-quarter threshold may be exceeded for alimony payments).

 

The following are new provisions on deductions:

– for recovery of loans to the employee with the employee’s written consent, not including interest;

– for payment of sums needed to repair harm caused by the employee’s error or disregard of employer instructions that resulted in damage to tools, equipment, products or materials belonging to the employer, subject to a cap of five days’ Salary per month, with any higher deductions requiring a court order.

 

In all cases, the total deductions may not exceed 50% of the employee’s Salary.

 

Annual leave

The provisions requiring 30 days of paid annual leave are largely unchanged. However, the new Labour Law does state that the employer and the employee may stipulate in the employment contract that annual leave will begin to accrue during the probationary period. An employee with unused annual leave at the end of service will cash it in pro rata based on the employee’s Basic Salary (in lieu of Salary, the figure used previously). The formula for cashing in unused annual leave while remaining employed will be addressed by Executive Regulations.

 

Other leaves

The rules on maternity leave and sick leave are retained with minor changes. Maternity leave entitlement of 45 days at full Salary is continued, but in a new provision this may be extended by 15 days at half Salary. An employee who exhausts her maternity leave may remain absent from work for a further period of 45 days (reduced from 100 days) without Salary if such absence is due to an illness suffered by her or the child as a result of pregnancy or delivery. Previously, a female employee who had not completed one year of service was entitled to maternity leave at half Salary; the new Labour Law does not reduce entitlement to the full benefit of maternity leave during the first year of employment.

 

In a new provision, it is specified that a female employee is entitled to maternity leave if the delivery takes place after at least six months of pregnancy, even if the child is still-born. Yet another new provision states that, if the child has special needs and requires continuous attention, then the female employee may be entitled to a further period of 30 days paid leave, renewable once, following the expiration of the maternity leave. The right of a female employee to take two breaks from work for 18 months following delivery for the purpose of nursing the infant has been reduced to six months.

 

In respect of sick leave, the entitlement now arises upon successful completion of the probationary period. Previously, the employee had to serve three months after the end of the probationary period.

 

The Labour Law now also includes provisions on bereavement leave, parental leave, leaves for education and military service, and unpaid leave. The provision for Hajj leave has been discontinued.

 

Workplace injuries

An employer continues to be responsible to provide medical care to an employee who suffers a workplace injury or an occupational disease. The employee must be kept on the payroll while the treatment proceeds, at full Salary for up to six months, and half Salary thereafter for up to another six months, until the employee recovers, dies, or becomes permanently disabled. An employer continues to be responsible to pay the surviving family members of an employee who dies as a result of a workplace injury or occupational disease a sum of money equal to 24 months’ Basic Salary, subject to a minimum of AED 18,000 and a maximum of AED 200,000. The maximum was AED 35,000 under the previous Law. An earlier provision for payment of a fraction of the foregoing in the event of a partial permanent disability has been discontinued.

 

An employee may lose the foregoing entitlement if the condition resulted from deliberate self-injury; occurred while the employee was under the influence of alcohol or drugs; resulted from the deliberate violation of workplace safety rules; resulted from the employee’s misconduct; or occurred while the employee unjustifiably refused medical treatment.

 

The employer is obliged to transport the remains of the deceased employee to the employee’s home country or place of residence if requested by the family of the deceased.

 

Disciplinary measures

Like the previous Law, the new Labour Law allows employers to develop workplace rules, including rules and procedures on disciplinary sanctions. Under the previous Law, it was required that an employer obtain the approval of the MOHRE to its disciplinary rules, and a sample disciplinary code was set out in a Ministerial Resolution. There was an ever-widening gap between that regulatory framework and the very detailed codes of conduct that are used in most workplaces.

 

With the new Labour Law, specifics on how an employer may deploy an enforceable set of rules will be provided in Executive Regulations. But the general contours of the earlier statute remain. Sanctions may range from warnings to dismissal from service. Specific measures set out in the Law are:

– a written admonition;

– a written warning;

– salary deduction, capped at five days’ Salary per month (previously, uncapped fines);

– suspension without Salary capped at 14 days (previously, suspension at reduced Salary capped at ten days);

– denial of Salary increment for a maximum of one year, if the employer implements periodic increments and the employee is otherwise entitled to the same;

– denial of promotion for a maximum of two years, if the employer implements a system of promotions;

– dismissal from service with payment of severance.

 

It continues to be true that an employee cannot be sanctioned for an act committed outside of the workplace and unrelated to the employee’s work, nor may multiple sanctions be imposed for a single infraction. An employee may be suspended in additional circumstances, including in connection with a disciplinary investigation or a criminal investigation.

 

Notice

The new Labour Law defines the notice period as the notice period that is specified in an employment contract for termination of the contract. However, it appears to be the case that a contract may be terminated with notice even if it lacks a clause to this effect. Notice must be no less than 30 days and no more than 90 days.

 

Accordingly, the previous distinction between contracts of specified term and unspecified term will no longer be material as regards terminability. A contract for a specified term that still contains a clause permitting termination with notice may be terminated with notice, with no penalty attaching to the terminating party.

 

Under the previous Labour Law, it was not permissible to terminate a contract for a specified term with notice prior to the end of its term. Breach of this could require the breaching party to be liable for damages equal to three months’ Salary. It is no doubt a welcome development that this somewhat arbitrary distinction between specified term and unspecified term contracts has now been eliminated. Termination of a contract without the required notice or for other than a “legitimate reason” – and particularly arbitrary dismissal of an employee – may still result in exposure to three months’ Salary as damages.

 

An employee remains employed during the notice period. If the employer initiates termination, then the employee may have at least one day of absence from work each week during the notice period to search for another job.

 

Executive Regulations will address how an employee who is not a UAE national may transfer to the sponsorship of a new employer. A non-UAE national employee who is absent from work without excuse may, in some circumstances, be barred from obtaining a labour permit for a period of one year, subject to rules determined by Executive Regulation.

 

Termination

The new Labour Law contains a list of circumstances in which an employment contract may terminate. These are:

– mutual written agreement;

– expiration of the term of the contract without extension;

– termination pursuant to written notice, subject to the provisions of the new Labour Law and the provisions of the employment contract concerning the same (discussed above);

– death or permanent total disability of the employee;

– employee’s conviction by final order and sentencing to detention or imprisonment of not less than three months;

– permanent closure of the employer in accordance with applicable law;

– the employee’s failure to meet the conditions for labour permit renewal for a reason outside of the control of the employer.

 

The new Labour Law continues the ten narrowly-defined grounds on which the employer may terminate an employment contract without notice. However, termination without payment of end-of-service gratuity is no longer available. Perhaps the elimination of this onerous consequence will facilitate termination for serious misconduct.

 

As before, an employee may leave work without one month’s notice in some circumstances. These are:

– breach by the employer of its obligations, but now provided that the employee must notify the MOHRE 14 days in advance and provided that the breach remains uncured during that period;

– the employee is subject to assault, violence or harassment at the workplace by the employer or the employer’s representative, but now provided that the employee must report the same to the concerned authorities and to the MOHRE within five working days of when the employee is able to make such report;

– if the workplace presents a serious threat to the safety or health of the employee (to be detailed in Executive Regulations), provided that the employer is aware of and has failed to address the same;

– the employer unilaterally imposes job obligations on the employee other than those stated in the employment contract, unless done as a temporary measure to avoid an accident or to remedy the consequences thereof and done in accordance with the Executive Regulations.

 

The employer is required to settle all dues of a departing employee within 14 days of the last day of service.

 

End-of-service gratuity

The formula remains the same, but the baseline figures are different. At the end of service, an employee who has served up to five years receives 21 Working Days of Basic Salary for each year of service. An employee who has served in excess of five years receives this plus 30 Working Days of Basic Salary for each year in excess of five years. Partial years are pro-rated. Calculation is based upon “Working Days,” a concept that was used previously in connection with calculation of overtime and leaves. Under the old Labour Law, the end-of-service gratuity was a function of “days.” Perhaps the exact method of calculation will be determined by Executive Regulations.

 

In a change from the previous rules, no end-of-service gratuity is lost if an employee resigns or if an employee’s services are terminated without notice. The provisions of the previous Labour Law for replacement of the end-of-service gratuity obligation with pension and savings plans have been discontinued, although the new Labour Law states that the Cabinet has authority to promulgate rules on replacement systems.

 

In the event of death of an employee, the employer is required within ten days of death or of learning of the employee’s death to pay the accrued end-of-service gratuity to the employee’s family.

 

Non-competition obligations

Under the previous Labour Law, it was permissible to include a non-competition clause in an employment contract when the work in question gives the employee access to an employer’s customers or business secrets. Such non-compete clause may stipulate that the employee may not compete with or be engaged with any business that competes with the employer in the same business sector following expiration of the contract. Such non-compete clause must also specify the time, place and type of work to the extent necessary to protect the legitimate business interests of the employer.

 

This provision has been continued with two changes. First, there is now an express stipulation that such non-compete clause may not exceed two years in duration. Second, an action by an employer for breach of a non-compete clause must be brought no later than one year from the date on which the employer discovers the breach on the part of the employee. There is scope for elaboration in Executive Regulations. Employers will be particularly interested in whether enforcement of such obligations – problematic under the previous statute – will be facilitated.

 

Related but separate confidentiality obligations are also imposed on employees. An employee is required to keep confidential all information and data that the employee accesses during the course of employment, to refrain from disclosing any business secrets, and to return all items in the employee’s possession to the employer at the end of employment. An employee is also obliged not to retain any hard or soft papers or documents relevant to business secrets without the employer’s permission. These obligations of confidentiality are imposed by the statute, and (in contrast with non-compete clauses and probationary clauses) do not require restatement in the employment contract.

 

Disputes

It continues to be the case that an employee must file a grievance with the MOHRE in lieu of proceeding directly to court. If the MOHRE cannot achieve a settlement by mutual agreement of the parties, then the employee may obtain a certificate from the MOHRE that the dispute remains unresolved and proceed to court on that basis. The courts are directed to dismiss any claim where this process is not followed. Moreover, the courts may not hear any employment claim that is filed more than one year after the claim arose.

 

An employee is exempt from payment of court fees for a claim not in excess of AED 100,000; this monetary cap is a new feature of the new Labour Law. In another new provision, the MOHRE may order an employer to continue paying an employee’s Salary for up to two months while a grievance is pending.

 

Regulation by MOHRE

The extensive powers of the MOHRE to conduct inspections of workplaces are maintained, to be elaborated in Executive Regulations.

 

Penalties for violations have been increased. A fine of AED 20,000 to AED 100,000 may be imposed for providing false information or documentation, for obstructing MOHRE officials, or for disclosure by a public official of confidential information obtained by the official in the course of discharge of official duties.

 

In addition, an employer may be punished with a fine from AED 50,000 to AED 200,000 for:

– hiring an employee without obtaining a labour permit;

– recruiting or hiring an employee and then leaving the employee without a job;

– using a work permit for a purpose other than the purpose for which it was issued;

– closing or ceasing its activity without taking the procedures for settlement of employees’ entitlements, in violation of the provisions of applicable law;

– employing a juvenile in violation of the provisions of the new Labour Law;

– agreeing to the employment of a juvenile in violation of the provisions of the new Labour Law as regards the juvenile’s parent or guardian.

 

A fine of AED 200,000 to AED 1,000,000 may be imposed on anyone who abuses or misuses, or permits a third party to abuse or misuse, the online credentials for MOHRE electronic transactions resulting in disruption of labour relations or procedures. A separate fine may be imposed for each employee in respect of whom the violation has occurred, subject to a maximum of AED 10,000,000 for each employer. A repeat violation within one year may result in a sentence of detention and/or a doubling of the otherwise applicable fine. There is a general provision imposing a fine of AED 5,000 to AED 1,000,000 on any other violation of the provisions of the new Labour Law and its Executive Regulations.

 

Powers of Cabinet

The new Labour Law spells out the specific powers that are delegated to the Cabinet and to the MOHRE.

 

The Cabinet is given the following powers:

– to adopt rules on classification of employers;

– to adopt rules on classification of skill levels of manpower and the privileges provided to each skill level;

– to adopt rules on employment of students;

– to adopt rules on employment of persons with special needs;

– to adopt general rules on regulation of the labour market in the UAE and promotion of the contribution of UAE nationals to the labour market;

– to issue resolutions addressing the effects of general exceptional circumstances affecting the labour market;

– to change the terms, rates or values stated in new Labour Law, in accordance with the public interest and the needs of the labour market;

– to determine the fees necessary for the implementation of new Labour Law.

 

The Cabinet is also given the express power to promulgate Executive Regulations, and specifically to make determinations on the work week, official holidays, and the minimum wage.

 

The powers of the Ministry are stated as follows:

– to propose policies, strategies and legislation that encourage employers to invest in manpower, to adopt modern technology, and to train students;

– to put in place templates for unified workplace rules and to set procedures for adoption of the same.

 

General

The new Labour Law makes it clear that its provisions are minimum requirements in terms of employee benefits. Employers are able to introduce contracts or workplace rules that provide more favourable benefits, but not less favourable benefits. The Law expressly states that any release, conciliation or waiver of any rights by an employee shall be null and void to the extent that it contradicts the provisions of the new Labour Law.

 

Payments to the employee or to the employee’s family members shall take priority over all funds of the employer, save amounts payable to the Public Treasury and legal alimony awarded to the wife and children.

 

Arabic continues to be the official language of all documentation used under the Labour Law. All time periods shall be calculated using the Gregorian calendar, on the basis of a 365-day year and a 30-day month.

 

Although the old Labour Law stands repealed, any resolutions, regulations and rules previously in force shall continue in effect to the extent that they do not conflict with the provisions of the new Labour Law, until they are replaced by new Executive Regulations or Ministerial Resolutions. ■

International Estate Administration for Canadian Executors

The administration of an estate can be a complex and intimidating process at the best of times.  If the estate in question has international components to it, the complexity increases and professional guidance will almost certainly be essential.  This article will provide an overview of some of the issues that arise in the context of estate administration with international elements, from the perspective of a Canadian executor or a Canadian beneficiary.

 

There are a number of things that can make an estate administration “international”.  These include:  foreign assets that form part of the estate; the existence of foreign beneficiaries; the non-Canadian domicile[1] of the deceased at the time of death or at the time of making his/her will; a foreign executor; or some combination of the foregoing.  When an estate has one or more of these characteristics, there are certain questions that need to be addressed.  The remainder of this article will be guided by these key questions and answers.

 

What laws apply to the estate?

 

As a starting point, movables in an estate are governed by the laws of domicile at the time of death, and immovables (real property and certain intangible assets) are governed by the laws of the place in which they are located.  The practical application of this concept can be much more complex than it appears at first blush, particularly if there is a will that was executed during an earlier stage of life when the deceased may have been domiciled elsewhere, or if the will only addresses part of the estate assets (partial intestacy), or where outcomes based on the laws of one country must be enforced in another country which may have its own administrative or substantive requirements. The issue of which country’s laws apply is very important, as it determines the scheme of distribution (on intestacy) or how the will will be applied and how it may be challenged (if there is a will). This includes spousal or dependant relief claims and other challenges to a will or intestate distribution. For example, if the deceased was found to be domiciled outside of Canada at the time of death, the Canadian (provincial) laws that give preferential rights to spouses and dependents would not apply.  The issue of domicile and determining whose laws apply is therefore central and must be considered as a first step.  Note that a Canadian court may still agree to take jurisdiction and issue a grant of probate for the estate even if the deceased was not domiciled in Canada, but whether this would be appropriate is a case by case decision based largely on where the deceased’s assets are located (more on issues of probate and asset location below).  The issue of which laws apply to which aspects of an international estate can be difficult and do not always have perfect solutions, particularly when the laws of multiple countries need to work together. The cooperative efforts of professional legal advisors in all relevant countries is usually a necessity in order to agree on how to achieve the best practical outcomes.

 

Where should you apply for probate?

 

Where to apply for the “original grant” of probate will be driven largely by which assets in the estate require probate in order to enable the executor to deal with them, and where those assets are located.  Assets that require probate are usually assets that are subject to a third party’s control or consent, like bank accounts (the bank), land (land registry), public company shares (the company or the relevant exchange).  As such, once an inventory of assets and their locations has been taken, inquiries should be made with the foreign third parties and authorities in order to confirm their particular requirements.  Those requirements will be one of the following:  a certified copy of the will; a fully attested copy of the will (possibly translated)[2]; a grant of probate in the jurisdiction of domicile; or, the original grant of probate submitted to the local courts to obtain a local court endorsement to enable local parties to rely on it; a local ancillary grant of probate (i.e., a fresh probate application in the local courts).  Which of these documents will be required in each instance will need to be confirmed with each relevant asset registry or authority.  Note that assets that do not require probate in Canada may require it in other jurisdictions.  If there is foreign real property to deal with, local probate will almost certainly be required (either re-sealing an original grant or issuing an ancillary grant locally).  Probate fees may therefore apply in more than one jurisdiction as well.

 

In most cases, obtaining the original grant of probate in the place of the deceased’s domicile at the time of death is advisable as that is normally where the majority of matters requiring administration emanate from.

 

In general, even if probate is not strictly required, it is often advisable for an executor to obtain a grant of probate anyway as it offers protection against claims against the executor.  In the context of an international estate administration this should be a material consideration for any executor.

 

Are there special tax issues with an international estate?

 

From the perspective of a Canadian executor that needs to distribute assets to foreign heirs, there are some additional tax compliance requirements.  Most importantly there is an obligation on the executor to withhold what is known as Part XIII withholding tax (referring to Part XIII of the Income Tax Act) of 25 percent, or less if reduced by a tax treaty between Canada and the other country.  If the distribution of assets consists of Canadian real property or amounts derived from it, the executor may also need to obtain a special clearance certificate from the CRA before making the distribution (a section 116 clearance certificate). Note  this  is  different  from  the  clearance  certificate  that  the  executor should obtain from the CRA to protect him/herself from liability for tax in respect of estate distributions in any event, even domestically[3].

 

For assets located in other jurisdictions, local advice will be required as to whether any tax liabilities or filing obligations are applicable in respect of such assets, such as estate tax (as in the United States) or transfer taxes or stamp duties or similar.

 

For a Canadian beneficiary that receives distributions from a foreign estate, there are generally no tax consequences of the receipt itself.  However, an information return may still need to be filed with the CRA[4].  If the distribution results in the Canadian owning foreign assets worth CAD 100,000 or more, this will give rise to an additional filing requirement with the CRA[5].  Note that if a Canadian resident owns (or acquires by inheritance) any foreign asset that generates income, that income will be taxable in Canada and will need to be declared going forward.

 

It is worth pointing out an opportunity for tax planning when a foreign benefactor wishes to leave an inheritance for a Canadian resident.  If the foreign benefactor is not a Canadian resident, and has not been a Canadian resident for the past 18 months prior to death[6], then they will be able to establish a trust in their will in a foreign jurisdiction (i.e., a low/no tax jurisdiction) using the inheritance.  The Canadian beneficiary(ies) can receive distributions from the trust tax free, forever.  The benefit of this structure is with respect to the income generated by the trust settlement, not the trust capital itself (which would not have been taxed in Canada in any event when transferred to the heirs).  The income generated by the trust can be accumulated, capitalized, and paid out to Canadian beneficiaries as capital on an ongoing basis, attracting no tax.

 

What should you do to plan your international estate in advance?

 

Having a well-planned estate will make its administration much easier on your executors, and will help to ensure your wishes are in fact carried out in the way you intended and not thwarted by unforeseen legal or administrative obstacles.  Some key elements of good planning that you may wish to consider are:

 

1. Keep your will(s) up to date as your assets grow or change in type, value or location, or your family (or other beneficiary) circumstances change, or as your country of residence changes.  An out of date will can result in unnecessary and entirely avoidable difficulties and a distribution of your estate in a manner you did not intend.

 

2. Have multiple wills where appropriate on a country by country basis, or sometimes by asset type, so they can be probated and administered locally, or so that probate can be avoided for some assets.  This can help to avoid the international attestation requirements, translation requirements, and international recognition or enforcement issues that can arise and which can be very time consuming.  If multiple wills are used, be sure they are drafted in express contemplation of one another and do not operate to invalidate the other(s).  Consider preparing an explanatory note to your executor regarding how the multiple wills are intended to operate, and what formalities are expected to be required to implement them so your executor does not need to struggle to work out your intentions.

 

3. Confirm whether you are subject to any forced heirship regime, as is the case for some EU nationals  (e.g. Germany, France),  and  Middle  Eastern  nationals  (e.g. Saudi Arabia, the UAE), and plan your estate with an awareness of which assets, if any, will be subject to the forced heirship regime.  You can plan your will(s) accordingly so as to avoid a conflict between your wishes and what is required by law, or, you may be able to plan to effectively exclude some or all of your assets from the regime.

 

4. Keep a document that will be easily located by your heirs upon your death which sets out what documents you have prepared (i.e. your wills and any instructional memos) and where they can be located, and the best lawyers or other professionals who were involved in their preparation or other estate planning.

 

5. Consider establishing a trust during your lifetime which can hold some of your assets in order to avoid the probate and estate administration issues that would otherwise arise.  Since ownership of the assets will have passed to the trust already, the only administration that is necessary is to provide the trustees with proof of death, whereupon the trustees will deal with the trust assets in whatever manner is provided in the trust deed.  This provides ease of administration, avoidance of probate (and probate fees), and immediate access to assets for your heirs (or limited or delayed or conditional access, according to what you had provided in the trust deed).  The use of trusts can dramatically ease the burden on your estate administrators.

 

International estate administration can be daunting.  The support of professionals who are experienced in dealing with international issues and who are part of a strong network of professionals in other jurisdictions is essential.  If you require assistance or have any questions about domestic or international estate administration issues, please do not hesitate to reach out to us. ■

 

 

[1] The term “domicile” is not always the same as “residence”, although they usually are the same.  Domicile requires a higher level of permanence, where one has their permanent home.  For many people the answer is obvious, but for recent immigrants or emigrants of Canada, or for people with significant residential ties in multiple countries, the determination of domicile can require further analysis.

[2] The attestation process typically consists of notarization in the place of origin, attestation by the Ministry of Foreign Affairs or equivalent, then finally attestation (or legalization) by the consulate or embassy of the country in which the document will be used.  This can be an onerous process for those unaccustomed to it.  Consideration should be given to the translation requirements in the local jurisdiction, which may include the necessity to use only licensed translators in that jurisdiction.  It is usually more efficient to have the translation done in the foreign jurisdiction.

[3] Such clearance certificates are required under section 159(2) of the Income Tax Act, as opposed to the section 116 clearance certificates for distributions of taxable Canadian property (mainly real property) to foreign beneficiaries.

[4] Form T1142 (Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust).

[5] Form T1135 (Foreign Income Verification Statement).

[6] Note the same tax-efficient offshore trust structure can be used during the life of the benefactor too, but they must have been non-resident for at least 5 years rather than 18 months.

Amendments to management liability under the Bankruptcy Law

This inBrief examines the latest amendments to the Bankruptcy Law (Federal Decree Law No. 9 of 2016, as amended) introduced under Federal Decree Law No. 35 of 2021 (the New Law) and their impact on the personal liability of the board of directors and managers of bankrupt companies. The New Law came into effect on 1 November 2021.

 

In contrast with earlier amendments to the Bankruptcy Law (such as Federal Decree Laws No. 23 of 2019 and No. 21 of 2020), which were focused on assisting companies in financial distress through difficult times (such as the COVID-19 pandemic) the New Law is focused on amending and clarifying the scope of the personal liability of directors and managers of companies in bankruptcy, specifically under Articles 144 and 201 of the Bankruptcy Law.

 

The key amendments under the New Law are discussed below.

 

Amendments to Article 144

 

Under the old Article 144 of the Bankruptcy Law, if the value of the assets of a company in bankruptcy were insufficient to settle at least 20 per cent of its liabilities, the court could order some or all of its board members and managers to pay some or all of the company’s debts, provided that they were found liable for the losses of the company under the Commercial Companies Law (Federal Decree Law No. 2 of 2015, as amended). Article 1 of the New Law introduces the following changes to Article 144 of the Bankruptcy Law:

 

(a) The requirement to establish liability for losses under the Commercial Companies Law is replaced with the requirement to establish that the directors and managers have committed any of the acts under Articles 147(a) through (c) of the Bankruptcy Law. Under Article 147 of the Bankruptcy Law, the directors or managers of a company in bankruptcy may be liable to pay the company’s debts if they have; (i) used commercial methods of ill-considered risks, such as disposing of the goods at prices lower than their market value, in order to obtain assets, with a view to avoid bankruptcy procedures or delay the commencement thereof; (ii) entered into transactions with a third party to dispose of the assets at no charge or for an inadequate charge and without any certain benefit or a benefit that is commensurate with the debtor’s assets and/or; (iii) fulfilled a particular creditor’s debts with the intent to cause damage to other creditors, during the period of cessation of payment or during insolvency; in each case during the period of two years following the initiation of bankruptcy proceedings.

 

In addition to severing the cross-liability link between the Commercial Companies Law and the Bankruptcy Law, this amendment to Article 144 of the Bankruptcy Law also limited the scope of the liability from all past and future acts (as under Article 162 of the Commercial Companies Law) to just current and future acts under Article 147 of the Bankruptcy Law (i.e., limited to actions of the directors and managers following the initiation of bankruptcy proceedings). This will be a welcome development for directors and managers, as now any breach of the broader liability provisions under the Commercial Companies Law will not expose them to the risk of having to pay the bankrupt company’s debts under Article 144 of the Bankruptcy Law.

 

(b) New Article 144(2) of the Bankruptcy Law provides the directors and managers of a bankrupt company with a right to appeal any judgement of liability issued under Article 144 of the Bankruptcy Law. An appeal will not result in the (i) stay of execution of the judgement; or (ii) a stay of the bankruptcy proceedings or compromise its validity.

 

The substitution of the broader scope of liability under the Commercial Companies Law for the narrower scope under Article 147 of the Bankruptcy Law, the defence under Article 147(2) (i.e., a person cannot be judged to have breached Article 147(1) if such person has taken all possible precautionary measures to reduce the potential losses that may affect the assets of the debtor company or its creditors), the exemption under Article 147(3) (i.e.,  directors and managers shall not be liable for any of the acts under Article 147(1) if they can establish that they did not participate in such acts or provided their reservations to such acts (e.g., by lodging their objection at the relevant directors’ meeting(s)) and the right to appeal any court judgement under Article 144 of the Bankruptcy Law all combine to reduce the risk exposure for directors and managers of bankrupt companies. However, it should be noted that any wrongful acts (leading to losses for the bankruptcy company), committed outside of the period under Article 147 of the Bankruptcy Law may still attract liability under other legal provisions.

 

Amendments to Article 201

 

Article 1 of the New Law also introduces some minor amendments to the old Article 201 of the Bankruptcy Law, principally to Articles 201(1) and (2), which, when read together with the updated start of Article 201 of the Bankruptcy Law, now provides that the directors and/or managers of a bankrupt company shall be punished by imprisonment for a period not exceeding two years and/or a fine not exceeding AED 100,000 if they deliberately:

 

  • fail to maintain commercial books that are sufficient to reveal the company’s financial position or did not conduct inventory-taking as imposed by under the law, with the intent of harming the company or its creditors (Article 201(1)); or

 

  • refrain from providing the data required by the trustee appointed according to the provisions of Title 4 of the Bankruptcy Law or the court, or intentionally provides incorrect date (Article 201(2)).

 

The key amendments to Article 201 of the Bankruptcy Law are the inclusion of the AED 100,000 fine and the requirement to demonstrate an intention to deliberately perform the acts under Article 201(1) and (2), on the part of the directors and/or managers.

 

Conclusion

 

Although the New Law may have dislodged the Court’s ability to use a director’s or manager’s liability under the Commercial Companies Law as a segue to possible liability for the bankrupt company’s debts under Article 144 of the Bankruptcy Law, it does not eliminate the risk of liability for directors or managers who have acted in a dishonest or fraudulent manner.

 

It should be remembered that the Bankruptcy Law and its application in practice is still in its infancy. In our experience the courts have used their wide discretion in interpreting and applying the Bankruptcy Law and have displayed an indication to examine the role played by the management of a bankrupt company and impose penalties. In light of the above, it would be prudent for management of companies considering initiating, or which have already initiated, bankruptcy proceedings to seek legal guidance and plan a clear strategy to address all potential liability. ■

 

 

New UAE Labor Law – Initial Thoughts

The long-awaited Labor Law has been published in the Federal Official Gazette and is scheduled to take effect on 2 February 2022. The new Law, Federal Decree-Law No. 33 of 2021, replaces the previous 1980 statute in its entirety. The new statute does not constitute a fundamentally different approach to labor relations in the UAE, but it does introduce important reforms.

 

I will discuss a few of these in this note and save a lengthier discussion for a future inBrief. I will focus here on the areas of employment law where disputes are encountered with the greatest frequency.

 

Termination with notice

The 1980 Labor Law accorded differential treatment to contracts of specified term (with a commencement date and an expiration date) and contracts of unspecified term (with only a commencement date). The new Labor Law states that an employment contract must be for a specified term of no longer than three years. Previously, such a contract could not be properly terminated by notice. Termination by notice was available only for unspecified term contracts. No longer. The new Labor Law provides that an employment contract may be terminated by either party for a “legitimate reason” with notice. As before, there is considerable scope for the courts to determine as an issue of fact whether a “legitimate reason” for termination exists in a particular case. Notice of termination must be given in writing. It is not a requirement that the contract set out a notice period, but it is a requirement that the parties follow the notice period set out in the contract, provided that it be no less than 30 days and no more than 90 days.

 

This 90-day cap on the notice period is a new feature. The enforceability of provisions for longer notice periods – common in contracts with senior personnel – is now unclear. This and other issues might be addressed in Executive Regulations to be promulgated by the Ministry of Human Resources and Emiratization.

 

End-of-Service Gratuity

Upon termination of services, an employee who has completed one year of service receives end-of-service gratuity. An employee who does not complete three years or five years of service no longer forfeits a portion of the end-of-service gratuity.

 

Previously, the calculation of end-of-service gratuity was based upon the employee’s salary, but excluding allowances and in-kind payments. Bonuses and commissions were not excluded, and disputes arose over whether these elements of compensation should be included in the figure that was used for calculation of the end-of-service gratuity. The new statute makes it clear that the end-of-service gratuity is based upon the employee’s basic salary. Accordingly, no argument would appear to be available any longer that the figure should include bonuses and commissions.

 

In what appears to be a step in the wrong direction, scope for replacement of the end-of-service gratuity with pensions and savings plans is eliminated. Instead, the Cabinet may by Resolution promulgate systems that would replace the end-of-service gratuity.

 

Overtime

The work week continues to be 8 hours per day and 48 hours per week, with Friday as the weekly day of rest. Crossing either threshold triggers a requirement on the part of the employer to pay additional compensation for overtime. Inconsistencies in calculation of overtime have been eliminated. It is no longer the case that an employee receives overtime based on basic salary in some cases and total salary in others. Instead, overtime compensation is always based upon an employee’s basic salary. Similar anomalies in the calculation of the cash value of unused annual leave have also been eliminated, with basic salary also to be used for that calculation.

 

The rules governing calculation of overtime and the overall caps on overtime have been changed somewhat. The categories of employees that are exempt from the rules on overtime will be detailed in Executive Regulations; it appears that the current exemption for managerial staff will continue until the new Executive Regulations are promulgated.

 

Competition

In a liberal labor market such as the UAE, the hiring away of employees is a feature of the landscape. The 1980 Labor Law stated that an employer could include a clause in the employment contract that would restrict the right of the employee to compete against the employer following termination of services. The enforcement of such clauses was always a separate matter, with the authorities often showing reluctance to prohibit a person from earning a living. Of course, the employer’s central concern is not so much that a former employee may work for a competing employer, but instead that the former employee will make unauthorised use of confidential and proprietary information.

 

The new Labor Law does not really grapple with these issues. It continues the previous language on non-compete clauses, but now limits them to two years’ duration. The narrowing of the restriction might make enforcement more palatable. But it would appear that employers will still have to deal with the reluctance of the local courts to award declaratory and injunctive relief as remedies for threatened breaches of contract. ■

Succession Planning for a Family Business

Planning for the succession of a family business is something that is too often delayed or addressed on an ad-hoc basis without a cohesive strategy.  Considering that the business is likely the most valuable asset in a business owner’s estate, and probably the most complex, it is very much worth the time and effort to develop and implement a plan for succession before life circumstances take these decisions out of your hands.  This article will provide an overview of some of the tools available for family business succession planning, with an emphasis on what is known as an estate freeze.  This article does not address the advantages and disadvantages of providing for the succession using a will, and focusses only on lifetime succession plans.

 

This article will assume the business is incorporated.  If it is not, it is possible to transfer an unincorporated business to a newly formed corporation on a tax-deferred basis, so achieving corporate form is not usually a major obstacle.

 

The simplest approach to succession is for the business owner to make a simple gift of some, or all shares in the company to the intended successors during his/her lifetime.  The gift approach keeps the shares out of the transferor’s will and is simple and has virtually no cost associated with execution, but has little other benefit associated with it.  It is the blunt instrument of wealth transfer.  There are drawbacks to this approach, such as the fact that the gift will be treated as disposition at fair market value for tax purposes and tax will be payable on any capital gain that is deemed to have been realized.  Also, the transferor would be giving up the value and control associated with the gifted shares, and there may be no way to backtrack once the gift is made.

 

Gifts can be made of only some of the shares, or new classes of shares can be created and issued to the successors in order to better customize their voting rights, participation in growth and entitlement to dividends. You may not wish to give your successors voting rights, or possibly even dividend entitlements, until you are prepared to exit from a leadership role in the company. In any scenario in which the company will have multiple shareholders, putting in place a shareholders’ agreement is strongly recommended in order to avoid conflict.  A shareholders’ agreement should give clarity on matters of company governance, board participation, exit rights, what happens if the company is to be sold, what happens on death of a shareholder, how dividends will be dealt with, any expected contributions to the company from the shareholders, key issues for which unanimous or super-majority voting may be required, and how disputes will be managed (among many other things).   In the family business context, a good shareholders’ agreement can act almost like a family constitution, and can be critical to both the business and family harmony.

 

One popular succession planning technique is the estate freeze.  An estate freeze is a restructuring of a corporation in which a business owner exchanges his/her shares in the company for preference shares that have a fixed redemption value and certain other specific attributes required by the CRA.  The fixed value is usually equal to the fair market value of the company at the time.  At the same time, common shares are issued to the intended successors.  The growth in the company from that point forward will accrue to the common shares only, not the preference shares, which remain at their fixed redemption value (and may or may not have dividend entitlements, as desired).  As such, the value of the business owner’s interest (the preference shares) is said to have been “frozen” as of the time of the freeze.  The share exchange is designed to occur on a rollover basis so that no taxable event is triggered, as the business owner has not actually extracted any remuneration from the corporation (just exchanged shares for shares).[1]  On death, or upon an earlier disposition of the preference shares, the business owner will realize a taxable capital gain on the value of the preference shares.  The estate freeze has several important advantages, which include:

 

  • The value of the business owner’s interest is frozen, so his/her tax exposure on death or disposition is known and will not increase (so this can be predictably insured against with life insurance, for instance);
  • The future growth in value of the company is transferred to the successors, and this “transfer” occurs without tax because the value of the common shares issued to the successors is close to zero at the time of issue (the present value of future growth potential is not taxed, under current CRA practices);
  • The lifetime capital gains exemption can be effectively multiplied among the successors, assuming the corporation’s shares qualify for the exemption (meaning the corporation meets certain Canadian ownership and Canadian business and asset requirements, qualifying it as a “qualified small business corporation”);
  • Income splitting among the successors is possible if their shares are entitled to dividends (and if certain attribution rules are avoided);
  • The successors are directly and personally invested in the continued success and growth of the business; and/or
  • The business owner gets to enjoy witnessing the successors benefitting during his/her lifetime as opposed to dealing with the succession in a will.

 

An estate freeze is very often structured using a trust to hold the growth shares (common shares) for the benefit of the successor family members, rather than issuing the common shares to the family members directly.  The trust then controls the shares subject to the terms of the trust instrument.  This can be very useful as it allows the trust to act as a conduit through which the family members’ respective interests in the underlying common shares is divided, and the nature of the division can continually change as needed.  For instance, the trust can distribute dividend income among the beneficiaries in a manner that is most tax efficient in view of the different income brackets of the beneficiaries (income splitting, but not during the lifetime of the settlor/freezor as the TOSI (tax on split income) rules would apply) and this can change from year to year, and can withhold benefits during periods when a beneficiary is subject to creditor claims (asset protection).  The use of a trust also allows the settlor/freezor to retain more control over how the shares will ultimately be distributed to beneficiaries, if indeed a distribution is intended at all, and to help protect the shares from potential spousal claims.  It may not be obvious at the time of the freeze which of the beneficiaries is the appropriate successor(s), which ones have an interest in the business, the aptitude for it, etc.  A trust allows for deferral of such decisions without deferring the economic transfer and crystallization of the tax benefits.  Essentially, the trust facilitates continued flexibility in decision making in ways that direct gifting or direct ownership does not.  As of the date of writing, the lifetime capital gains exemption can still be multiplied among the beneficiaries even when the growth shares are held through a trust.   A shareholders’ agreement should be put in place between the settlor/freezor and the trust.

 

There are many permutations on the estate freeze to accommodate a wide range of goals and circumstances.  For instance, as part of the share exchange that occurs, a settlor/freezor may also choose to take back low value, super-voting shares along with the fixed value preference shares, so that he/she maintains voting control during his/her lifetime.  These shares can be made to cease to carry such voting rights upon the settlor’s/freezor’s death so that control passes automatically to the family (or as provided in the shareholders’ agreement).  Another permutation is that the freeze can be structured in such a manner that only some of the future growth is transferred to successors (say, up to the amount of the lifetime capital gains exemption for each beneficiary, and no more), and the settlor/freezor retains the rest.  Or, the settlor/freezor can retain the ability to receive dividends or to take back some of the growth shares in what amounts to a partial unwinding of the freeze (aptly known as a “thaw”), if circumstances change.  This can be achieved by making the settlor/freezor a discretionary beneficiary of the trust.  It is also possible to execute a second freeze on an already frozen company, known as a refreeze, which may be advisable if the value of the company declines after the first freeze, or if the recipients of the growth shares themselves wish to freeze the value of those in favour yet further recipients (the next generation, for instance).  There are several other named permutations which are need not be addressed here, the point having been made that the estate freeze is an adaptable structure.

 

When structuring an estate freeze, particularly when using a trust, it is important to be very careful to structure it in a manner that adheres to the CRA’s guidance on acceptable estate freezes, and does not trigger any of the so-called attribution rules in the Income Tax Act, and it is therefore important to execute a freeze only with the guidance of professionals who focus on trusts and have experience with estate freezes.  The potential for inadvertent error is high, and the consequences of an error could be disastrous from a tax perspective (i.e., inadvertent attribution of all income and capital gains on trust property – being the common shares – back to the settlor/freezor, or the inadvertent application of the TOSI rules, or the inadvertent application of the corporate attribution rule).  When executed correctly, the structure is safe and is not controversial from a CRA perspective; hence its popularity.

 

An estate freeze should be viewed as a flexible, customizable way of transferring ownership, control and economic benefits (as much or as little of each as is desired over time) in a family business to the next generation, in a tax efficient manner and with the added benefit of the continued flexibility offered by the use of a trust.

 

There are further permutations on the estate freeze that can benefit from the use of foreign trust and/or corporate structures established in low/no tax jurisdictions.  For instance, foreign trusts can avoid being subject to the mandatory deemed disposition of all assets that applies to Canadian trusts every 21 years, and can therefore be made to last much longer than a Canadian trust, creating a much longer legacy.  If the trust/corporation is established in a jurisdiction with which Canada has a tax treaty, there are potential additional benefits with respect to capital gains realized by the trust/corporation (e.g., Barbados and the United Arab Emirates).  As always, planning with offshore trusts requires the assistance of professionals experienced in the area, as it is complex, but the advantages can be worth the additional planning in the right circumstances.  It is worth noting that the media’s unfortunate portrayal of “offshore” structures as illegal or immoral is misleading.  Such vehicles have always been, and they remain as of the date of the writing, entirely legitimate planning vehicles under Canadian law when used correctly.

 

The above presents a selective review of potential succession planning techniques relevant to a private or family business.  Within each option, there is large scope for customization according to individual needs and goals and family composition.  The terms of any shareholders’ agreement or trust instrument, or the rights attaching to any class of shares, can all be tailored to suit your specific circumstances.  While there are tried and true structures that provide good basic starting points, succession planning for a business is not a cookie cutter process and always benefits from bespoke professional guidance.

 

If you have any questions or wish to discuss any issues around family business succession, please do not hesitate to contact us. ■

 

 

[1] If a business owner does wish to extract cash from the company, a tax liability will be incurred on the payment of such amount.  It is often possible to extract such amount in the form of a capital gain.

 

The dishonour of a cheque for insufficient funds will no longer be a crime in the UAE after 2 January 2022

Drawing a cheque which is dishonoured due to insufficient funds will not be a criminal offence after 2 January 2022, when Federal Decree No. 14/2020 (the Decree) comes into effect. Here is a quick primer on the changes that the Decree will introduce.

 

– The highlight of the Decree is the decriminalisation of the act of drawing a cheque which is dishonoured due to insufficient funds. The Decree repeals Articles 401, 402 and 403 of the UAE Penal Code which criminalised the acts of drawing (or endorsing), in bad faith, a cheque without a sufficient balance in the account to honour the cheque, writing a cheque in a manner that makes it unpayable, and ordering a drawee (i.e., a bank) not to make payment.

 

– It is important to note that the Decree does not decriminalise all cheque related offences. For example:

 

 

  • Deliberately writing a cheque in a manner rendering it unpayable (e.g., deliberately placing a wrong signature), closing an account or withdrawing all funds before a cheque is presented, and ordering a bank not to make payment of a cheque (except in the limited circumstances of loss of a cheque, bankruptcy, or the cheque being rendered stale) are punishable with a fine of not less than 10 per cent of the cheque’s value, subject to a minimum of AED 5,000, and a maximum of double the value of the cheque and/or imprisonment for no less than six months.

 

  • Endorsing or delivering a bearer cheque with the knowledge that there are insufficient funds is punishable with a fine of not less than 10 per cent of the cheque value, subject to a minimum of AED 1,000, and a maximum of the value of the cheque.

 

  • Forging a cheque, knowingly using a forged or counterfeit cheque, and knowingly accepting funds received by use of a forged or counterfeit cheque are punishable with a fine of between AED 20,000 and AED 100,000 and imprisonment of no less than one year.

 

  • The court may ‘name and shame’ defendants found guilty of committing any of the foregoing crimes by publication of their name, profession and address in two widely-circulated dailies in the UAE.

 

– The court may prohibit a convicted defendant from conducting business for up to three years where the crime(s) were committed in relation to, or in the course of conducting business. Where the crimes have been committed in the name of or for the benefit of a corporate entity, the natural person managing the entity will not be criminally liable unless it is proved that s/he was aware of the crime or that s/he committed the crime for personal benefit or the benefit of third parties.

 

– The Decree facilitates civil remedies by deeming a cheque which is confirmed by the bank as being dishonoured due to insufficient funds to be an ‘executive instrument’. As a result, a party holding a cheque dishonoured due to insufficient funds can, after January 2, initiate proceedings directly before the execution division of the courts to obtain payment, and seize assets of the drawer. The time and cost incurred with ordinary proceedings are bypassed as a result.

 

– The Decree permits partial payment of cheques, which will facilitate some payment being made under a cheque even where there are insufficient funds for the value of the cheque. Where the beneficiary requests partial payment, the bank must comply and thereafter inform the UAE Central Bank.

 

– The following provisions of the Decree are relevant to banks:

 

  • A bank must make partial payment of a cheque where there are insufficient funds for the whole value, unless the bearer declines partial payment.

 

  • A bank must report events of insufficient funds, where a drawer has emptied an account and cheques cannot be honoured, and where partial payment of a cheque has been made, to the UAE Central Bank.

 

  • Banks may be subject to a fine of not less than 10 per cent of the cheque value, subject to a minimum of AED 5,000 and a maximum of double the value of the cheque, where it refuses to make partial payment, or refuses to make payment of a cheque despite sufficient funds, among others.

 

Decriminalising the act of writing a cheque which is dishonoured due to insufficient funds, and restricting criminal sanctions to acts which are essentially fraudulent in nature, is undoubtedly a step in the right direction. The threat or use of criminal action to pursue civil rights has always been problematic, and the change introduced by the Decree will enhance the UAE’s credibility in the financial world. It is also encouraging to see that the Decree has introduced provisions to make civil remedies in relation to cheques a more efficient process, thereby balancing the interests of the drawer and the beneficiary. The implementation of the Decree will no doubt be monitored with great interest. ■

Dubai Court of Cassation clarifies the application of Optional Arbitration Clauses

In a decision issued in July 2021, the Dubai Court of Appeal held that an arbitration clause should be construed narrowly, and emphasized that everything that may be waived or prevents its [i.e., the arbitration clause’s] application must be sought.  This judgment, which rejected a challenge to the jurisdiction of the Dubai Courts based on the existence of a purported arbitration agreement, was discussed in our inBrief dated 12 September 2021. The gist of the judgment of the Court of Appeal was that the dispute resolution clause of the contract in question included language stating that any referral to arbitration will be ‘without prejudice’ to the jurisdiction of the UAE Courts and ‘subject to agreement between the parties’ and, following the principle of narrow construction of arbitration agreements, the Court of Appeal found that there was no evidence that an agreement was reached between the parties to resolve disputes through arbitration.

 

The judgment of the Dubai Court of Appeal was appealed to the Dubai Court of Cassation. The appellant took up the following arguments in appeal, among others:

 

(a) there are multiple references to arbitration in the contract between the parties (in addition to the dispute resolution clause), which was evidence that the parties had agreed to resolve disputes through arbitration; and

 

(b) there is evidence that the parties negotiated the applicable arbitration rules before entering into the contract, which is evidence that the parties had agreed to resolve disputes through arbitration.

 

In October 2021, the Court of Cassation affirmed the judgment of the Court of Appeal and rejected the appeal. In rejecting the argument summarized in (a) above, the Court of Cassation relied

on the principle that arbitration agreements must be narrowly construed, which is now a common reference in judgments addressing the validity of an arbitration agreement. The Court of Cassation went further, and held that where there is an optional arbitration clause and one of the parties commences litigation, the other may not seek to rely on the arbitration agreement to challenge the jurisdiction of the courts. Unfortunately, the Court of Cassation did not elaborate further on this principle in this judgment, and is a missed opportunity for useful guidance on issues surrounding optional arbitration clauses. Would it have made a difference if it was a unilateral optional arbitration clause? What would have been the position if a party commences arbitration, as opposed to litigation, first?

 

In rejecting the argument summarized in (b) above, the Court of Cassation held that as the evidence relied on by the appellant was not produced in the lower courts, it is not admissible before the Court of Cassation, which is a court of law in the UAE.

 

This judgment highlights the need to have a carefully drafted dispute resolution clause, particularly where the parties wish to have disputes resolved through arbitration. ■

POD inBrief – Competition & Anti-Trust Law in the UAE

 

This episode of POD inBrief features Bashir Ahmed,  partner, and Abdus Samad, senior associate, where they discuss competition, anti-trust, and price fixing in the UAE.

 

Listen to “Afridi & Angell’s POD inBrief _ Competition and Anti-Trust in the UAE” on Spreaker.
 
An overview  is mentioned below:    

Overview:  

– Recent regulations to the UAE competition and anti-trust law 

– Exemptions to the law 

– Merger clearance and due-diligence advice 

–  How businesses can organise themselves to be in line of the law