Category: inBriefs

Business Income Tax in the UAE in 2023

Many are still of the belief that business income tax (also called corporate income tax (CT)) is only under discussion and its introduction uncertain. That is certainly not the case. The UAE federal government has announced the application of income tax for business activities as of 1 June 2023.

 

Although the law for CT has not yet been issued, we know that the Federal Tax Authority (FTA) (which also administers the VAT) is busy preparing for the introduction of CT. We also know that federal public prosecutors are being trained and prepared to prosecute tax crimes such as tax evasion.

 

Also, we have a rough framework of what the CT law will encompass. In May 2022, the UAE Ministry of Finance issued a detailed public consultation document with respect to CT describing their proposals for the CT law and sought views from the public on any improvements/modification (which final version of CT law may be different but we do not anticipate much change).

 

1. TAXABLE PERSONS

1.1 Natural persons

CT will apply to natural persons engaged in a business or commercial activity in the UAE. This will include sole establishments or proprietorships, and individual partners in an unincorporated partnership that conducts business in the UAE. Whether an individual is engaged in a business that is subject to CT would generally depend on whether the activity requires the individual to obtain a commercial licence or equivalent permit from the relevant competent authority.

 

1.2 Legal persons

CT will apply to UAE companies and other legal persons incorporated in the UAE, as well as to foreign legal entities that have a permanent establishment in the UAE or that earn UAE sourced income. For the application of CT, legal persons incorporated in a foreign jurisdiction that are effectively managed and controlled in the UAE will be treated as if they were UAE incorporated entities. Limited and general partnerships and other unincorporated joint ventures and associations of persons will be treated as ‘transparent’ for CT purposes. Their income will instead ‘flow through’ and be taxed in the hands of the partners or members only.

 

1.3 Exempt persons

Certain persons will be exempt from CT, either automatically or by way of application. For examples, regulated investment funds and Real Estate Investment Trusts can apply to the FTA to be exempt from CT subject to meeting certain requirements.

 

1.4 Free Zones

Companies and branches that are registered in a Free Zone will be within the scope of the CT and subject to tax return filing requirements. The CT regime will however honour the tax incentives currently being offered to Free Zone Persons that maintain adequate substance and comply with all regulatory requirements. Therefore, it would be important to review the specific tax incentives offered in each Free Zone. A Free Zone Person that has a branch in mainland UAE will be taxed at the regular CT rate on its mainland sourced income, whilst continuing to benefit from the zero percent CT rate on its other income.

 

2. BASIS OF TAXATION

2.1 Residents

Residency is a key determining factor of whether business profits will be subject to CT in the UAE. A legal person that is incorporated in the UAE will automatically be considered a ‘resident’ person for CT purposes. Equally, any natural person who is engaged in a business or commercial activity in the UAE, either in their own name or through an unincorporated partnership, will also be considered a resident person for purposes of the CT regime. A foreign company may be treated as a resident person if it is effectively managed and controlled in the UAE. UAE resident persons will be taxable in the UAE on their worldwide income, which for a natural person will be limited to the income earned from their business activity carried out in the UAE. However, certain income earned from overseas will be exempt from CT. Where income earned from abroad is not exempt, income taxes paid in the foreign jurisdiction can be taken as a credit against the CT payable in the UAE.

 

2.2 Non-residents

Non-residents will be subject to CT on:

 

  • Taxable income from their Permanent Establishment (PE) in the UAE. The main purpose of the PE concept is to determine if and when a company has established sufficient presence in a foreign country to warrant the direct taxation of the business profits of the company in that country. The activity threshold that will trigger a PE for a foreign company in the UAE will be determined by the following two main tests:

 

(i) Fixed place of business test: a fixed place of business will include a place of management, a branch, an office (including a temporary field office or an employee’s home office), a factory, a workshop, real property, and a building site where activities are carried out for a period exceeding six months.

 

(ii) Dependent agent test: the “dependent agent test” may be met where business travelers or UAE based persons act on behalf of the foreign company in the UAE and have, and habitually exercise, the authority to conclude contracts in the name of foreign company.

 

  • Income which is sourced in the UAE

Considering the UAE’s position as a leading investment and wealth management centre, the CT regime will allow regulated UAE investment managers to provide discretionary investment management services to foreign customers without triggering a UAE PE for the foreign investor or the foreign investment fund.

 

UAE sourced income earned by a foreign person that does not have a PE in the UAE will be subject to withholding tax at a rate of zero percent.

 

3.CALCULATION OF TAXABLE INCOME

3.1 Basis of calculating taxable income

The CT regime proposes to use the accounting net profit (or loss) as stated in the financial statements of a business as the starting point for determining their taxable income.

 

3.2 Treatment of unrealised gains and losses

Unrealised gains or losses arise in instances where an asset or liability held by a business has changed in value but no transaction to generate a gain or loss has yet taken place. For example, when a business property increases in value, but the property is not sold, the gain would be unrealised. These gains or losses may be recorded for accounting purposes even though they are not yet realised. The CT will have specific rules to determine whether an unrealised gain or loss should be taken into account when calculating taxable income. These relate to whether the gain or loss is related to capital items or revenue items.

 

3.3 Exempt income

UAE resident companies will be subject to CT on their worldwide income, including capital gains. However, to avoid instances of double taxation, the CT regime will exempt certain forms of income from taxation.

 

3.4 Exemption for dividends and capital gains

A UAE corporate shareholder will generally be exempt from CT on dividends received and capital gains earned from the sale of shares of a subsidiary company. Also, the proposed CT regime will exempt all domestic dividends earned from UAE companies. Dividends paid by foreign companies, and capital gains from the sale of shares in both UAE and foreign companies will also be exempt from CT, provided certain conditions are met.

 

3.5 Foreign branch profit exemption

A foreign branch would typically constitute a PE in the foreign country and be subject to CT (or an equivalent tax) on its profits in that foreign country. UAE companies can either (i) claim a foreign tax credit for taxes paid in the foreign branch country, or (ii) elect to claim an exemption for their foreign branch profits.

 

3.6 Expense deduction limitations

The calculation of taxable income will largely follow accounting rules, but the CT regime will disallow or restrict the deduction of certain specific expenses. This is to ensure that relief can only be obtained for expenses incurred for the purpose of generating taxable income, and to address possible situations of abuse or excessive deductions.

 

3.7 Interest capping rules

Interest and other similar financing costs are considered a cost of doing business and will accordingly be deductible for CT purposes. The proposed CT regime will cap the amount of net interest expense that can be deducted to 30 percent of a business’ earnings before interest, tax, depreciation, and amortisation (EBITDA), as adjusted for CT purposes.

 

Businesses may be allowed to deduct up to a certain amount of net interest expenditure (safe harbour or de minimis amount) irrespective of the interest deductibility limit based on the EBITDA rule. The interest capping rules will not apply to banks, insurance businesses, and certain other regulated financial services entities. Additionally, the interest capping rules will also not apply to businesses carried on by natural persons.

 

3.8 Non-deductible expenses

Businesses will be allowed to deduct up to 50 percent of expenditure incurred to entertain customers, shareholders, suppliers and other business partners, to acknowledge that these types of expenses often also have non-business or personal element.

 

3.9 Losses

A fundamental principle behind the CT regime is that CT is meant to be paid on the total profit of a business over its entire life cycle, as opposed to a single financial period. A business will be able to offset a loss incurred in one period against the taxable income of future periods, up to a maximum of 75 percent of the taxable income in each of those future periods. Tax losses can be carried forward indefinitely provided the same shareholder(s) hold at least 50 percent of the share capital from the start of the period a loss is incurred to the end of the period in which a loss is offset against taxable income. If there is a change in ownership of more than 50 percent, tax losses may still be carried forward provided the same or similar business is carried on by the new owners. No tax loss relief will be available for the following losses:

 

  • losses incurred before the effective date of CT;
  • losses incurred before a person becomes a taxpayer for CT purposes;
  • losses incurred from activities or assets which generate income that is exempt from CT; or
  • losses incurred by a Free Zone Person that are not attributable to a PE in the mainland.

 

4. GROUPS

Large businesses often conduct their operations through a group of companies, which has a parent company and a number of subsidiaries. The CT regime will allow full consolidation for tax purposes (tax grouping) for essentially wholly-owned groups of companies, and the transfer of losses between group companies that are 75 percent or more commonly owned.

 

4.1 Tax groups

A UAE resident group of companies can elect to form a tax group and be treated as a single taxable person if the parent company holds at least 95 percent of the share capital and voting rights of its subsidiaries.

 

4.2 Intra-group transfer of assets and liabilities

Intra-group transfer relief will be available for transfers of assets and liabilities between UAE resident companies that are at least 75 percent commonly owned, provided the assets and/or liabilities being transferred remain within the same group for a minimum of three years. Where intra-group relief is claimed, the relevant assets and liabilities will be treated as being transferred at their tax net book value, so that neither a gain nor a loss needs to be taken into account when calculating the taxable income of the transferor and the transferee company.

 

4.3 Restructuring relief

To facilitate mergers, spin-offs and other corporate restructuring transactions, the CT regime will exempt or allow for a deferral of taxation where a whole business, or independent parts of a business, are transferred in exchange for shares or other ownership interests.

 

  1. TRANSFER PRICING

This section sets out the proposed treatment under the CT regime of transactions between related parties. The CT regime will have transfer pricing rules to ensure that the price of a transaction is not influenced by the relationship between the parties involved. In order to achieve this outcome, the UAE will apply the internationally recognised “arm’s length” principle to transactions and arrangements between related parties and with connected persons.

 

5.1 Arm’s length principle

All related party transactions and transactions with connected persons will need to comply with transfer pricing rules and the arm’s length principle as set out in the OECD Transfer Pricing Guidelines.

In order for a transaction or arrangement between related parties or with a connected person to meet the arm’s length standard, the results of the transaction or arrangement must be consistent with what the results would have been if they had been between parties that are not related to each other.

 

  1. CALCULATION OF CT LIABILITY

6.1 Applicable CT rates

CT will be charged on the annual taxable income of a business as follows:

 

  • zero percent for taxable income not exceeding AED 375,000; and
  • nine percent, for taxable income exceeding AED 375,000.

 

6.2 Withholding tax

Given the position of the UAE as a global financial centre and an international business hub, a zero per cent withholding tax will apply on domestic and cross-border payments made by UAE businesses.

 

6.3 Tax Credits

To avoid double taxation, the CT regime will allow a credit for the tax paid in a foreign jurisdiction against the CT liability on the foreign sourced income that has not been otherwise exempted. This is known as “Foreign Tax Credit”.

 

The maximum Foreign Tax Credit available will be the lesser of:

  • the amount of tax that was paid in the foreign jurisdiction; or
  • the CT payable on the foreign sourced income.

 

  1. ADMINISTRATION

7.1 Registration and deregistration

A business subject to CT will need to register with the FTA and obtain a Tax Registration Number within a prescribed period. Where a business ceases to be subject to the CT (e.g., due to cessation or liquidation of the business), it will need to apply to the FTA to be deregistered for CT purposes within three months from the date of cessation.

 

7.2 Filing, payment and refund

A business will only need to prepare and file one tax return and other related supporting schedules with the FTA for each tax period. Each tax return and related supporting schedules will need to be submitted to the FTA within nine months of the end of the relevant Tax Period. Payments to settle a taxpayer’s CT liability for a Tax Period will need to be made within nine months of the end of the relevant Tax Period. Where a taxpayer can demonstrate that a CT refund may be due, the taxpayer can apply to the FTA to request a refund.

 

7.3 Assessment

The FTA may review a CT return filed and may issue an assessment within the timeframe prescribed in the Tax Procedures Law. A taxpayer may challenge an amended assessment issued by the FTA via the processes and procedures outlined in the Tax Procedures Law. ■

Deadline for Emiratisation in private sector approaches

In the last few months, the UAE authorities have introduced a number of measures intended to increase the number of UAE nationals who are employed in the private sector. The Emirati Cadres Competitiveness Council (Nafis) program, originally established in 2016 with the aim of attracting UAE nationals to the private sector, has been reinvigorated.

 

The UAE government has also introduced the following measures aimed at employers in the private sector:

 

(a) Ministerial Resolution 279 of 2022 on Monitoring Mechanisms of Emiratisation Rates in the Private Sector (Emiratisation Resolution): Issued in June 2022, the Emiratisation Resolution requires each employer registered with the Ministry of Human Resources and Emiratisation (the MOHRE) to increase the proportion of Emiratis in the workforce by 2 per cent each year, until reaching the level of 10 per cent by 2026.

 

Requirement: The required proportion of UAE nationals in the workforce is currently one out of every 50 skilled employees. This will increase proportionately until it reaches five out of every 50 by 2026. These thresholds do not apply to banks and insurance firms, where separate Emiratisation targets of 4 percent and 5 per cent respectively are applicable.

 

Applicability: The Emiratisation Resolution does not apply to free zone businesses. For all other entities, compliance should be ensured by January 2023 to avoid sanctions.

 

Consequences of non-compliance: With effect from January2023, a penalty of AED 6,000 per month for every UAE national not employed in accordance with the Emiratisation Resolution along with suspension of issuance and renewal of work permits is prescribed. The penalty increases by AED 1,000 every year. Any drop in the Emiratisation percentage must be recouped within two months to avoid a penalty.

 

Non-payment of the penalty for two months after the due date would result in suspension of the labour file for the offending employer and for all other entities wholly owned by the same proprietors.

 

(b) Cabinet Resolution 18 of 2022 on the Classification of Private Sector Establishments (Classification Resolution): Issued in March 2022, the Classification Resolution classifies all employers into three categories as follows:

 

i. First category: An employer in compliance with the Labour Law and its implementing regulations that also fulfils any of the following criteria: (a) achieved an Emiratisation level of three times the target; (b) cooperates with the Nafis program by hiring and training at least 500 citizens each year; (c) is owned by national youth and is classified as a small or medium-sized enterprise or as innovative in character; (d) is located in the training and employment centres that support manpower planning through promotion of cultural and demographic diversity in the labour market; (e) operates within targeted economic sectors and activities as determined by the Cabinet; or (f) belongs to the Higher Corporation for Specialized Economic Zones.

 

A subsequent Resolution issued by the MOHRE clarifies that an employer, in order to qualify under item (a), above, must also have at least 30 UAE nationals in its workforce.

 

ii. Second category: An employer in compliance with the Labour Law and its implementing regulations that also complies with manpower planning policy through promotion of cultural and demographic diversity in the labour market. However, an employer having 50 employees or more is to be placed in the second category during the transition period.

 

iii. Third category: An employer that is not compliant with the Labour Law and its implementing regulations.

The Classification Resolution provides for different levels of fees for MOHRE transactions. An employer in the first category is charged a fee of AED 150 for the issue or renewal of a labour permit. The fee increases to AED 250 to AED 1,000 for an employer in the second category and AED 2,500 for an employer in the third category. Each employer is also required to provide a bank guarantee of AED 3,000 for each employee or to provide insurance for each employee.

 

Accordingly, all employers should ensure that they achieve compliance with the new requirements by January 2023 in order to avoid penalties or downgrading of category status. They may also consider registering on the Nafis programme (voluntary scheme) which acts as a recruitment portal for UAE nationals. ■

Dubai Decree No.22/2022 – On the Approval of the Privileges of the Property Investment Funds in the Emirate of Dubai

What’s happened?

On 22 July 2022 Dubai Decree No. 22/2022 (the Decree) came into force with the purpose of encouraging further investment in the Dubai real estate market via the provision of various incentives and privileges aimed towards real estate investment funds.

 

In this inBrief, we look at the various privileges that will now be afforded to property investment funds in order to attract further investment into Dubai’s already booming real estate market, as well as giving a brief overview of other key articles contained in the Dubai Decree.

 

Previous Position

Traditionally, property investment funds were afforded the same property rights as those that were granted to any other investment entity or foreign investor.

 

However, property investment funds were not commonly utilised as an investment vehicle in Dubai as any change in the fund’s shareholding attracted the standard Dubai Land Department transfer fee. Due to the everchanging nature of many property investment fund’s shareholding this was seen by investors as an onerous burden.

 

Further, as property investment funds are permitted to be established only under the Abu Dhabi Global Market’s (ADGM) REIT framework (the ADGM Fund Rules), the Dubai International Financial Centre’s Investment Trust Law framework (the DIFC Investment Trust and REITS Rules Instrument), and the Emirates Securities and Commodities Authority’s framework (Administrative Decision 6/R.T of 2019 Concerning Real Estate Investment Fund Controls), property investment funds were not seen as a cost-effective investment method due to the various restrictive regulations that applied to them.

 

Privileges

However, now a registered property investment fund will be able to avail of the following privileges:

 

  • property investment funds will have the right to own property, or the right of usufruct or rental for a duration that does not exceed (99) years in not only where UAE non-nationals are allowed to purchase, but, also in areas where ownership is typically not allowed to UAE non-nationals in the specific areas identified by the newly established Committee of Property Investment Funds;
  • the Decree explicitly states that no Dubai Land Department registration fees shall be imposed upon the property investment fund on the disposition of shares by the shareholders of the property investment fund. This, as noted above, was one of the main factors in discouraging investors from utilising property investment funds as a method for investment; and
  • Dubai Land Department registration fees applied for property purchased by the property investment fund have been reduced from the standard 4 percent of the market value of the property to 2 percent. Similarly, the applicable fee to register a usufruct right or long-term lease has also been reduced to a fee of 2 percent of the market value of the property.

 

Other Key Articles

Article 4: Establishment of the Register

The Dubai Land Department shall establish a register for the purposes of registration of property investment funds that meet the required criteria outlined below.

 

Article 5: Conditions and Procedures of Registration in the Register

In order for a property investment fund to be added to the register and thereby avail of the privileges set out above, the following criteria must be met:

 

  1. the property investment fund must be licensed by the relevant competent authority and hold a valid license;
  2. the value of the real estate assets owned by the property investment fund at the time of submission of its registration application must not be less than AED 180,000,000;
  3. the Property Investment Fund, upon submitting the application of registration in the Register, must not be suspended from trading its shares in the financial markets of the Emirate; and
  4. the relevant registration fee of AED 10,000 must be paid to the Dubai Land Department.

 

Article 6: Writing off from the Register

A property investment fund can be removed from the register upon the occurrence of a number of circumstances:

  1. it no longer meets the criteria specified in the Decree;
  2. it has been adjudged bankrupt;
  3. upon its dissolution and subsequent liquidation of its assets; and
  4. upon the restriction of its activities by virtue of a final judgement.

 

Article 7: Duration of entitlement to the privileges

A registered property investment fund is entitled to avail of the new privileges from its date of registration in the above-mentioned register until the date it is removed from same.

 

Article 9: Committee of Property Investment Funds

The responsibility for the identification of areas where ownership is not permitted to be held by UAE non-nationals and where property investment funds may now have the right of absolute ownership or usufruct or a long-term lease (the term of which does not exceed 99 years) will fall to the newly established Committee of Property Investment Funds (the Committee). In determining which such areas are suitable for investment and therefore available to property investment funds, the Committee shall consider:

  1. the market value of the real estate to be owned by the property investment fund shall not be less than AED 50,000,000;
  2. the real estate shall have an investment return according to the standards of the Dubai Land Department;
  3. the Provisions of Dubai Decree NO. 4/2010 (in the event that the property is, or forms part of, granted land); and
  4. any other considerations as determined by the Director General of the Dubai Land Department.

 

It should also be noted that property investment funds are required to obtain preliminary approval from the Committee in advance of disposing of its interest in any property acquired in the areas identified by the Committee.

 

Article 12: Privileges of property investment funds operating in the DIFC

Whilst this Decree applies equally to all property investment funds licensed to operate in Dubai (including those licensed in free zones or special development zones), the extent of the privileges that shall apply to those licensed in the DIFC will be at the discretion of the chairman of the DIFC.

 

Future

The two key changes ushered in by this Decree (the permitting of ownership of selected real estate within areas where it is typically prohibited for non-UAE nationals to own property and the removal of the Dubai Land Department registration fee upon a change of a property investment fund’s shareholding) are a significant development and an indication that property investment funds may now begin to have a greater impact on Dubai’s real estate market.

 

We anticipate that the changes that have now been introduced will relieve a number of burdens that would generally apply to property investment funds and encourage investors to re-evaluate property investment funds as a viable investment vehicle.

 

***

 

If you require more detailed information, please do not hesitate to contact us. ■

Dubai Development Authority – Filing of audited financial statements

All entities (free zone limited liability companies and branch offices) registered under the jurisdiction of Dubai Development Authority (DDA) are required to file their most recent audited financial statements along with a summary sheet (to be generated through their AXS portal account) on or before 31 October 2022. Entities are required to make these filings through their respective AXS portal accounts.

 

The following notification can be seen on the AXS portal accounts of entities:[1]

 

“In compliance with the Private Companies Regulations of 2016, FZLLCs and branch offices are required to submit their most recent Audited Financial Statement along with the summary sheet (as per the DDA template) by or before 31st October 2022.”

 

Free zone limited liability companies incorporated under the jurisdiction of the DDA are required to maintain audited financial statements. As per our discussions with DDA representatives, branches of foreign companies may not be required to maintain separate audited financial statements if the accounts of such branches have been included in their parent companies’ audited financial statements.

 

As per the Private Companies Regulations of 2016, free zone limited liability companies were always required to file, with the DDA Registrar of Companies, audited financial statements. Branches of foreign companies were required to file annual returns which were filed in the jurisdiction of incorporation of the parent companies. The DDA, however, has only recently started to enforce these requirements.

 

Certain free zones of the UAE such as Jebel Ali Free Zone and Dubai Multi Commodities Centre already require entities established in such free zones to file their audited financial statements.

 

With the introduction of corporate tax and other laws to closely monitor the activities of entities established in the UAE, it is likely that other free zones in the UAE as well as UAE mainland licensing authorities will start requiring the filing of audited financial statements on an annual basis. ■

 

***

 

[1] We expect the DDA to circulate guidance/clarification on the requirements and/or changes to the deadlines in coming weeks. The DDA may send specific notification to entities depending on their financial year end.

UAE Economic Substance Requirements (ESR) – New Penalties imposed by the Federal Tax Authority

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.

 

 

 

Choosing the Right Offshore Jurisdiction

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. ■

 

***

 

[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)

The Era of Crypto

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).

 

* * *

 

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. ■

 

 

Tax-Driven Changes in Residency for Canadians

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

Arbitrary termination of employment under the new UAE Labour Law

The new UAE Labour Law (Federal Decree-Law No. 33 of 2021) came into effect on 2 February 2022. The new Labour Law replaced the previous 1980 statute (Federal Law No. 8 of 1980, as amended). The new Labour Law is generally applicable to employment relationships in the private sector in the UAE (excluding the DIFC and ADGM free zones).

 

Under the new Labour Law, either party may terminate an employment contract for any “legitimate reason” by giving a written notice to the other party. There was a similar provision in the old Labour Law. The meaning of “legitimate reason” was frequently debated and often gave rise to employment disputes in the UAE. Termination of an employment contract without notice or for other than a “legitimate reason” would lead to a claim for damages.

 

In addition, a claim for damages can arise in the event of “arbitrary” termination. The old Labour Law provided that termination by the employer would be arbitrary if done because the employee filed a complaint or court case. It also provided that termination by the employer would be arbitrary if the cause of termination is not related to work. The meaning of “not related to work” was frequently disputed. It was also unclear whether termination for a “legitimate reason” could nevertheless give rise to damages if it was found to be “not related to work.”

 

The new Labour Law amends the definition of what is considered as arbitrary termination. It retains the retaliatory element – termination of employment by the employer shall be arbitrary if due to (i) the employee filing a complaint with the Ministry of Human Resources and Emiratisation or (ii) the employee filing a valid lawsuit against the employer. In contrast, the new Labour Law discontinues the “not related to work” element. Accordingly, an employee may base a claim for arbitrary termination, and thereby claim three months’ salary as compensation, only when the retaliatory element is present.

 

Absent retaliation, the employee must argue that termination was done without notice or was done for other than a legitimate reason. This provides less scope than before for recovery by a disgruntled employee. The legislative authorities may have intended to reduce the number of employment disputes by narrowing the basis for a claim for arbitrary termination. But the change might not have this effect, given that the “legitimate reason” requirement has been preserved. The UAE courts are known to be hospitable venues for employee claims, and the issue of whether termination was legitimate in a particular case always turns on the specific facts. As before, an employer must be prepared to document its reasons when termination is contested. ■

UAE Labour Law: Implementing Regulations

As reported earlier, the new Labour Law of the UAE provides that many of the detailed rules on its implementation will be governed by Implementing Regulations. The first set of Implementing Regulations has been promulgated as Cabinet Resolution No. 1 of 2022. This measure took effect on 2 February 2022, the same effective date as the new Labour Law.

 

The new Cabinet Resolution provides some clarity in many respects, but it also leaves room for further regulations to address yet more aspects of the new Labour Law. This note discusses some of the more interesting features of the new Cabinet Resolution.

 

Non-competition clauses

The Implementing Regulations introduce new restrictions on the use by employers of non-competition clauses in their employment contracts. Like the new Labour Law, the regulations provide that a non-competition clause must be restricted in geographic scope, must be limited in duration to no more than two years, and must be limited to jobs where competition by an employee could harm the employer. The Implementing Regulations specify that the burden of proof of harm is on the employer if a non-competition clause is contested.

 

A non-competition clause cannot be enforced in cases where the cause for termination of services is attributable to the employer or to the employer’s breach of its statutory or contractual obligations. The employee may also be exempted from a non-competition clause if the employment contract is terminated during the probation period. There is also scope for either the employee or the new employer to render the non-competition clause unenforceable by paying compensation to the former employer in an amount not exceeding three months of salary, provided that the former employer agrees to the same. Moreover, a non-competition clause will not be enforceable in respect of specific job categories that will be determined by the Minister of Human Resources and Emiratisation.

 

In the absence of a non-competition clause, an employee is free to change jobs in the event that:

 

  • The term of the existing contract expires without renewal; or
  • The contract is properly terminated in accordance with the Labour Law; or
  • The employer terminates the contract for a reason other than fault of the employee.

 

Overtime

With a few minor adjustments, the new Labour Law continues the previous rules on an employee’s entitlement to overtime compensation for work in excess of normal working hours. At the same time, it states that the Implementing Regulations will determine which job categories are not covered by the rules on overtime. This led to an expectation that a broader set of employees would be exempt than before, especially given the general shift away from the 6-day, 48-hour work week that the Labour Law allows.

 

A significant expansion of exempt categories has yet to occur, although the Implementing Regulations leave some room for a move in this direction. The new Implementing Regulations exempt from overtime the following categories of employees:

 

  • Chairmen and members of Boards of Directors.
  • Persons who exercise the authority of the employer by virtue of their supervisory positions.
  • Crew of marine vessels and employees who work at sea who enjoy special terms of service because of the nature of their work.
  • Tasks whose technical nature requires continuity of work through successive shifts, provided that average working hours do not exceed 56 hours per week.
  • Preparatory and supplementary tasks that must be performed outside of normal working hours.

 

Save for the fifth category noted above, all of these exemptions existed under prior law. However, the new Cabinet Resolution delegates to the Minister the authority to promulgate further rules on these categories of employees in accordance with the requirements of the labour market.

 

Leave

The Implementing Regulations contain new details on leaves. Previously, a part-time employee received the same entitlement to annual leave that was extended to a full-time employee. This has now been replaced with a fractional entitlement, based upon the actual hours worked by the part-time employee, subject to a minimum of five working days per year. The Implementing Regulations take a similar fractional approach to the end-of-service gratuity entitlement of an employee not serving under a full-time contract.

 

Unused annual leave may be carried forward, but no more than half of the entitlement may be carried forward from year to year. Unused leave may be cashed in at the rate of the employee’s salary. Upon termination of services, an employee is paid a cash allowance for any unused annual leave at the rate of the employee’s basic salary.

 

Workplace injury

As reported earlier, an employer is required to provide medical care for an employee who suffers a workplace injury or sickness. This includes treatment in a government or private treatment facility and includes the hospital stay, surgery, x-rays and tests, pharmaceuticals and rehabilitation equipment and protheses, and transportation required for the employee’s treatment. These costs must be covered until the employee recovers or until the employee’s permanent disability has been established.

 

Absenteeism

Under Article 44 of the new Labour Law, an employer is able to terminate the services of an employee without notice if the employee is improperly absent from work for more than seven consecutive days. In such case, the employer must be unaware of the employee’s whereabouts and unable to communicate with the employee. The employer is required to report the employee’s absence to the Ministry in accordance with procedures that will be promulgated by the Ministry.

 

An employee who is improperly absent from work may be denied another work permit for another employer for a period of up to one year. Exempted from this are employees whose visas are sponsored by family members, holders of golden visas, employees having a level of professional skill or knowledge required by the UAE, or employees in one of the categories that will be designated by the Ministry.

 

Employment models

The new Cabinet Resolution recognises that there are many different models for work other than full-time employment with a single employer. It contemplates that there will be arrangements for remote work (where the employee and employer are in different locations) and job sharing (where a task is assigned to multiple employees).

 

The new Cabinet Resolution also details many types of work permits, reflecting the multiple types of arrangements. The types of work permits that are addressed by the Implementing Regulations are:

 

  • A work permit for an employee recruited from outside the UAE.
  • A transfer work permit.
  • A work permit for a person whose residence visa is sponsored by a family member.
  • A temporary work permit.
  • A work permit for a specific task (similar to the “mission visas” that were available under prior law).
  • A part-time work permit, allowing an employee to work for multiple employers.
  • A juvenile work permit, for an employee between the ages of 15 and 18.
  • A student training permit.
  • A work permit for citizens of the GCC countries.
  • A work permit for a golden visa holder.
  • A work permit for a national trainee.
  • A self-employment work permit.

 

Additional types of work permits may be promulgated by resolution of the Minister. The Implementing Regulations also contain specific provisions on freelance work and on the activities of employment agencies.

 

End-of-service gratuity

A number of issues remain to be clarified by regulations. One of these concerns is the calculation of end-of-service gratuity, discussed in our inBrief dated 15 December 2021 and our Legal Alert dated 19 December 2021.

 

Article 51 of the new Labour Law states that an employee will receive end-of-service gratuity that is calculated on the basis of working days. This is inconsistent with the previous approach, which expressed end-of-service gratuity in terms of “days” as opposed to “working days”. Moreover, Federal Decree-Law No. 47 of 2021, on the uniform general rules of work in the UAE, which is supposed to harmonise the public and private sectors, refers to end-of-service gratuity based upon “days” and not “working days.”

 

A calculation based upon working days raises the issue of how that term is defined. This is not clarified by the Implementing Regulations. One approach is to calculate basic salary for a working day as equal to 22/30 of the employee’s basic salary for a month. An employer that has a five-day work week would have 22 working days in most months, because of the two-day weekends. However, an employee who works a six-day work week would have a working day basic salary equal to 26/30 of the employee’s basic salary for a month. Two similarly-positioned employees could receive end-of-service gratuity payments differing by as much as 14 per cent as a result of the employer’s work week.

 

Alternatively, a working day could be calculated as a fraction of annual calendar days as opposed to monthly calendar days, and the calculation could take account of official holidays as well as weekends. Perhaps the approved calculation will appear in further regulations.

 

Specified-term contracts

Another issue involves the treatment of specified-term contracts. Applied literally, a specified-term contract ends upon its expiration. No affirmative action by either the employer or the employee is required to bring the relationship to an end. Thus, immediately upon expiration of a specified-term contract, it would be the right of the employer to proceed with termination of the employee’s labour permit and residence visa, and it would likewise be the right of the employee to demand that the employer pay the applicable end-of-service package and to seek other employment.

 

In order for the relationship to continue, the parties must either continue to do so by conduct, in which case the contract would be deemed renewed for a similar period. It is not clear what length of conduct would have this effect. It would also be possible for the parties to reach express agreement on extension or renewal of a specified-term contract. Perhaps an employment contract should be drafted to contain a clause requiring the parties to provide advance notice of intent to renew or not to renew the contract. ■