Category: inBriefs

Family Governance in Trust Structures

When contemplating a family wealth structure that is intended to endure, such as a family trust or foundation, it is important to consider how the structure will be governed, particularly in the longer term after the founder’s lifetime. Governance mechanisms that are designed to encourage ongoing family involvement in the structure have proven to be effective at averting second, third and future generation conflicts that can undermine the structure. The most common family governance mechanisms are the family charter and the family council. This inBrief will provide an introduction to those mechanisms and explain why they can be useful for many families.

 

Trust Governance versus Family Governance

 

Most family trusts are fully discretionary, meaning the trustees are given very broad discretion to manage the trust assets and distributions. Such trusts are also normally made subject to some common governance and control mechanisms which set out either firm rules or soft guidance for the trustees. Those mechanisms typically consist of the terms of the trust deed, the appointment of a trust protector, and the issuance of a letter of wishes. These governance structures are discussed in more detail in our inBrief “A Matter of Some Discretion: Controlling Your Trust.”

 

The usual control mechanisms for a trust are a necessary starting point; however, if the trust is intended to survive through multiple generations and successfully serve the needs of the family, family governance becomes very important. When a family wealth structure fails over time, it is most often because of relationship breakdown among family members, no matter how well-drafted the trust deed was or how effective the tax planning. It would be rare, for instance, for a founder to be able to successfully lay out the detailed investment and distribution scheme for a trust beyond one or two generations into the future, after which that exercise becomes overly cumbersome and complex and will probably be incorrect.

 

The main purpose of a family governance structure is to enable long term harmony between family members; it achieves this by keeping all family members engaged with and informed about the trust, and by placing some important decision-making powers in their hands.  When a grandchild or great-grandchild is a beneficiary of a trust, they will likely lack personal context around the ancestor (founder) who established it and why, and they may quite naturally view the trust through the lens of self-interest without any broader family context.  They may not know or care about the ongoing future success of the structure. The natural outcome over time is conflict between family members or with the trustees or both.

 

Family governance mechanisms can be especially important when there is a family business that is owned by the trust, since trust ownership can lead to a lessening of family members’ emotional attachment to the business over time. There is also a natural divide between passive family member beneficiaries, and family members who are involved in the family business.

 

Good family governance seeks to remedy these disconnects and prevent that sort of conflict by ensuring each family beneficiary, over generations, is kept informed about the structure and has a voice along with other family members in decision-making for the trust.

 

Family Charter and Family Council

 

A family governance structure sets out how a family makes decisions in the context of a wealth structure like a family trust, how family members are kept informed, and how family governance integrates with other structures such as a trust or family business. Family governance usually consists of two main components: the family charter and the family council.

 

The Family Charter

 

The family charter is essentially the family’s constitution or code of conduct. Its contents are unique to the particular family’s needs and wishes and should retain some flexibility for amendments so it can adapt to future needs. It is a document that should have moral and ethical value to the family, while operationally it is intended to set out how family decisions will be made, when such decisions are required, and some principles or guidelines to inform those decisions. It has been aptly described as a bridge between family and business, or family and trust. Some of the topics typically addressed in a family charter include[1]: a preamble for important context; the family history; core values or goals of the family; adherence by family members; formation of a family council and its functions, decision making and voting rights; relationship with the family trust/business structure; family philanthropic/charity/education goals; conflict resolution; and procedures to amend the family charter.

 

Although family charters are generally not intended to be legally binding documents, that possibility is not ruled out. While it is not an area that has been sufficiently tested given the private nature of such documents, there is a growing belief that family charters can be legally binding (at least in part) if they are drafted and executed in a manner that indicates a clear intention to be bound.  Even where a family charter is not legally binding, it can of course remain very morally persuasive.  Importantly, it can carry tangible consequences by properly linking compliance with the terms of the family charter to one’s ongoing entitlement to benefits from a family wealth structure.  That is, a family member might be given reduced or suspended entitlements to receive trust distributions in case of non-compliance with requirements set out in a family charter, and such consequences can be given effect by a family council using influence or control that it enjoys over the role of trust protector, for example.

 

The Family Council

 

If the family charter is the family constitution, then the family council is the parliament or board of directors, made up of representative members of the family.  The family council is tasked with giving effect to the family charter, making decisions on behalf of the family as a whole, balancing competing interests, and communicating trust and company business to the other family members who otherwise would not have visibility into or involvement with the family wealth structures.

 

The family council can build harmony by communicating with the broader family and representing their interests at family council meetings thereby giving them a voice through representation, among other things.  It can also advise on how and when to make distributions equitably across branches of the family and across generations, taking into account the purpose of the structure, individual needs, or current versus future needs.  Sometimes the family council can also be a useful vehicle to track informal shared ownership arrangements in which one family member may be tasked with owning property for the broader benefit of other family members, in an arrangement that relies on family integrity rather than legally enforceable obligations.  Such informal arrangements can be very beneficial because they do not generally trigger reporting, disclosure, registration, attribution, FATCA/CRS, tax, and other consequences that arise when formal trusts are created.  This is a benefit of greater family strength, and is one way in which tangible value is produced by good family governance.

 

Integration of Family Governance

 

As noted above, family trusts are usually the sole creation of a founder with little or no input from family members (although that dictatorial approach seems to be softening these days). One way to promote the success of a family trust over multiple generations is to have the founder consult representatives of the family members during the trust planning process, and in particular in the family charter drafting process. The trust document may integrate the family charter and family council and include ways for the family representatives to select, remove and replace the trustees, or to act collectively as trust protector or trustee advisory committee.   It could also include dispute resolution provisions to avoid future litigation among beneficiaries and trustees.  Allowing for future members of a family council to exercise control over a trust, in the role of protector or otherwise, ensures that the trust’s operations remain flexible over time and are adapted to best serve the family through evolving needs and successive generations.  Having room to adapt to changing family and legal environments is crucial to the long-term success of any wealth structure.

 

Vesting trust protector and advisor powers in a diffuse, multi-person committee can also be important from a tax planning point of view.  Where only one person has effective control over the trust in the role of protector, there is a risk that trust income will be taxable in such person’s hands, or that the trust itself will be deemed tax resident in the place of such person’s residence.

 

This inBrief has focused on family governance in the context of a family trust. We would note that the same concepts apply to private foundations as well, and to family businesses through the terms of shareholders’ agreements, partnership agreements, or other comparable constitutional documents.   In all cases, the goal is to provide for a vehicle through which family interests are represented and communicated, in an effort to achieve a fair and sustainable balance between family interests versus business interests, and immediate needs versus future needs.

 

Finally, although our focus as a firm is to ensure a robust legal and tax structure, we would be remiss if we did not acknowledge the fact that family governance structures can be valuable beyond the wealth management context, and we encourage families to capture their broader beliefs, values and goals and reflect them in their family charters.

 

Planning with trusts, foundations and business structures is complex, and particularly so in the cross-border context. It is critical to obtain legal and tax advice from experienced professionals before embarking on such planning. Please don’t hesitate to contact us and we will be delighted to discuss how we can assist.■

 

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[1] This is not an exhaustive list of topics that can be included in a family charter. For further information on the drafting and substance of family charters, please contact the author.

Invest in Start-ups in Canada: Qualify for Canadian Citizenship

Venture capital (investing in startups) has been a popular form of investment for many over the years. In recent years, Canada’s Start-up Visa Program has offered Canadian permanent residency (leading to Canadian citizenship upon qualification) to immigrant investors as well as immigrant entrepreneurs with the skills and potential to build businesses in Canada that are innovative; can create jobs for Canadians; and can compete on a global scale.

 

 

A qualifying immigrant investor can now invest a minimum of CAD115,000 in a qualifying Angel Fund and a qualifying startup (and an approved immigrant entrepreneur can manage and operate such start-up) in order to qualify for Canadian permanent residency. Based on past cases, it takes between two to two and a half years to process such application and to obtain Canadian residency if all proceeds in the ordinary course. Such investor and entrepreneur could further qualify for Canadian citizenship by remaining in Canada for three years (during a five year residency).

 

 

Under this program, designated organizations (certain venture capital funds, angel investor groups or business incubators) choose which startup investment business proposals to review and to invest in. The startup does not even have to be in Canada: it can be a foreign startup and then the immigrant entrepreneur can relocate with the start-up to Canada and become eligible for Canadian residency. Each designated organization has its own intake process for proposals and criteria used to assess the proposals. If a designated organization chooses to support the start-up business idea, it will give applicants a Letter of Support. For example, for an incubator, such Letter of Support will mean that the incubator is willing to accept the start-up into its program and help the business grow in Canada while providing guidance and expertise. As a result, the investor and entrepreneur are not alone in growing the start-up: they receive support and direction from the incubator, in addition to obtaining Canadian residency leading to Canadian citizenship upon qualification.

 

Finally, it is important to note that the ability to communicate and work in English, French or both languages will help a start-up succeed in Canada. As a result, applicants will have to take a language test from an approved agency. Applicants will also need to give proof that they have sufficient initial funds to support themselves and their dependents after arrival in Canada. For example, this requirement can be satisfied for a family of four if an applicant and family bring CAD25,000 to Canada. ■

VARA issues full market product regulations

The Virtual Assets Regulatory Authority (VARA), established in March 2022 to regulate all activities relating to virtual assets in Dubai, has issued its much-awaited regulatory framework. So far, VARA was only issuing MVP (minimal viable product) licenses on a select basis. In addition, VARA had, in August 2022, issued its Marketing Regulations governing the marketing activities relating to virtual assets in Dubai.

 

On 7 February 2023, VARA has issued its full market product regulations and introduced the following regulations applicable to all virtual asset service providers:

 

1 – Virtual Assets and Related Activities Regulations 2023

2 – Company Rulebook

3 – Compliance & Risk Management Rulebook

4 – Technology & Information Rulebook

5 – Market Conduct Rulebook

 

In addition, VARA has introduced several activity-specific Rulebooks to cater for risks associated with the provision of each virtual asset activity. These will apply depending on the category of license obtained by the relevant entity:

 

1 – Advisory Services Rulebook

2 – Broker-Dealer Services Rulebook

3 – Custody Services Rulebook

4 – Exchange Services Rulebook

5 – Lending & Borrowing Services Rulebook

6 – Payments & Remittances Services Rulebook

7 – Management & Investment Services Rulebook

 

VARA has also issued a VA Issuance Rulebook which provides for registration requirements for issuing permitted virtual assets and approval requirements for issue of any other virtual assets.

 

Pursuant to the new regulations, all entities seeking a license from VARA have to adhere to the licensing process as prescribed by VARA from time to time, which shall include compliance with the VARA regulations. The licensing procedure and application forms are awaited. ■

Termination of a Commercial Agency Contract under the (New) Commercial Agency Law

The importance of the UAE as a trading and consumer goods hub resulted in a protective approach of the authorities towards distributors and franchisees. The UAE Federal Law No. 18 of 1981 on Commercial Agencies (Old Law) was drafted with the intent of protecting the interests of UAE nationals (and companies wholly owned by UAE nationals), and was protective towards the interests of registered commercial agencies. In the last few years, there has been a gradual shift away from such protectionist measures and this shift has now led to the issuance of a new Federal Law No. 3 of 2022 Regulating Commercial Agencies in December 2022 (New Law).

 

The New Law repeals the Old Law and will come into effect in June 2023. Kindly refer to our inBrief of 26 January for a snapshot of the key changes to the regime. In this inBrief, we focus on the termination of commercial agency contracts and disputes that may arise.

 

1 – Term and termination: Expiry or termination of a registered commercial agency has been the most contentious issue under the Old Law. The Old Law provided that the principal is not permitted to terminate or refuse to renew a commercial agency contract unless there is mutual consent of both parties or there is a fundamental reason justifying the termination. The term ‘fundamental reason’ was not defined and was determined by the court or the Commercial Agencies Committee (Committee) at their discretion. The New Law has proposed major amendments in this regard and provides that:

 

(a) Unless otherwise agreed between the parties, if the contract requires the agent to establish display buildings, commodity stores, or maintenance or repair facilities, there shall be a default contract term of five years.

 

(b) The commercial agency contract shall expire in any of the following cases:

 

  • upon expiry of the contract term unless renewed;

 

  • pursuant to the terms of the contract;

 

  • by mutual agreement of the principal and the agent; or

 

  • by court order.

 

The ability of the principal to terminate the contract in accordance with its terms or at expiry of the term is a deviation from the Old Law which had very restrictive termination provisions.

 

2 – How to terminate? The party intending to terminate the agency pursuant to the terms of the agency contract is required to:

 

(a) send a termination notice to the other party of their wish to early terminate the agency contract. Unless otherwise agreed in the agency contract, the notice period for the termination notice should be not less than one year notice prior to the effective date if termination or prior to the lapse of one half of the contract term, whichever is less. This requirement can be dispensed with if agreed by the parties; and

 

(b) either party may submit a detailed report prepared by a specialized professional body on the settlement of dues, guarantees of non-interruption of after-sales services, estimation of assets and expected damages, consequent to the termination.

 

In case of non-renewal of the contract, the party wishing to not renew the contract is required to notify the other of non-renewal one year before expiry of the term or before the lapse of one half of the term, which is less, unless the two parties agree otherwise.

 

3 – How to challenge termination: A party may challenge the termination notice before the Committee. The Committee is required to give its decision within 120 days from the date of the request. If it does not give its decision within this timeline, the challenge is deemed rejected. The ability to terminate / not renew and the strict timelines for resolution of the challenges to termination are very principal friendly. This is a major departure from the earlier regime which practically saw a timeline of four to six months for the Committee to issue its decision on such matters.

 

4 – Compensation on termination: The New Law lays down certain provisions relating to the compensation that may be claimed upon termination/expiry of the agency contract. The New Law permits the parties to agree to ‘no compensation’ provisions in the contract in the event the contract is terminated due to expiry of the contract term. This however appears only to relate to circumstances  where the contract terminates due to the expiry of the contract terms. In circumstances where the agency contract is terminated pursuant to the terms of the contract, the agent shall be entitled to compensation, if it proves that their legitimate activity has contributed to the achievement of visible and significant success of the products of the principal, has led to the promotion of such products or the increase in the number of customers and that the termination of the contract would deprive the agent of their lost profit.

 

5 – Commercial Agencies Committee: In line with the Old Law, the New Law also provides that disputes in relation to commercial agencies shall be referred to the Committee prior to being referred to Court. This however does not appear to be the case if the parties have agreed to arbitration. The New Law introduces a timeline of 120 days for the Committee to issue its decision. Failure to comply with the timeline grants the parties the right to approach courts within 60 days of lapse of the deadline.

 

6 – Arbitration: In a major departure from the Old Law, the New Law recognises the parties’ right to agree to arbitration. While the default seat of arbitration has been identified as ‘within the UAE’, the parties are free to agree on a different seat. Note however that this provision does not apply to agency contracts in respect of which a dispute is being heard before the Committee or the competent courts before the New Law is issued. Also, if a party initiates arbitration after the issuance of the Committee’s decision, the Committee’s decision shall be disregarded and have no effect or consequences. The effect of this is likely to be that the Committee could be circumvented by a party, if the agency contract contains an arbitration clause.

 

7 – Application of termination provisions to existing agencies: In order to protect the existing agencies, the provisions relating to termination due to expiry of term or termination in accordance with the contract terms shall apply to existing agency contracts only after two years from the effective date of the New Law. Further, in case of agencies that have been registered for the same agent for more than ten years or agencies in which the volume of the agent’s investment exceeds AED 100 million, such provisions shall only apply ten years after the New Law comes into effect in June 2023.

 

Further clarity is awaited on penalty provisions, release of certain activities from the requirement of being undertaken only through commercial agency and provisions relating to import of goods and services into the UAE during the period of dispute between the parties.

 

Overall, the New Law introduces much expected changes. The provisions on commissions and exclusivity have been retained and existing agents have been protected from termination for a specified time. This would soften the blow on the existing agents who enjoyed full protection and advantages under the Old Law. ■

UAE Commercial Agencies Regime (2023)

The UAE commercial agency regime has been a central pillar of commerce since the issuance of UAE Federal Law 18 of 1981 (the 1981 Law). While piecemeal amendments to the 1981 Law have been introduced from time to time, the UAE government has now issued UAE Federal Law 3 of 2022 concerning commercial agencies (the New Agencies Law) which repeals and replaces the 1981 Law in its entirety.

 

The New Agencies Law represents a substantial modernisation of the 1981 Law and will no doubt contribute further to the development and expansion of the UAE economy and its integration into global commerce. This inBrief considers some of the salient issues concerning registration and termination of commercial agencies under the New Agencies Law.

 

Requirement for registration as a commercial agent

 

The New Agencies Law provides that the following shall be permitted to act as “commercial agents”:

 

– natural persons who are UAE nationals; or

 

– a body corporate that is wholly owned by:

 

(a) one or more natural persons who are UAE nationals; or

 

(b) a public company (subject to what is stated below).

 

A separate regime is contemplated for UAE incorporated public joint stock companies that are (or propose to be) registered as commercial agents under the New Agencies Law. Such companies may be registered as commercial agents notwithstanding that they do not have 100 per cent UAE national participation (but provided that UAE national participation is not less than 51 per cent) however, additional specific implementing regulations are contemplated.

 

In addition, the New Agencies Law provides that the UAE Federal Cabinet may, upon the recommendation of the Minister of Economy, permit an “international” business not owned by UAE nationals to promote and sell its own products in the UAE (and presumably to be registered as its own “commercial agent” in accordance with the New Agencies Law) provided that:

 

– there is no commercial agent registered for the relevant product(s) in the UAE; and

 

– there has not previously been a commercial agent registered for the relevant product(s) in the UAE.

 

The scope of this carveout for a foreign principal is anticipated to be supplemented by a decision of the UAE Federal Cabinet and we look forward to further clarity on what is no doubt going to be an issue of interest.

 

As with the 1981 Law, a written contract is required to be entered into and default jurisdiction for commercial agency disputes is reserved for the commercial agencies committee within the Ministry of Economy and subsequently the onshore courts of the UAE. However, the New Agencies Law allows for the parties to a commercial agency contract to provide for the resolution of disputes by arbitration. This is an important change to the 1981 Law which did not provide for such an alternative.

 

Expiry or termination of  registered commercial agencies

 

It is common knowledge that the 1981 Law provided substantial safeguards against termination to a registered commercial agent. The New Agencies Law provides that a commercial agency shall “expire” upon the expiry of the contractual term stated in the contract of commercial agency. The New Agencies Law also provides that a commercial agency contract may be terminated unilaterally by either principal or agent in accordance with the provisions of the commercial agency contract. Both of the foregoing concepts concerning expiry and termination are new and fundamentally change the previous position with respect to termination, as stated in the 1981 Law.

 

In addition, the New Agencies Law provides that a party wishing to terminate a commercial agency contract at the end of its term (i.e., a “non-renewal”) shall serve notice on the other party not less than either:

 

(a) one year prior to the expiry of the term of the underlying commercial agency contract; or

 

(b) prior to the lapse of half of the stated contractual term,

 

whichever of (a) and (b) is shorter.

 

Application of the New Agencies Law to existing commercial agencies

 

The New Agencies Law is stated to come into effect six months after the date of its publication in the Official Gazette. The New Agencies Law was published in the Official Gazette on 15 December 2022 and accordingly will come into effect in June 2023.

 

Notably however, the New Agencies Law provides that the stipulation concerning the expiry of a commercial agency (as summarised above in this inBrief) shall not immediately apply to commercial agency contracts in force at the time of the issuance of the New Agencies Law and shall only apply to such contracts after the lapse of two years of the date of application of the New Agencies Law (i.e., two years from June 2023). Equally importantly (and by way of exception to the two-year period above), where a commercial agency has been registered for a period of ten years or a commercial agent’s investment into the development of the relevant agency exceeds AED 100 million, the provisions of the New Agencies Law concerning expiry of a registered commercial agency shall only apply after the lapse of ten years from date of its application (i.e., ten years from June 2023) in relation to such agencies. Further implementing regulations concerning this carveout are contemplated in the New Agencies Law.

 

Key takeaways

 

As noted, the New Agencies Law represents a substantial modernisation of the 1981 Law. New provisions concerning the expiry and termination of registered commercial agency contracts have been introduced and will be very important in any negotiations concerning commercial agency contracts proposed to be entered into. A number of key provisions remain subject to further supplementary rules and legislation. As with all legislative updates, the application and enforcement of the New Agencies Law will determine the further development of the UAE commercial agencies regime. ■

Venture Financing

This inBrief highlights the different aspects of venture capital, an important source of raising money for start-up companies which do not have access to capital markets. We discuss the different types of venture financing through which start-ups can raise money and which are taken into account when assessing valuations.

 

Types of Venture Financing

 

Although there are different forms of venture financings that can be utilised by start-ups depending on their needs and goals, it should be noted that generally a start-up can only raise financing through issuing equity or debt. Therefore, venture financing is fundamentally provided as a form of debt or equity. When deciding which form of equity or debt to pursue, it is important to bear in mind ‘maturity’, ‘valuation’ and any other ‘preferences’ awarded to investors.

 

Below we set out the common types of structures for venture financings and the typical terms which may apply.

 

1 – Convertible Promissory Notes 

 

This form of venture financing is a debt security convertible into equity upon the occurrence of a certain conversion event. Such conversion event could encompass a financing round, a liquidation event or even an initial public offering. This is an effective method for start-ups to raise capital without the cost, time, and complexity of a preferred stock financing as it involves minimal negotiations with investors and significantly less volume of documentation. As these notes are a debt security, the start-up does not require to conduct a company valuation. While these convertible promissory notes are considered as debt, investors could benefit from accrued interest payable to the note holder upon maturity as stipulated in the terms of issuance of these promissory notes.

 

Upon the occurrence of a financing event, the notes often convert at a price that is lower than the price paid by the investors purchasing shares in a qualified financing round. This is because the conversion price is often determined and calculated based on either a discount rate (which is typically a percentage of the qualified financing’s issue price) or a valuation cap (a cap on the pre-money valuation at which such notes may convert).

 

2 – Simple Agreement for Future Equity (SAFE)

 

A SAFE is similar to the process of issuing a convertible promissory note. A start-up could issue a SAFE to the investor as a promise of repayment. This typically means that the SAFE converts in the same manner as a convertible promissory note, but because a SAFE is not considered a debt instrument, it does not accrue any interest and it does not have a maturity date. Consequently, a SAFE is left outstanding until a qualified financing or corporate transaction triggers conversion of or payment on the SAFE. Upon conversion, the SAFE coverts into a number of shares of preferred stock, determined by dividing the purchase price of the SAFE by the applicable conversion price, which is normally calculated based on either a discount rate (which is typically a percentage of the qualified financing’s issue price), or a post-money valuation cap at which the SAFE may convert. The terms of the SAFE often stipulate that the choice of calculation would be the calculation which results in the greater number of shares.

 

3 – Preferred Stock Financings

 

This type of equity financing involves issuing preferred stock to venture investors at a substantial premium over the price charged to the founders or the seed investors. As a justification to the premium paid for the shares, investors are given preferential treatment. This could take form of a liquidation preference and other preferential rights over holders of common stock as well as certain voting rights. This helps startups classify shares according to the investment rounds and also justifies a lower price (lower than is paid by preferred investors) for common stock to its employees.

 

Assessing Valuations

 

Pre-money valuations of a start-up are provided as an indication in a given financing round which investors take into consideration when determining the company’s development stage and assess their investment potential prior to investing.

 

The pre-money valuation is carried out based on the price per share that the investors are offering to pay the start-up company multiplied by the total number of shares outstanding (including options, other convertible securities and shares reserved for employee stock options).

 

The standard position for start-ups to determine valuation is by contrasting the company’s position in the future with the desired rate of return by the investors for the near future. However, in practice venture capitalists tend to estimate the amount of cash required to achieve some development milestone and equate that amount to a certain percentage of the company. It is often the case that a start-up company in the UAE is likely to be valued on a similar scale at what valuations venture capitalists have been giving to other companies with a similar business model. Following a financing round, the start-up company’s post-money valuation can be determined by adding the amount of money invested in the financing to the pre-money valuation. ■

UAE Corporations and Businesses Tax – Registration of Taxable Persons

The Federal Tax Authority (FTA) has launched early registration for corporate and business tax (CT) through the EmaraTax platform for digital tax services pursuant to Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (CT Law). The CT Law states that Taxable Persons will become subject to CT from the beginning of their first financial year that starts on or after 1 June 2023.

 

The FTA has stated that the early registration period is available from January 2023 to May 2023 for certain categories of companies operating in the UAE. These selected companies are to receive invitations from the FTA by email and SMS, allowing them to register via the EmaraTax platform.

 

Following this phase, the FTA has stated that it will announce when registration will open for other companies and businesses, with priority being given to companies and businesses that have a financial year starting on 1 June 2023. ■

Sharjah Law No. 2/2022

What has happened?

 

On 27 October 2022 Sharjah Law No. 2/2022 was issued by Sultan Bin Mohammed Al Qasimi, Ruler of the Emirate of Sharjah expanding the rights of ownership of real estate within the Emirate to foreigners.
In this inBrief, we look at the implications of this new law and what the expansion may mean for the real estate market in Sharjah.

 

Previous Position

 

Previously under the laws of Sharjah, foreign ownership of real estate was limited to the right to hold a usufruct over property in specified areas for a maximum period of 100 years only. Non-UAE or GCC nationals were not permitted to own property on a freehold basis. A usufruct right is a limited right that permits the right holder to use and enjoy land owned by another subject to various contractual and legislative restrictions.

 

Therefore, whilst foreign nationals could hold such a property right, the right itself was quite restrictive and limited the foreign nationals’ ability to deal with the property. The preclusion of foreign investors from participating fully in the Sharjah real estate market has meant that it has not experienced the same level of growth as that of its neighbor Dubai, which has permitted such investment in designated areas for some time and has experienced a further surge in foreign investment since the beginning of the conflict in Ukraine.

 

What has changed?

 

Sharjah Law No. 2/2022 amending Article 4 of Sharjah Law No. 5/2010, has restated the general position that the right of property ownership in Sharjah is limited to UAE and GCC nationals. However, it provides for a number of exceptions whereby the right of ownership can also occur, this includes areas and projects specifically determined by Sharjah Executive
Council. It is anticipated that this will extend to the provision of rights of full ownership to foreign nationals in the specific areas and projects identified. We have summarised these exceptions as follows:

 

a. transfer by inheritance by virtue of a sharia inheritance notice;

 

b. through assignment by the owner to one of the relatives up to the first degree, as set forth in the implementing Regulation of the law; and

 

c. ownership in areas and projects of real estate development, as per the controls determined by the Sharjah Executive Council.

 

Conclusion

 

Whilst the specific areas and projects remain to be fully identified by the Sharjah Executive Council, the granting of full ownership rights to foreign nationals is a positive step toward the encouragement of direct foreign investment in the Sharjah real estate market. Foreign investors that have been priced out of the Dubai market due to increasing property prices may now be more inclined to invest in the Sharjah market.

 

It should be noted that the tested legal and administrative framework that exists in Dubai which provides protection to foreign investors through various laws concerning the ownership and maintenance of jointly owned property, the sale of off-plan properties and the governance of escrow accounts relating to same has not been fully implemented in Sharjah thus far. Therefore, whilst Law No. 2/2022 is a welcome development, it may take some time before a complementary legal structure is in place that will provide foreign investors with the necessary comfort to significantly invest in this market. ■

 

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For more detailed information, please do not hesitate to contact Shahram Safai at ssafai@afridi-angell.com.

Video inBrief: Merger Control in the UAE

In this video inBrief, Abdus Samad discusses Merger Control in the United Arab Emirates.

 

 

 

Disclaimer: Afridi & Angell’s video inBriefs provide a brief overview and commentary on recent legal announcements and developments. Comments and opinions contained in the video and description are general information only. They should not be regarded or relied upon as legal advice.

Hiring an employee in the UAE – key considerations to be mindful of

The United Arab Emirates (UAE), a sought-after destination by foreign businesses for establishing their regional offices, consists of multiple jurisdictions for incorporation/establishment of entities. Each Emirate of the UAE has its own licensing authority and, additionally, there are more than 40 free zones in the UAE. Each Emirate and each free zone can be regarded as a separate jurisdiction for the incorporation and establishment of entities.

 

Federal Decree-Law 33 of 2021 on Regulation of Labour Relations (as amended) (the new Labour Law), which repealed and replaced Federal Law 8 of 1980 concerning the Regulation of Labour Relations (as amended) (the old Labour Law), applies to all jurisdictions within the UAE except for the Dubai International Financial Centre (DIFC) free zone and Abu Dhabi Global Markets (ADGM) free zone, both of which have their own employment laws.

 

In this inBrief, we discuss certain fundamental points which are commonly raised by employers headquartered outside of the UAE and with little familiarity with the new Labour Law. Although commonalities exist in all jurisdictions, points covered in this inBrief apply to entities established in the UAE excluding the DIFC and the ADGM.

 

UAE Residency Visa and Work Permits

The majority of the workforce in the UAE is comprised of foreign nationals (excluding Gulf Cooperative Council (GCC) countries nationals) who are sponsored by their employers. To sponsor an employee, a UAE employer will arrange residency visas and work permits for such foreign national employees. Subject to complying with certain procedural requirements and passing a routine health and security check, UAE residency visas and work permits are readily issued by the appropriate UAE authorities.

 

Use of Standard Form of Employment Contract

Most jurisdictions within the UAE require the use of standard form of employment contracts. For entities operating in mainland UAE (outside of the free zone areas), the UAE Ministry of Human Resources & Emiratisation (MOHRE) has published a standard form employment contract. Similarly, Jebel Ali Free Zone Authority (JAFZA) (the authority which regulates Jebel Ali Free Zone) and a number of other free zones have issued standard forms of employment contracts.

 

The standard form employment contracts are invariably basic documents covering the minimum provisions required for an employment contract. Therefore, it is common for an employer and an employee (such as senior employees) to enter into a more sophisticated contract covering additional points not covered in the standard form contract or providing greater detail on standard provisions than what is typically included in the standard form contract.

 

Term of Employment Contracts

Under the old Labour Law, it was permissible to enter into either limited term employment contracts or unlimited term employment contracts. However, under the new Labour Law, the concept of unlimited term employment contracts has been removed. There is no limit on the minimum or maximum number of years of a term. It is permissible to renew an employment contract for similar or shorter periods as agreed between the parties.

 

Probation Period

The probation period of an employee can be a maximum of six months. Under the old Labour Law, either party could terminate an employment contract during probation period without notice. Under the new Labour Law, however, notice of termination of employment is required to be served and notice period will vary depending on the circumstances.

 

Salary and End of Service Gratuity

Salary is generally divided in two components, basic salary and allowances. Allowances can be further divided into different types of allowances and can be any amount the employer chooses and are not required to be the actual amounts incurred by the employee. For example, the monthly housing allowance is not required to be equal to the actual monthly rent of an employee.

 

Employees are entitled to an end-of-service gratuity (a benefit which an employer is required to pay at the end of an employee’s service) which is calculated on the basis of basic salary. The higher the basic salary, the higher will be the end-of-service gratuity. It is common to split the monthly basic salary and allowances to, say, 40-60, 50-50 or 60-40 ratios. An employer has discretion to keep a further lower basic salary and offer higher allowances.

 

Once agreed in an employment contract, the employer will not be able to unilaterally reduce or adjust the basic salary and allowances to the detriment of an employee.

 

Pension contributions are mandatory for employees from GCC countries. End of service gratuity is not required to be paid to employees from GCC countries.

 

Termination at Will

The Labour Law does not provide for termination of employment at will. The Labour Law provides for grounds on which an employment contract may be terminated by either party. In case of wrongful termination of an employment contract by an employer, the UAE courts may award compensation to an employee which is capped at a maximum of three months of current salary[1].

 

Governing Law and Dispute Resolution

All employment contracts must be governed by the laws of the UAE and be subject to UAE local courts. In case of a dispute, irrespective of the provisions of an employment contract, UAE courts will have jurisdiction and will apply the laws of the UAE. An employment dispute cannot be subject to resolution through arbitration.

 

Reliefs of Injunction and Specific Performance

The UAE courts generally do not grant remedies of injunction and specific performance. In case an employee, in breach of his non-compete obligations, joins a competitor of his previous employer, the previous employer will need to file a case before the UAE courts and prove and claim damages (which is often difficult) from the employee.

 

A detailed inBrief on the new Labour Law can be accessed here. ■

 

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[1] Other provisions may apply for termination of employment of UAE nationals.