Category: inBriefs

Further recognition of judge-made law, and new courts: more changes to the UAE’s Civil Procedure Code

The UAE’s Civil Procedure Code was enacted in 1992 as Federal Law No. 11, and the first amendments to the Code were made more than a decade later in 2005. Since 2014, almost each successive year has seen amendments being made, the most extensive of which were the regulations issued under Civil Procedure Code (the Regulations) which came into effect on 16 February 2019. The Regulations themselves were amended in 2020 by Cabinet Decision No. 33/2020.

 

Federal Decree No. 15 of 2020 (the Decree) and Cabinet Resolution No. 75 of 2021 (the Resolution) comprise the latest set of amendments to the Civil Procedure Code and the Regulations, and cover a range of issues from service of defendants, to the conduct of proceedings, and the execution of judgments. This article examines some of the more notable changes introduced by the Decree and the Resolution.

 

The creation of Single-Level Courts 

The Decree makes provisions for the UAE Minister of Justice or the head of the Judicial Authority of an Emirate to create a Single-Level Court, which shall comprise of three judges, one each drawn from the Court of First Instance of the Emirate, the Court of Appeal of the Emirate, and the Court of Cassation of the Emirate or the Federal Supreme Court (to allow for the fact that save for the Emirates of Abu Dhabi, Dubai and Ras al Khaimah, the final level of appeal for the other Emirates is the Federal Supreme Court). The Single-Level Court was first proposed several years ago and, when established, will have jurisdiction where parties have agreed to submit themselves to the jurisdiction of that court, or where the subject matter falling within its jurisdiction is identified by regulations issued under the Civil Procedure Code (which is yet to happen). The court will only have jurisdiction over disputes which have a ‘definite value’  (i.e.  would  exclude  claims  for  unassessed damages) which is over AED 500,000. The judgments of the Single-Level Court will not be subject to appeal, except where the judgment is subjected to review under the provisions of Article 169 of the Civil Procedure Code, reversal pursuant to Article 187(bis) (discussed below) or where the judgment is defective as the parties were not properly summoned.  

 

Review of Court of Cassation judgments – a step towards further recognising judge-made law  

The UAE, being a civil law jurisdiction, does not have a system of binding judicial precedent as understood in common law systems. That said, while a single judgment of the UAE Courts does not bind, a line of authority established by the superior courts is influential, for example the principle that arbitration is an exceptional form of dispute resolution. Federal Law No. 10 of 2019 created a judicial tribunal comprising judges from the Federal Supreme Court and the Courts of Cassation to unify the federal and local judicial principles and precedents issued by these courts and to eliminate potential conflicts.

 

The role of judicial principles within the framework of UAE law is further recognised by the Decree, which identifies conflict with judicial principles as one of the grounds for appealing a judgment of a Court of Cassation. Prior to the Decree, Article 187 of the Civil Procedure Code provided that a judgment of a Court of Cassation was not subject to appeal, but was subject to review in certain limited circumstances set out in sub-articles 1, 2 and 3 of Article 169 of the Civil Procedure Code (being fraud, forgery or false testimony, and suppression of conclusive evidence respectively). The Decree adds Article 187(bis) which provides that the Court of Cassation may at its own initiative or at the application of the party against who the judgment is issued, reverse a decision, among others, in the following cases:  

 

– where a procedural error (either by the court directly or by one of its departments) affecting the conclusion of the decision/judgment has occurred;

 

– where the decision/judgment is based on a repealed law, and a different outcome would result if the current law is applied; and

 

– the decision/judgment violates judicial principles established by the panel, or other entire court circuits, or if it violates the principles established by the court, or the principles established by the judicial tribunal created by Federal Law 10 of 2019.    

 

Where a party wishes to seek this remedy, an application for reversal should be made to the President of the Federal Supreme Court/Court of Cassation, with a deposit of AED 20,000. Applications may only be made within one year of the initial judgment. If the application for reversal is accepted, the matter will be remanded back to the court which issued the decision for reconsideration.

 

The amendments do leave some matters unresolved. There is no clear guidance as to what constitutes a judicial principle. The Decree is also silent regarding judgments of any courts other than the Federal Supreme Court and Courts of Cassation which may have become final, e.g. by reason of not being appealed, although the language suggests that this mechanism is limited to judgments of the Federal Supreme Court and Courts of Cassation.

 

Amendments regarding Payment Order applications

One of the key changes introduced through the Regulations was the expansion of the summary procedure known as Payment Orders, previously confined to disputes involving commercial instruments, to disputes which involve a written confirmation of debt. The Cabinet Resolution makes further changes to the law governing this procedure, notably the following:

 

– Amending Article 64 of the Regulations to require the judge to provide justification for the court’s decision when granting or denying a Payment Order application in relation to implementation of a commercial contract. Previously, justification was required only where the judge rejected an application.

 

– An appeal against a Payment Order (appeals are available where the value of the claim is more than AED 50,000) now may be made within 30 days of the decision. Previously, it was 15 days. The amendment also requires a detailed memorandum of appeal to be filed at the time of filing the appeal. Previously, a simple notice of appeal sufficed. Where the value of the claim is less than AED 50,000, a challenge must be made by way of an objection (or a ‘grievance’ as commonly referred to) within 15 days – the law with respect to such challenges has not changed.

 

– The Cabinet Resolution provides that in an appeal originating from a case has been filed as ordinary proceedings but the supervisory judge has instead issued a Payment Order, and the Court of Appeal takes the view that the requirements for issuing a Payment Order has not been met, the Court of Appeal may remand the matter to the Court of First Instance to be heard as an ordinary claim. Prior to the amendment, if the Court of Appeal takes the view that the requirements for issuing a Payment Order have not been met, the application would be dismissed.

 

Summoning of parties  

A constant theme in the amendments to the Civil Procedure Code since 2017 is the attempt to streamline the process of serving court process on defendants. The Cabinet Resolution take further steps in this direction by providing that:

– summons may be served by recorded audio or video calls, short message services, smart applications, email, fax, or any other means agreed between the parties from the method of service recognised in the Regulations;

 

– summons may be served at the defendant’s domicile, residence, or on their attorney, spouses, relatives or servants and that refusal to accept summons will be deemed to result in personal service; and

 

– summons may be served at a place of work on the defendant, his/her manager or the management of the workplace.  

 

If service cannot be affected as above, summons shall be served among others by publication on the court’s website or in newspapers, including a foreign language newspaper where the party sought to be summoned is not a UAE national. In practice service of summons can still be a time-consuming exercise in the UAE courts (less so in the Dubai Courts), and it is hoped that the changes made by the Cabinet Resolution will make this a more efficient process.    

 

Added scope for ad-hoc courts

Article 30(bis) of the Civil Procedure Code provides that the Minister of Justice or the head of the Judicial Authority of an Emirate may create an ad-hoc court presided by one judge and assisted by two local or international experts to hear and determine certain matters that would otherwise fall within the jurisdiction of the major circuit of courts. The Cabinet Resolution clarifies that the ad-hoc courts will have the jurisdiction to hear civil, real estate, commercial and inheritance cases, and such disputes that the parties agree will be subject to the jurisdiction of the ad-hoc courts. Where there is such an agreement, other courts should decline jurisdiction, provided that the defendant in the matter asserts a jurisdictional objection before addressing the court on the merits of the dispute (i.e. similar to the position when asserting a jurisdictional objection based on the existence of an arbitration agreement). Each ad-hoc court will have a ‘preparation judge’ who shall exercise the powers of supervising judge and case manager. The ‘preparation judge’ is required to encourage settlement of disputes, and if a settlement is reached, the minutes of settlement shall acquire the status of a writ of execution. If settlement is not possible, the ‘preparation judge’ must, within 30 days, prepare a memorandum of opinion considering the parties’ position and the applicable law, and the matter will be referred to the competent court for adjudication in the ordinary manner. ■  

SAFEs-Start-up Company Financing

The UAE has seen a significant increase in investments and entrepreneurship over the last decade.  The Dubai International Finance Centre (DIFC) reported record growth driven by ‘a robust ecosystem, global partnerships and investment in FinTech and Innovation’. This exceptional growth in investments has acted as a catalyst for the increased usage of Simple Agreements for Future Equity (SAFEs) in start-up company financings.

 

SAFEs are a method of funding directly between start-ups and investors used in the seed financing rounds of a company’s start-up phase to raise capital in return for future equity. They have been an increasingly popular form of funding within the start-up ecosystem since their establishment in 2013, and even more so since their modification in 2018.

 

What is a SAFE?

SAFEs were established to create a quick and easy way for investors to invest in start-ups using a simplistic legal document that is entrepreneur friendly and easily understandable. Under a SAFE, investors can provide funding for start-up companies during the initial phase of funding of a company and in return, the SAFE will convert into ownership of shares during the next equity investment round of funding at a predetermined rate. The major difference between SAFEs and other forms of start-up financing such as convertible notes, is that SAFEs have no interest rate or maturity date.

 

SAFEs were established to create a quick and easy way for investors to invest in start-ups using a simplistic legal document that is entrepreneur friendly and easily understandable. Under a SAFE, investors can provide funding for start-up companies during the initial phase of funding of a company and in return, the SAFE will convert into ownership of shares during the next equity investment round of funding at a predetermined rate. The major difference between SAFEs and other forms of start-up financing such as convertible notes, is that SAFEs have no interest rate or maturity date.

 

Pre-money SAFEs vs Post-money SAFEs

When introduced in 2013, SAFEs were formed based on pre-money valuations which are based on the initial value of the company before taking into account the investment contributions made by the SAFE investors (pre-money SAFEs), however, complications resulted as SAFEs became increasingly popular and of higher value making it difficult for start-ups to know their share capital dilution and for investors to know their relative ownership percentage. In light of this difficulty, SAFEs were revised and adapted in 2018 (post-money SAFEs).

 

The key difference between pre and post money SAFEs is that the investor’s ownership percentage using a post money SAFE is fixed and calculated based on a fixed post SAFE valuation. This makes it much more transparent and guarantees the investor a minimum percentage of ownership after the SAFE round.

 

Pro Rata Rights

Initially, pro rata rights were compulsory in SAFEs meaning SAFE holders were required to participate in subsequent equity rounds in order to maintain their percentage of ownership without dilution. However, upon adaptation in 2018, this was changed and pro rata rights became optional for investors.

 

Advantages and Disadvantages of SAFEs

The advantages and disadvantages of SAFEs are:

 

Advantages

– No interest rates (unlike convertible notes) meaning the costs of financing are lower.

 

– No maturity date which means theoretically the SAFE could be everlasting, except in the following circumstances, which would terminate a SAFE: the following equity round, acquisition of the business, IPO or if the company shuts down.

 

– Instant transactions directly between the start-up and the investor meaning no co-ordination with other shareholders is needed.

 

– Simplicity makes it a cost effective and time effective option.

 

Disadvantages

The disadvantages of SAFEs are dependent on the type of SAFE acquired.

 

– The disadvantages of a pre-money SAFE is that it lacks transparency between the start-up company and investor as tracking dilution and stock ownership is difficult.

 

– The most significant drawback of pre-money and post-money SAFEs is the inevitable dilution effect on existing investors, which is amplified even more in post-money SAFEs because a guaranteed minimum percentage of ownership is given to investors.

 

Conclusion

SAFEs have proven to be an increasingly popular method of start-up company financing, and we anticipate this trend to continue, especially in the Middle East. The upcoming EXPO 2020, beginning in October 2021, which aims to attract more investors into the Middle East will further accelerate the growth of the start-up/venture capital ecosystem and the use of SAFEs. In addition, the successful handling by the UAE government of the COVID-19 crisis continues to bolster the attraction of the UAE as an investment destination. ■

Consistent messaging from the Dubai Courts: Arbitration clauses are to be construed as narrowly as possible

In a decision issued in July 2021, the Dubai Court of Appeal held that an arbitration clause should be construed narrowly, and emphasized that everything that may be waived or prevents its [i.e., the arbitration clause’s] application must be sought.   

 

In finding that the Dubai Courts have jurisdiction over the dispute, the Dubai Court of Appeal referred to judgments of the Dubai Court of Cassation characterizing arbitration as an exceptional means of dispute resolution and, being a departure from the general rule that the courts have jurisdiction over disputes, arbitration clauses must be interpreted narrowly, and everything that may be waived or prevents its application must be sought. The latter phrase in particular is of interest, as it suggests that the Court will need to be satisfied that there exists no issue that might affect the applicability of an arbitration clause.    

The dispute resolution clause in question, while containing the provisions regarding the number of arbitrators, the seat and the language of the arbitration, included language stating that any referral to arbitration will be ‘without prejudice’ to the jurisdiction of the UAE Courts and ‘subject to agreement between the parties’. The Court of Appeal recognized that parties may agree to arbitration as a method of dispute resolution, provided that it does not conflict with public order. However, in this case the Court of Appeal found that there was no evidence that an agreement was reached between the parties to resolve disputes through arbitration as set out in the dispute resolution clause, and that consequently the forum for dispute resolution is the Dubai Court.    

 

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

 

The principle that arbitration clauses must be interpreted narrowly is a well-established one, and the language that everything that may be waived or prevents its [i.e., the arbitration clause’s] application must be sought appears to have been used by the Dubai Court of Cassation as far back as in Petition No. 192 of 2007. This principle and precedent was part of a strategy successfully deployed by Afridi & Angell in a recent case before the Dubai Court of First Instance to argue that the Dubai Courts had jurisdiction over a dispute in which the plaintiff and one of the defendants had an arbitration agreement. The dispute in question arose from a real estate contract containing an arbitration clause. The developer at the time the contract was entered into had been replaced by the time the dispute arose, and the new developers were added as defendants to the court proceeding by the purchaser (our client). The court found that as the added parties did not have an arbitration agreement with the plaintiff, the court had jurisdiction over all of the defendants, notwithstanding that the plaintiff and the initial defendant had an agreement to resolve disputes through arbitration. ■  

POD inBrief: Real Estate in the UAE

 

This episode of Afridi & Angell’s POD inBrief focuses on real estate in the UAE, recent performance, trends, and indicators for the upcoming months.

 

Shahram Safai, partner at Afridi & Angell and head of the real estate team led the discussion. He represents real estate stakeholders including developers, owners, architects, engineers, contractors and government entities in all stages of the real estate and construction process. In addition to real estate, Shahram represents clients on general corporate matters, private equity, venture capital and doing business in the region.

 

Listen to “Afridi & Angell’s POD inBrief _ Real Estate in the UAE” on Spreaker.

 

Overview:

 

  • Summary of real estate performance since 2018/2019
  • Current trends in recent real estate transactions
  • Discussion of the upward trends in real estate activity and the high demand for luxury housing and if these trends are here to stay
  • Evaluation of the impact of Dubai Expo 2020 on the economy and real estate in particular
  • Words of advice to investors and end-users looking to buy real estate in the UAE

Booming Market: Real Estate Ownership Rules for Foreigners in Dubai and Abu Dhabi

The real estate market in Dubai has been making significant improvements in 2021 after the successful handling of the COVID-19 pandemic by the UAE. March 2021 had the highest number of transactions in 16 months as well as the highest number of secondary/ready properties transacted for foreigners in a single month since June 2015. This boom in sales resulted in record increases (23 per cent annual increase between April to June for luxury villas). Such developments in real estate activity will most likely translate into positive activity in Abu Dhabi as well.

With the above in mind and such renewed interest, in this inBrief we compare the foreign ownership laws for real estate in Dubai and Abu Dhabi:

 

Where Can Foreigners Buy Property in Dubai, Abu Dhabi

 

Foreign investors should familiarise themselves with the two foreign ownership systems that operate in Abu Dhabi and Dubai so that they can make an informed decision when purchasing a property.

 

Dubai: The general rule regarding nationality requirements to acquire real estate interests in Dubai is set out in Article 7 of 2006 which states that: “non-UAE nationals may, in certain areas determined by the rules, be granted the following rights: (a) freehold ownership of Real Property without time restrictions; and (b) usufruct or leasehold over Real Property for a period not exceeding ninety-nine (99) years.”

 

The designated areas for foreign ownership of real estate interests are determined by the ruler of the Emirate of Dubai by way of decrees and regulations issued from time to time.

 

For foreigners, the most attractive designated areas have traditionally been Emirates Hills, The World Islands, Dubai Marina, Palm Jumeriah, Burj Khalifa, Downtown and Business Bay.

 

However, due to the current global economic climate, foreign investors have now been looking to Dubai’s affordable housing sector which has seen strong returns in communities such as Jumeriah Village Triangle, Jumeriah Village Circle and International City.

 

Foreigners must make specific inquiries with the Dubai Land Department as to whether foreign ownership is permitted for areas which are not listed above as the list of designated areas is subject to change as previously alluded to.

 

Furthermore, foreigners should be aware that currently the Dubai Land Department (DLD) does not allow foreign companies to own real estate directly in designated areas; instead it requires foreign companies to own real estate by establishing subsidiary companies in the free zones of: (a) Jebel Ali Free Zone; (b) the Dubai Multi Commodities Centre; or (c) The Abu Dhabi Global Market (ADGM; which we note is a recent development pursuant to a memorandum of understanding dated 10 October 2018 between the DLD, ADGM, and the International Financial Centre in Abu Dhabi).

 

As of April 16, 2019, the right to own real estate on a freehold basis in the investment areas has been granted to foreigners in Abu Dhabi, according to Law 13 of 2019. The law states, “Non-Nationals, whether natural or legal persons, may own and acquire all original and secondary rights in rem of the real estate existing within the investment areas, and they may conduct any disposition thereof.”

 

A right of ownership, known as freehold, is considered an original right in rem, while the right to grant a mortgage pledge or lien over that freehold property is classified as secondary rights in rem.

 

In a move to modernize its real estate laws, on 16 April 2019 Abu Dhabi announced that foreigners are now permitted to own freehold title to real estate within the “investment areas” in Abu Dhabi. Prior to this, foreigners were only able to buy real estate through long term leases of up to 99 years or rights of Musataha or usufruct.

 

It is expected that this change in the law will contribute to the increasing demand in real estate in Abu Dhabi and level the playing field with Dubai in terms of its foreign ownership rules.

 

The ten most popular investment areas where foreigners can now buy freehold property are: Al Reem Island; Yas Island; Saadiyat Island; Al Reef; Al Raha Beach; Al Shamkha; Masdar City; Nurai Island; Al Falah City; and Al Maryah Island.

 

What are the transfer fees payable by foreigners – Dubai vs Abu Dhabi

 

Dubai: A transfer fee of 4 per cent of the value of the sale contract is payable to the Dubai Land Department to register a transfer of property in Dubai. The fee is the same regardless of whether it is a foreign individual or a company making the purchase.

However, after the registration of the transfer, any change in the shareholding (at any level up to the ultimate beneficial owner) of the foreign company purchaser is considered a transfer of the real estate requiring payment of a further transfer fee at the Dubai Land Department.

Abu Dhabi: A transfer fee of between 1 per cent to 4 per cent of the property value is payable to register a transfer of property in Abu Dhabi. Currently, the Municipality is applying a rate of 2 per cent of the property value (or if higher the property value as assessed by the Municipality). The fee is the same regardless of whether it is a foreign individual or a company purchasing. Post-acquisition, the transfer fee process varies in the different investment areas in Abu Dhabi in respect of how changes in shareholders’ equity of a foreign company are dealt with, and specific inquiries for each investment area must be made.

 

What permanent residency and long term visas are available to foreign real estate investors – Dubai vs Abu Dhabi

 

In both Dubai and Abu Dhabi, a 5 year residency visa may be applied for by the investors in real estate in the UAE if the following conditions are met pursuant to Cabinet Decision 56 of 2018:

 

  • The investor must have invested in one or more properties in the UAE with a total value of no less than AED 5 million;
  • The amount invested must not be derived from the proceeds of a loan. Consequently, it will not be possible for there to be a mortgage over the property if this visa is to be applied for;
  • The property must be owned by the investor for at least 3 years from the date of issuance of the residency visa;
  • The investor must be financially liable for any claims or civil judgements which reduce his/her financial solvency below AED 10 million; and
  • The investor must have a comprehensive health insurance policy covering him/herself and any family members.

 

In both Dubai and Abu Dhabi, a 10 year residency system called the “Golden Card” is available to the following categories of foreigners in the UAE (and their spouse and children): (1) investors; (2) entrepreneurs; (3) specialised talents; (4) researchers; and (5) outstanding students. Amidst the pandemic, Dubai and Abu Dhabi have seen this visa expand and in particular authorities are encouraging frontline workers such as doctors to apply. The UAE Government Communications Office reported that, since 21 May 2019, the “Golden Card” system has granted a “Golden Card” to 6,800 qualified individuals with approximately AED 100 billion in combined total investments in the first round of applications.

In light of the pandemic, authorities have developed other visa options, such as retirement and remote working, which adhere to work flexibilities. This makes it an idealistic time to secure residency in Dubai and Abu Dhabi.

 

Conclusion:

The new announcement in Abu Dhabi permitting foreign freehold ownership in the designated investment areas, along with the introduction of the 10 year residency and other long-term visa schemes in the UAE, will serve to increase investor confidence and attract more foreign investment into the UAE. Dubai and Abu Dhabi remain attractive markets for domestic and international investors alike with globally high rental yields and relatively low prices.  The UAE’s successful handling of the COVID-19 pandemic has added to such attraction. The UAE continues to attract entrepreneurial companies and people from across the world. There is much to be positive about regarding the Dubai and Abu Dhabi property markets in 2021 and 2022. ■

UAE FDI: latest developments

Since our 4 July inBrief on the UAE permitting 100 per cent foreign ownership for certain activities, there have been some significant developments which we will discuss below.

 

List of Strategic Impact Activities

The UAE Cabinet has now issued a list of strategic impact activities and the rules for licensing companies that engage in any of the listed strategic impact activities.

 

Cabinet Decision 55 of 2021 on the Determination of the List of Strategic Impact Activities (the Cabinet Decision) identifies the following broad strategic impact activities:

 

  1. Security and defence activities and activities of a military nature.
  2. Banks, money exchange, finance companies, and insurance activities.
  3. Printing currencies.
  4. Telecommunications
  5. Hajj and Umrah services.
  6. Quran memorisation centres.
  7. Fisheries-related services.

 

For each activity, depending on its nature, a specific UAE authority has been identified as the regulatory authority. For example, the Ministry of Defence and the Ministry of Interior are the relevant regulatory authorities for the activities in the security and defence sector.

 

Each regulatory authority has been provided with a broad range of powers to determine the percentage of permitted foreign direct investment (FDI) and enact rules and conditions applicable to the strategic impact activities under the purview of the regulatory authority. This is with the exception of the fisheries-related services activity which is the only activity listed in the Cabinet Resolution which requires 100 per cent UAE national ownership.

 

An investor must submit an application to the local licensing authority (i.e., the Economic Department) of the Emirate in which such an investor wishes to conduct the desired activity. The local licensing authority will then submit an application to the appropriate regulatory authority.

 

The regulatory authority will consider the application and will then issue a decision either (i) approving the application and determining the percentage of the national contribution together with any conditions attached to such approval or; (ii) reject the application.

 

The regulatory authority will notify the local licensing authority of its decision and will then communicate the decision to the applicant and if permitted, implement such decision. The Cabinet Decision also provides certain timelines within which a local licensing authority and the relevant regulatory authority are required to process a complete application.

 

Abu Dhabi Department of Economic Development (Abu Dhabi DED)

Pursuant to the Cabinet Decision, the Abu Dhabi DED has issued Administrative Decision 320 of 2021 (Decision 320 of 2021) which contains a list of 85 strategic impact activities. These comprise of the actual activity descriptions which fall under the general descriptions of the strategic activities listed at numbers 1-7 above. Establishing a business in the Emirate of Abu Dhabi licensed to conduct one of these strategic impact activities will be governed by the process discussed above.

 

In addition to the issuance of a list of strategic impact activities, Decision 320 of 2021 also repeals Administrative Resolution 37 of 2021 concerning Activities available for Foreign Ownership. As such, Decision 320 of 2021 repeals the previous list of activities for which up to 100 per cent FDI was permitted. Decision 320 of 2021 instead provides that natural person(s) or entity(ies) are permitted to fully own or to own any percentage of companies to practice all commercial and industrial activities except for the strategic impact activities (emphasis added). This would suggest that the Abu Dhabi DED has now taken the position that all activities licensed by it, will now be permitted for foreign ownership with the exception of the activities which are designated as strategic impact activities. As such, it would appear that there will no longer be a specific list of such FDI activities similar to those that were contained in Administrative Resolution 37 of 2021.

 

Sharjah Economic Development Department (SEDD)

The SEDD has also published a list of approximately 1,200 activities for which up to 100 per cent foreign ownership is permitted together with a guide on foreign investment. At this time, we understand that (i) no specific conditions will be attached to a company in which foreign direct investment is permissible and; (ii) no additional fees will be imposed for the practice of an FDI activity. ■

 

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Afridi & Angell’s corporate department has extensive experience in advising on foreign direct investment and corporate restructuring matters. Should you have any questions, please contact the authors or your usual Afridi & Angell contact.

 

 

UBO registration: it’s time to comply or risk being penalised

The UAE has introduced new administrative sanctions on all entities that fail to comply with the requirements of Cabinet Decision 58 of 2020 concerning the Regulation of Real Beneficiary Procedures (Decision 58 of 2020).

 

Issued on 23 May 2021, Cabinet Decision 53 of 2021 (Decision 53 of 2021) empowers the Ministry of Economy and the relevant licensing authorities in the UAE to administer various penalties on violators of Decision 58 of 2020.

 

To provide our readers with a brief background, the UAE enacted Decision 58 of 2020 on 24 August 2020. The Decision places a number of obligations on all entities licensed to conduct business in the UAE (with the exception of those licensed in a financial free zone in the DIFC and the ADGM), including identifying, recording, submitting and maintaining details of the shareholder(s)/partner(s) (the Shareholders) and the real beneficiaries or the ultimate beneficial owner(s) (the UBO). Please refer to our October 2020 inBrief for further information on your obligations under Decision 58 of 2020.

 

Further to the issuance of Decision 58 of 2020, various licensing authorities in the UAE had issued a deadline of 30 June 2021 for all licensees to submit, amongst other things, details of their UBO and Shareholders. However, some authorities have issued different deadlines or none altogether.

 

We have set out below a summary of the key fines:

Under Decision 53 of 2021, entities that fail to create and maintain records of their UBO, will be issued a written notice in the first instance. If the entity does not rectify these failures, a fine of AED 50,000 will be imposed along with another notice to remedy the position within 30 days. If the entity fails to remedy its position within the 30-day period, the entity shall face a fine of AED 100,000 and the suspension of its licence for a minimum period of one year.

 

Entities that fail to create records of their Shareholder(s) will be issued a fine of AED 50,000 and will be given notice to remedy the position within 60 days. If the entity fails to remedy its position within the 60-day period, it shall face a fine of AED 100,000 and the suspension of its licence for a minimum period of one year.

 

A written notice will be sent to entities that fail to maintain the records of their Shareholder(s), after which a fine of AED 30,000, and a notice to rectify the failure within 15 days will be issued. If not rectified, it will result in a fine of AED 60,000 and a suspension of its licence for a minimum period of six months.

 

Similarly, entities that fail to submit the details of its UBO and its Shareholder(s) to licensing authorities, shall be issued a written notice in the first instance, and thereafter a fine of AED 15,000 will be issued along with a notice to rectify the non-compliance within 15 days. If the failure is not rectified after the second warning, a fine of AED 30,000 will be levied along with the suspension of the licensee’s licence for at least three months. On a practical level, we are aware of action being taken by the relevant licensing authorities to implement the provisions of Decision 53 of 2021, with notifications being sent to licensees that have not fulfilled these obligations.

 

Providing incorrect, incomplete, non-updated information or the omission of the information on the UBO as well as the manager(s) or nominee director(s), is subject to fines along with a suspension of licence. Such entities will be issued a written notice first. Thereafter, a fine between AED 10,000 to AED 20,000 will be levied on the second instance with a notice of 15 days to rectify the fault. A third recurrence will result in a fine of AED 20,000 to AED 40,000 and the suspension of licence for at least one month. At the same time, Decision 53 of 2021 states that the authorities or the Ministry shall also restrict the authority of the board of directors or managers of entities who have provided inaccurate, incomplete or non-updated information. We await to see how this will be implemented in practice.

 

Entities currently under liquidation or those which have been liquidated are also required to comply with the relevant provisions of Decision 58 of 2020. The liquidated entity (or entity under liquidation), or its liquidator, who fails to maintain the details of the UBO, the Shareholder(s), manager(s) and director(s) of such liquidated entity for a period of 5 years from the date of dissolution, shall firstly be issued with a written notice followed by a fine of AED 20,000 upon non-compliance and then a fine of AED 40,000 upon the third recurrence.

 

With these strict enforcement measures in place and the enactment of new legislation concerning anti-money laundering and economic substance, the UAE has affirmed its strong position to craft a robust legal framework to combat the modern-day economic and financial crimes. ■

 

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Afridi & Angell’s corporate department has extensive experience in advising on ultimate beneficial ownership obligations. Should you have any questions, please contact the authors or your usual Afridi & Angell contact.

UAE FDI: the doors are open to foreign investors but what are the practical considerations?

As most readers will now know either via the press or through other legal publications, the requirement for a limited liability company (LLC) to have at least 51 per cent UAE national ownership was removed on 30 March 2021 pursuant to Federal Decree-Law 26 of 2020 (Decree Law).

 

Under the Decree Law, local licensing authorities (i.e., the relevant economic departments) of each Emirate were granted the authority to determine a list of activities for which up to 100 per cent foreign ownership is permitted (FDI Activities).

 

The Department of Economic Development in Abu Dhabi and the Dubai Department of Economic Development have already published their list of FDI Activities. We understand that the Department of Economic Development in Sharjah will publish its list imminently.

 

No conditions/restrictions on 100 per cent foreign owned LLCs?

What has changed since September 2018 when Federal Decree-Law 19 of 2018 regarding Foreign Direct Investment (the 2018 FDI Law) was enacted?

 

Pursuant to the 2018 FDI Law, Cabinet Resolution 16 of 2020 was issued which contained a positive list of 122 activities wherein a 100 per cent foreign owned company could be established with certain conditions and/or restrictions. The key conditions and/or restrictions were the requirement to have a specified minimum share capital and a minimum level of Emiratisation of the workforce (to be determined by the Ministry of Human Resources and Emiratisation).

 

The 2018 FDI Law was repealed with effect from 2 January 2021.

 

While the 2018 FDI Law did impose some conditions/restrictions on 100 per cent foreign owned companies, as of now, no special conditions/ restrictions have been imposed by the Economic Departments of Abu Dhabi and Dubai.

 

Other Considerations

While a 100 per cent foreign owned LLC in mainland UAE is an attractive option, there are various other matters to be considered before deciding on an ownership structure for an LLC.

 

1. GCC Customs Exemptions

Goods manufactured in the UAE by 100 per cent foreign owned LLCs under the current customs regime, will not be able to avail the benefit of the 5 per cent GCC customs duty exemption offered to entities which are owned at least 51 per cent by GCC nationals. Exports by a 100 per cent foreign owned company, would not be eligible for national treatment when exported to another GCC member state.

 

2. Tax holiday offered by free zones

Most free zones in the UAE offer a guaranteed tax holiday. For example, the Dubai Airport Free Zone offers a 50-year exemption from all tax (including income tax).

 

If an investor can conduct its business from one of the free zones of the UAE, even if a 100 per cent foreign owned company can be established in mainland Dubai or Abu Dhabi, such an investor may still wish to establish within a free zone in order to benefit from the guaranteed tax exemption.

 

Restructuring of existing LLCs

In addition to the issues raised above, the following points should also be kept in mind while restructuring ownership of existing LLCs:

 

 1. Arrangements with local partners

The terms of any existing arrangements with local partners should be reviewed in advance of triggering any proposed restructuring to ensure that the arrangements permit the foreign partner to request the transfer of the interest in the LLC held by the local partner.

 

2. A UAE LLC with branches in other Emirates

To the extent that there are variances among the Emirates in relation to the permitted FDI Activities, it will be interesting to see if a wholly foreign owned LLC will be permitted to register a branch in a different Emirate even if that Emirate does not have the LLC’s licensed activity on its list of permitted FDI Activities.

 

3. Name of the LLC

If the shares of an LLC are being transferred so that the LLC becomes a 100 per cent owned subsidiary of a foreign investor, note that as per Article 72 of the Companies Law, the name of the LLC will be required to be amended to reflect that the LLC is a single shareholder company. The phrase (One Person Company) must also be added to the LLC’s name. The implications of this change of name on the business operations of the LLC should be considered in advance of any restructuring. It is also worth noting, that under the Decree-Law, it is expected that the Cabinet will issue a Decision determining the procedures for the management of single shareholder LLCs. Once this decision is issued, foreign investors will be required to consider the effects of the decision on the running of their business.

 

Whilst the issues discussed in this inBrief are not an exhaustive list of matters to be considered, before incorporating a 100 per cent foreign-owned LLC or restructuring an existing LLC, they represent some useful and important considerations. For each type of business, careful analysis and planning will be required to determine the most suitable structuring option(s). ■

 

Afridi & Angell’s corporate department has extensive experience in advising on foreign direct investment and corporate restructuring matters. Should you have any questions, please contact the authors or your usual Afridi & Angell contact.

UAE Economic Substance Requirements – Penalties Imposed by the Federal Tax Authority

The Federal Tax Authority (the FTA) has started to impose penalties on businesses 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.

 

Pursuant to the Cabinet of Ministers Resolution 57 of 2020 concerning the Economic Substance Requirements (Decision), the FTA has imposed a penalty of AED 20,000 on a licensee who has failed to submit the notification and an amount of AED 50,000 on a licensee who has failed to submit the economic substance report. The Decision empowers the FTA to impose certain other types of penalties on licensees.

 

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 30 June 2020, the deadline to file an economic substance report is 30 June 2021, and if the financial year ended on 31 December 2020, the deadline to file a notification is 30 June 2021.

 

The notification and/or the economic substance report is required to be filed by creating an account on the Ministry of Finance website (www.mof.gov.ae/en/StrategicPartnerships/Pages/ESR.aspx). Additional information on Economic Substance Requirements can also be found on the Ministry of Finance website.

Canadian Immigration: The Importance of Tax Planning

For anyone planning to immigrate to Canada, or former Canadian residents preparing to return after a period of non-residency, it is worth taking the time to do some pre-immigration tax planning.  It may well be that the Canadian tax environment is a lot more aggressive than where you’re coming from. If you wait until after you arrive to start arranging your affairs, it will be too late.  Each personal or family situation will be unique and will benefit from bespoke professional advice, but this note will outline a few things that a prospective new/returning Canadian should bear in mind before making their move.

 

Canada imposes tax on the basis of residency, so once you become a Canadian resident you will be subject to Canadian taxation on your worldwide income, including foreign investments, foreign trusts, foreign rental properties, proceeds of the sale of foreign properties, and any other income from any source, anywhere in the world.  Foreign tax credits may apply to reduce your Canadian tax burden to some extent on foreign sources of income to avoid “double” tax on such amounts. The Canada Revenue Agency (CRA) actively investigates foreign income and has information exchange treaties with many other countries (including automatic exchange of information treaties that provide for easy, fast, automated sharing), so your assumption should be that the CRA will be able to find or verify any foreign income you may have. It is your responsibility under Canadian law to voluntarily report it – if the CRA has to seek it out, you will be subject to interest and penalties.

 

Certain income earned before you arrive in Canada, but which you receive after you arrive (i.e., become “resident” in Canada) are taxed in Canada, so make sure you receive as much income as possible prior to your arrival and do not leave amounts accrued and unpaid.

 

The deemed tax cost (i.e., the adjusted cost base) of your capital assets (worldwide) for Canadian tax purposes will be their fair market value as of the date you become a Canadian resident. This is a benefit because when you dispose of any such assets, you pay tax only on the capital appreciation over and above the adjusted cost base of the asset, so the higher it can be, the better. You should obtain third-party valuations of your material capital assets shortly before or after you become a resident and keep this information on file, as you will need it.

 

Consider arranging for the establishment of one or more trusts which can help reduce your Canadian tax burden during life and upon succession. Canadian tax laws apply various so-called attribution rules and deemed residency rules for non-Canadian trusts, which operate to severely restrict offshore planning opportunities. Other rules do the same for corporate entities that hold property for a Canadian resident (attributing passive income directly to the individual shareholder). There is greater opportunity to implement effective structures without falling afoul of these rules prior to becoming a Canadian resident. The same is true of a restructuring of existing trusts, that will become Canadian resident trusts when you move to Canada. The rules are complex and professional advice is necessary before attempting to implement any structures or changes.  The consequences of poor planning can be disastrous from a tax perspective, and such consequences are often avoidable.

 

Note in particular that even some actions taken prior to residency will come under the scrutiny of the CRA.  For instance, if a foreign trust has been settled, or contributed to within the 5-year period prior to Canadian residency, the trust could be deemed to be Canadian resident, including retroactively to the time of the contribution. It depends on who made the contributions and how. For trusts which do become Canadian resident when you do, note that those trusts will be taxable from January 1 of that year (even if you only became resident later in the year). If you can arrange for those trusts to receive payments prior to January 1 of the year you will become a Canadian resident, you should do that (such as paying out dividends to the trust on shares it holds).

 

Where a Canadian resident is a beneficiary of an offshore trust, and if the trust has been established in a manner that successfully avoids application of the Canadian attribution or deemed trust residency rules, it is possible to receive payments from such trusts on a tax-free basis. To achieve this, payments need to be made out of trust capital, not income, but this is not difficult to arrange with trusts that are established in jurisdictions that do not impose income tax on trusts. Such payments still need to be reported to the CRA as income received from a foreign trust on form T1142, but Canadian income tax is not payable on such amounts.

 

Even after Canadian residency is obtained, there remains many very good tax and non-tax reasons to make use of trusts in estate and succession planning, and they remain a central tool to the Canadian wealth planning community. However, there are unique and potentially very beneficial opportunities available to non-residents; be sure to take full advantage of them.

 

Our experienced team members will be pleased to arrange a confidential meeting or call to discuss your situation and goals, and how we can help you protect your wealth. ■