Category: inBriefs

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The 2018 FDI Law was repealed with effect from 2 January 2021.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

Implementing Regulation to the new Movable Security Registration Law

Since the issuance of Federal Law No. 4 of 2020 on Guaranteeing Rights Related to Movables (the Mortgage Law) the business community, particularly banks and financial institutions, have been eagerly awaiting the publication of the implementing regulations to the Mortgage Law, which would provide details on a number of key issues including the specific procedure for registering security on the new register; rules applicable to taking security over intangible assets; accessing information from the new security register; and the treatment of the existing security (particularly security that had been registered under the previous movables security registration regime). The implementing regulations were published in the Official Gazette as Cabinet Decision No. 29 of 2021 on the Implementing Regulations for Federal Law No. 4 of 2020 on Securing Rights Over Movable Property (the Regulations) on 21 March 2021 and came into effect the following day.

 

Whilst the Regulations do not address the creation of the security register or appointment of the registrar, (both of these issues will be clarified following the publication of the cabinet decision which will create the registry and identify the registrar), they do introduce the following key developments to the security registration regime.

 

How to make a registration

 

The registration process is relatively straightforward. Firstly, the applicant needs to establish an account with the registrar (only possible following the appointment of the registrar). The online registration must include the following information:

 

  1. details of the (i) security provider including its name, nationality/registration number (as applicable), identity card or passport number (in case of natural person) or license (in case of a legal person) and (ii) secured party including the name, address and email address (together, the Identification Information);
  2. description of the security assets including the specific type and class of assets and confirmation of whether the assets are existing or future assets; and
  3. description of the secured obligations, whether it is a specific amount, subject to an upper limit and/or refers to all obligations owed to the secured party.

 

In contrast to the earlier registration procedure under Federal Law No. 20 of 2016 (the Old Mortgage Law), it is no longer necessary to submit a completed security agreement between the secured party and the security provider, at the time of the registration application.

 

The registration fees range from AED 50 to AED 200 per registration, depending on the type of security registration. The register shall issue an electronic confirmation upon the completion of the registration.

 

Liability for registration

 

The Regulations provide that whilst the registrar can reject a registration application, if it does not contain the mandatory information therein, the registrar shall not review the contents of the registration or the accuracy or completeness of any information in the registration. These provisions are accompanied by a general move towards placing a high degree of responsibility for the registration, on the applicant.

 

In particular, the registration only becomes effective once it has been entered into the register database in a manner that allows the declaration to appear when searching the register. Merely completing the registration exercise does not guarantee enforceability. The registration may be unenforceable if (i) there is an error in entering any of the Identification Information, which leads to an inability to retrieve the information in the registration when conducting a search of the register database or, (ii) any other information in the registration which reasonably misleads anyone conducting a search of the register database. Whilst the Mortgage Law and Regulations do not provide any guidance on what constitutes “reasonably misleads”, we believe that this will include instances where information used to conduct searches in the database, as identified in the Regulations (see below), has been entered incorrectly. Given that any errors in the application could render the registration ineffective, applicants would be well advised to seek professional advice when completing registrations.

 

Accessing information from the register database

 

A person can search the register database by entering the registration number or the Identification Information. A person may also print a search report containing information regarding the registration, including its time of creation, details of the parties on the registration, description of the secured assets, validity period and any other data requested by the registrar.

 

Security over intangibles

 

The Mortgage Law provided that the creation of a security interest, its enforcement and priority relating to intangible assets shall be subject to the law of domicile (as identified in the Regulations) of the security provider. The Regulations provide that domicile shall be determined by looking to the country in which the security provider’s workplace is located or the country in which its head office is located (if it has operations in more than one country). Caution should be exercised in determining the domicile of a security provider, particularly when dealing with overseas companies / branches, or UAE companies which only have overseas operations.

 

Taking the secured assets without the Court’s assistance

 

A secured party may seize and dispose of secured assets, without the need to seek a specific court order, by sending a notice to exercise its right to seize and dispose of the assets to the security provider, the underlying obligor, other parties with a security interest in the relevant assets and other interested parties. The Regulations provide that such notice should also include details of the assets that will be seized and disposed, the method of execution, and the time and place of the disposal.

 

The prospect of being able to take quick unilateral action to seize and enforce a security interest may seem appealing, particularly considering the time and effort required to secure a court order. However, this will entail the secured party assuming responsibility for disposing of the assets, settling its debts (less, any reasonable execution expenses) and those of other secured parties, in order of priority. Any one of these obligations could expose the secured party to potential legal action by the security provider, underlying obligor and other secured parties, e.g., claims that the assets were sold at an undervalue or the proceeds were not correctly distributed amongst other secured parties. In any event, exercising this option will require the co-operation of other parties (e.g., third parties with possession of the secured assets) failing which the secured party will have no option but to enforce through the courts.

 

In relation to secured bank account, if the secured party is also the account bank, then it can exercise its security interest over the secured account, without a court order. This can also be achieved under the customary set-off provisions in most account opening documents. In the case where the secured account is held with a third party bank the security provider, secured party, account bank can enter into a side agreement to establish control and management over the secured account, in favour of the secured party. We note that such provisions are already customary in most account pledge agreements, involving third party account banks.

 

Existing security under the Old Mortgage Law

 

The Mortgage Law repealed the Old Mortgage Law in its entirety. Furthermore, all circulars, resolutions and regulations relating to the Old Mortgage remain valid (to the extent they are consistent with the Mortgage Law), until replaced by the Regulations and new resolutions and circulars. Consequently, it was not clear how a secured party, with a registration on the existing register, would exercise its rights to request the courts to seize and dispose of secured assets, when the very law providing such rights had been repealed.

 

The Regulations have confirmed that any existing registration under the Old Mortgage Law, shall remain effective against third parties, until it is terminated in accordance with the provisions of the Mortgage Law. Whilst this implies that any existing registrations will be effective against third parties it does not address enforcement against the security provider (e.g., how would the security party enforce its right to seize and dispose of secured assets that are in the possession of the security provider?). There is also little to no guidance on how to enforce an existing registration, under the Old Mortgage Law, before the courts (e.g., would you use the enforcement procedure under the Old Mortgage Law or the Mortgage Law?). The situation is further complicated by the fact that the Old Mortgage Law was, itself, in its infancy and remined largely untested before the local courts.

 

In light of the above and given the relatively modest fees for registering existing security interest(s) in the new register (i.e., AED 50 per registration), secured parties would be urged to register all eligible existing security interests in the new register.

 

The Mortgage Law provides a period of 6 months following the issuance of the Regulations to register existing security interests in the new security register. It remains to be seen whether the new register will be established and operational before this deadline. ■

Another step in the right direction – the Dubai Court introduces the concept of a pre-trial conference

The past couple of years have seen significant changes in litigation in the UAE Courts. On 31 March 2021, in what appears to be yet another move to modernize litigation in Dubai, the President of the Dubai Court of First Instance issued Circular No. 2 of 2021 (the Circular). The Circular introduces the concept of a ‘pre-trial conference’ into litigation in the Dubai Courts. The Circular provides that:

 

  • a pre-trial conference will be held between the parties under the supervision of a judge;
  • the pre-trial meeting may be held in person or by remote communication technology; and
  • the parties are to discuss matters which will assist in the case being disposed of without delay. The Circular lists the following by way of example:

 

  • The possibility of settlement and expediting the trial process.
  • The complexity of the case and the expected duration of the trial.
  • Narrowing down the scope of disputed issues and issues pertaining to evidence.
  • Scheduling a procedural timetable for the submission of written pleadings, documents, expert reports and other documents, and lists of witnesses (if any).

 

Common law practitioners, and clients who have experienced litigation in common law jurisdictions, will be familiar with the concept of a pre-trial conference, but what will pre-trial conferences look like in onshore Dubai – a jurisdiction in which a trial (as understood in a common law jurisdiction) does not exist?

 

No doubt time will tell. In the meantime, we set out below a couple of markers that may assist in tracking how this concept will be implemented in the UAE.

 

1. This is a step towards greater certainty – at least in matters of procedure. At present, there is no telling how many rounds of written submissions a Dubai court will require before fixing a matter for judgement. Litigants who file submissions at almost every hearing – regardless of whether the hearing is fixed for submissions to be filed by that party or not – are a frequent source of frustration and delay. Fixing a timetable in advance ought to remedy this.

 

2. Parties will be required to give more thought to the issues in dispute at the outset of the case, which ought to result in more focused pleadings being filed in court.

 

3. This could have a bearing on the use of court-appointed experts – but it most likely will not. Under current practice, the appointment of an expert by the court is the norm, rather than the exception. However, the decision to appoint an expert is driven primarily by the judges, as opposed to the parties. Consequently, the submissions by the parties at a pre-trial conference is unlikely to have a conclusive effect on whether or not an expert is appointed by the court. However, the pre-trial conference (particularly the requirements to discuss matters relating to presenting evidence) may have an effect on parties who attempt to file proceedings without evidence, or with light evidential support, and bank on the appointment of an expert to assist in the gathering of evidence.

 

4. It could be an avenue to require disclosure by litigants. The Circular requires the parties to narrow down the scope of disputed issues and, issues pertaining to evidence. In order to do so, ostensibly there needs to be a discussion regarding disputed facts and issues which in turn may lead to opportunities to question a counterparty regarding relevant facts and evidence.

 

5. Under the Civil Procedure Code Regulations issued in 2019, penalties were introduced to discourage parties from denying copied documents without a legal basis, and for failing to produce evidence in a timely manner. The Circular requires the parties to discuss the possibility of a settlement. It will be interesting to see whether penalties will be introduced for parties who declined a reasonable settlement at the pre-trial stage, and eventually have judgment rendered against them.

 

6. Finally, and perhaps most importantly, how the Circular will be implemented shall eventually be measured by the consequences of failing to comply with the orders issued at the pre-trial conference. What happens to a party who tries to bring up new or different issues not identified at the pre-trial conference? What are the consequences of deviating from the agreed procedural timetable? While the Circular is silent, we should expect guidance to follow.

 

The Circular is, without a doubt, a step in the right direction. However, how far of an actual travel in that direction, will depend on how the Circular will be implemented. Watch this space. ■

US Antiboycott Regulations Modified

The most recent edition of Federal Register, which appeared earlier this month, announces the removal of the United Arab Emirates from the list maintained by the US Department of Treasury of countries that observe the Arab League Boycott of Israel. This fact will substantially ease compliance burdens for American businesses operating in the UAE, although it does not eliminate the compliance burdens entirely.

 

The United States never supported the Arab League Boycott of Israel. But it went further than simple non-support by designating the Boycott of Israel as an unsanctioned Boycott. Persons who cooperated with or supported an unsanctioned Boycott could be subject to penalties under two different statutes, the Internal Revenue Code and the Export Administration Act.

 

The Treasury Department promulgates regulations under the Internal Revenue Code. Those regulations prohibit a US taxpayer from taking an act in furtherance of an unsanctioned boycott or from entering into an agreement to do so. Non-compliance could lead to loss of tax benefits and exposure of the taxpayer to tax penalties. The Treasury Regulations contain the well-known “apply” – “comply” distinction, which has probably led to more violations of US antiboycott law than any other feature of the regulations.

 

In the regulations, the Treasury Department adopted the position that a US taxpayer could not permissibly enter into an agreement to “comply” with the law of a country that participated in the Arab League Boycott of Israel unless the agreement to “comply” contained modifying language that carved out the Boycott laws of the boycotting country. In contrast, an agreement that the laws of the boycotting country shall “apply” to a US taxpayer’s operations in that country would not be prohibited.

 

Moving from the abstract to the concrete, consider the two following provisions:

 

“Shall Comply”

The contractor agrees that it shall comply with the laws, regulations, requirements and administrative practices of the State of the United Arab Emirates in the course of performance of this contract in the State.

 

“Shall Apply”

The contractor agrees that the laws, regulations, requirements and administrative practices of the State of the United Arab Emirates shall apply to performance of this contract in the State.

 

Under the Treasury regulations, sanctions would be imposed for agreeing to the first provision, but not the second provision. Of course, many unintentional violations occurred, as this “shall comply” language is common in public sector contracts in the UAE.

 

And if the issue was spotted, alternative language would have to be negotiated. In either case, the receipt of the request to participate in the Boycott would have to be reported to the Treasury Department by the taxpayer, and a failure to report would constitute a further violation.

 

That should now be behind us. Because of the amendment of the Treasury Department regulations, it is no longer a breach of the Treasury regulations to agree that a party shall “comply” with the laws of the UAE, since those laws no longer contain an obligation to comply with the Arab League Boycott of Israel. Likewise, receipt of such “comply” language no longer needs to be reported to the Treasury Department.

 

The actions of the Treasury Department constitute a belated acknowledgment of the Abraham Accords, which were announced in August 2020 and signed in September 2020, in connection with which the UAE repealed its Boycott Law, Federal Law No. 15 of 1972. (See our Legal Alert dated 31 August 2020). With this development, the UAE now joins the Kingdom of Bahrain and the Sultanate of Oman, previously recognized by the Treasury Department as non-Boycotting countries.

 

Although the Treasury Department regulations have been amended, the antiboycott provisions of the Internal Revenue Code and the Export Administration Act remain in effect. Agreeing to language that contains an overt obligation to commit Boycott-related acts continues to be prohibited. Because of this, it would still be prohibited for an American business to agree to contractual language that contained references to Israel, the Boycott or the blacklist. It may also be prohibited to agree to other clauses if there is a Boycott purpose to such clauses. For these reasons, and until Boycott language has been purged from all public sector contracts used in the UAE, continued vigilance will be necessary.

 

It is up to the Commerce Department to amend the Export Administration Act implementing regulations in light of the Abraham Accords. This may be expected in the coming months. ■

Doing Business in Sudan – A New Era

Lifting of US Sanctions

 

The US Government announced the removal of Sudan from the US list of state sponsors of terrorism effective as of Monday 14 December 2020.

 

After 27 years of US sanctions, such step restores sovereign immunity for the Sudanese government in US Courts. It is also a critical step in the process of reintegrating Sudan into the global economy and offering a lifeline of international financial aid to Sudan.

 

While the Obama administration took steps to lift sanctions, unfreeze assets and remove financial sanctions in January 2017, the recent declaration that Israel and Sudan intend to normalize relations has played a major role in Sudan’s delisting as a state sponsor of terrorism.

 

Sudan

 

Sudan is one of the largest and most geographically diverse states in Africa, recently having been split into two countries (Sudan and South Sudan – July 2011) after the people of the south voted for independence. It borders Egypt, Libya, Chad, the Central African Republic, South Sudan, Ethiopia and Eritrea. Sudan is also a country of great economic potential: strategic location, gold reserves, oil and gas fields, mineral resources, a favourable climate, as well as excellent irrigation and soil conditions.

 

Investment Law

 

Sudan’s National Investment Encouragement Act (the “Act”) of 2013 promotes foreign direct investment and prohibits discrimination against foreigners in investments. The Act defines three types of investment projects: national, strategic and state. Sudan has put in place an open investment legislative framework with several laws and regulations that are modern and based on best practices. The Act also establishes the National Investment Council, chaired by the President of Sudan. The focus and objective

 

of this council is to facilitate investment in all sectors of the Sudanese economy. The Act allows foreign and domestic private entities to establish and own business enterprises and to repatriate capital and profits.

 

New Era

 

Given the recent removal of Sudan from the US list of state sponsors of terrorism and given the normalization of the ties between the US and Sudan, investment opportunities in Sudan have opened up. It has been reported that multinational US corporations have already signed MOUs to invest in Sudan. This is the beginning of a new era for Sudan and a promising time to invest. Early movers are likely to reap the benefits, provided investments are structured in a prudent manner. ■

DIFC Courts Issue First Judgement Summoning UAE Witnesses

The DIFC Court of First Instance has, for the first time in its history, issued a judgement allowing the examination of witnesses resident in the UAE pursuant to two requests for judicial assistance (Letters Rogatory) from the District Court of the State of Minnesota, USA (the US Court).

 

The judgement, issued by Justice Robert French, clarifies the scope of Rules 30.65, 30.66 and 30.67 of the Rules of the DIFC Courts (the RDC).

 

Overview of Dispute

The Letters Rogatory were issued by the US Court further to the application of a Defendant in two claims relating to, among other things, product liability of a manufacturer. The Plaintiffs in both cases claimed losses and damages as a result of an accident which occurred in Sharjah by initiating proceedings before the US Court.

 

Given that a number of witnesses and authorities concerned with the first-hand events of the incident were resident in the UAE, the US Court, on the application of the Defendant, requested assistance from the DIFC Courts in obtaining the testimony of those witnesses and documents relating to the incident.

 

The Defendant issued Part 8 proceedings in the DIFC Courts pursuant to Rules 30.65, 30.66 and 30.67 of the RDC without naming any defendants. RDC 30.65 and RDC 30.66 specifies wide powers for the DIFC Courts to grant assistance to foreign courts:

 

RDC 30.65

 

Where an application is made to the Court for an order for evidence to be obtained in the DIFC and the Court is satisfied:

 

(1) that the application is made in pursuance of a request issued by or on behalf of a court or tribunal (“the requesting court”) exercising jurisdiction in:

 

(a) Dubai; or

 

(b) in any other part of the UAE;

 

(c) or in a country or territory outside the UAE; and

 

(2) that the evidence to which the application relates is to be obtained for the purposes of proceedings which either have been instituted before the requesting court or whose institution before that court is contemplated;

 

The Court shall have the powers conferred on it by the following provisions of this Section of this Part.”

 

RDC 30.66

 

The Court shall have the power, on an application under Rule 30.65, by order to make such provision for obtaining evidence in the DIFC as it may appear to the Court to be appropriate for the purpose of giving effect to the request in pursuant of which the application is made: and any such order may require a person specified therein to take such steps as the Court may consider appropriate for that purpose.

 

The Defendant requested the DIFC Courts to allow the examination of the witnesses and documents specified in the Letters Rogatory under oath or affirmation in the DIFC Courts by a practitioner authorized by the DIFC Courts’ Registrar.

 

The Judgement

In allowing the application of the Defendant in the US Proceedings, Justice Robert French held that the reliefs requested were “appropriate” after an analysis of the relevant provisions in the RDC as well as the DIFC Courts’ jurisdiction conferred upon it by Article 5(a) of the Judicial Authority Law No 12 of 2004 and Article 19(1)(d) of the DIFC Court Law No 10 which states as follows:

 

“The DIFC Court of First Instance has original jurisdiction pursuant to Article 5(A) of the Judicial Authority law to hearing any of the following:

 

…

 

(d) any application over which the DIFC Court has jurisdiction in accordance with DIFC Laws and Regulations.”

 

In his judgment, Justice French went on to hold that the DIFC Court Rules (i.e., the RDC), which are made by the President of the DIFC “answer the description of “DIFC Regulations”” for the purposes of Article 19(1)(d) of the DIFC Court Law.

 

Analysis

The judgement, which is a welcome development, would open avenues for international courts to request assistance from the DIFC Courts in disputes which involve witnesses resident in the UAE and who cannot otherwise be summoned to provide evidence before those courts for a number of reasons. In the past, such requests had to be directed through diplomatic channels to the “on-shore” courts of the UAE which would take a considerable amount of time to be communicated. The acceptance of such requests by the on-shore courts were largely subject to the existence of evidence of reciprocity among the UAE courts and the requesting court or the existence of specific treaties.

 

The judgement also confirms the DIFC Courts’ pragmatic approach to be an “international” common law court willing to expand its jurisdiction where required in the interests of justice.

 

Afridi & Angell’s Stuart Walker and Sulakshana Senanayake acted for the defendant in the US proceedings in obtaining the judgement from the DIFC Courts. ■

Onshore UAE Trusts Law – Refresher and Overview

UAE Federal Decree Law 19 of 2020 Regarding Trusts (the UAE Trusts Law) was issued in September of 2020. As there was no comparable law previously, the UAE Trusts Law opened the door to trusts in the UAE for the first time (not including DIFC and ADGM trusts, the UAE’s two financial free zones). This is a potentially significant development that holds great promise, although some key questions remain. 

 

Trusts and Some Examples

In short, a trust is an arrangement whereby a third party (trustee) is entrusted with assets given over by a person who establishes the trust (settlor or contributor) for the trustee to manage and distribute for the benefit of specified beneficiaries (or sometimes specified purposes). The settlor transfers legal ownership and (usually) control of the trust assets, which are legally owned and controlled by the trustee, subject only to the trustee’s duties at law, and duties under the trust instrument. The concept of trusts was developed by the English common law, although similar divisions of legal and beneficial ownership have long existed in the civil law world as well (civil law foundations being a well-known example).

 

Trusts can be a useful tool in business structures, as an investment vehicle, as a tool in estate/wealth planning for both tax and non-tax reasons, as an asset protection tool (from creditors or other third parties), and as a succession tool upon a person’s death, among many other uses. A few words about each of the above may be in order:

 

1. Business structures: trusts are used for many different reasons in business structures. Examples include ensuring continuity of ownership without disruption on succession; using trusts as a form of security in lending transactions to bypass local security registration mechanics; or simply a convenient and permanent method of managing divided rights among beneficiaries (beneficiaries instead of shareholders), as there may also be some significant advantages in terms of privacy.

 

2. Investment vehicle: a trust is a popular vehicle through which to solicit investment from third parties for the purpose of acquiring and managing underlying investments, whether in the form of real property, active businesses, or passive investments. The advantage of using a trust structure instead of a conventional corporate structure is largely tax driven, but there are other potential advantages in terms of the ability to manage rights of “unit” holders as opposed to the rights of shareholders (i.e., you can often limit their rights further). The UAE Trusts Law specifically contemplates the use of UAE trusts for this purpose. Note that the UAE’s laws regulating solicitation of investment from third parties should be assumed to apply as usual, whether or not the investment is structured as a trust (the UAE’s securities regulator, the Securities and Commodities Authority, has not commented on the UAE Trusts Law as of the date of writing, to our knowledge).

 

3. Estate/Wealth Planning: this is perhaps what trusts are best known for. Trusts can be invaluable tools for both tax and non-tax reasons in a person’s estate planning, both during life and after death. Income sheltering, income splitting, avoidance of probate, avoidance of estate administration burdens and delays, and control over one’s legacy are all common goals with trust-based planning. As a zero-income-tax jurisdiction, the UAE may begin to compete among the conventional low or no tax jurisdictions for the creation of trust-driven estate planning structures. Foreign assets, from foreign settlors, for the benefit of foreign beneficiaries, are all permissible under the UAE Trusts Law.

 

4. Asset protection: since the assets transferred to a trust are no longer the legal property of the settlor, creditors of the settlor cannot attach or recover them. Creditors can still attach and recover a beneficiary’s interest in the trust if and to the extent it is vested. This is addressed by granting trustees discretion as to the timing and amount of any distribution to any beneficiary, so that beneficiaries do not actually have any vested entitlement (and therefore nothing to attach or recover) unless and until the trustees resolve to make a distribution to any given beneficiary. The UAE Trusts Law contains provisions that specifically contemplate and support the use of UAE trusts for this purpose. Note that a disposition of assets into a trust on the eve of insolvency or to deliberately prejudice a particular creditor will not be effective as the UAE’s insolvency law permits recovery of assets disposed of up to two years prior to the date insolvency proceedings are commenced under that law[1].

 

As mentioned, the above list is indicative only and by no means exhaustive. Trusts are vehicles which, by their nature, allow for a great deal of creativity and flexibility, and particularly so in a zero-income-tax jurisdiction like the UAE.

 

UAE Trusts Law – Selective Overview

The UAE Trusts Law contains several provisions that will be familiar to trusts and estates practitioners in common law jurisdictions, such as the duties of a trustee to “preserve” the trust assets, and to manage the assets and make distributions in a manner that is “neutral between the beneficiaries” (even hand rule). How these and other provisions of the law, upon which there is an enormous quantity of jurisprudence in the common law world, will be applied and enforced by UAE courts remains to be seen.

 

The role of the trustee should not be taken on lightly, as the role comes with many duties and many possible sources of liability. Professional advice is essential for anyone considering acting as a trustee in the UAE. Individual trustees can be appointed without any particular qualifications, but corporate trustees must be licensed to provide trustee services (details of this licensing requirement are to follow). The duties of a trustee under the law, however, apply equally to all trustees, whether professional service providers or inexperienced individuals. While professional trustees will find the compliance burden imposed by the UAE to be light compared to many other jurisdictions (as so much of a trustee’s administrative burden and liability can relate to tax compliance, which is not a concern in the UAE), the duties are still a significant burden for the uninitiated and include regular report preparation, careful record keeping, asset management and supervision, interpreting and applying the terms of the trust instrument, knowing the law and key accounting principles around management and distribution of the trust assets, and appropriately documenting all actions taken as trustee. Failings can expose the trustee to liability, the source of which is not always obvious.

 

The UAE Trusts Law places a great deal of importance on the trust instrument itself, which is entirely appropriate. The trust instrument is the written document that establishes the trust and sets out its terms. It is very important to craft the terms carefully and thoughtfully, and with a view to several specific provisions of the law which allows for certain outcomes only if the trust instruments include certain language. For instance, the trust instrument should specifically empower a trustee to appoint auditors or else the settlor will have to amend the trust instrument or the trustee will have to make an application to the court; or, a trustee can only obtain a discharge of liability from the beneficiaries if this is contemplated in the trust instrument. The New Trusts Law contains several other similar “if/then” consequences, and careful drafting is therefore critical. If there are any foreign settlors or beneficiaries (very likely to be the case in a cosmopolitan jurisdiction like the UAE), it may be that specific drafting will be required to avoid unintended tax consequences in other jurisdictions as well (such as attribution rules that attribute assets or income back to an individual if they retain certain interests or control over trust property or governance, for example).

 

Note that a UAE trust will not exist until it is registered with the UAE Ministry of Finance, in a registry to be created for the purpose. The creation of, and rules governing, the register is one of the issues that will be addressed by the Cabinet Decision. While full disclosure of the identity of the settlor(s), trustee(s), protector(s) and beneficiary(ies) will be required, what this means in terms of specific submissions required remains a key question mark (ID copies? Proof of address? Proof of tax residency? CRS-style questionnaires? Ongoing reporting on a periodic basis?). This registration requirement differs from DIFC or ADGM trusts (and the common law world at large) and could act as a disincentive for the use of onshore UAE trusts given the reluctance of settlors to file potentially sensitive, personal details contained in trust instruments with a government body.

 

Finally, I will note that the New Trusts Law provides that UAE trusts are legal entities with their own legal personality, which is not the case with common law trusts. This means the trust itself, not the trustee, will have legal ownership of the trust property. While this is conceptually a major difference between common law trusts and a UAE trust, the practical implications of this will be relatively minimal. The trustee still carries liability for its failures, just as with a common law trust. One advantage may be that it will make the replacement of trustees easier, since ownership of property need not change hands.

 

Foreign Tax Considerations

Many high-tax jurisdictions apply “deemed residency” rules to foreign trusts where the foreign trust has connections to that jurisdiction, such as where there is a settlor that is a resident of the high-tax jurisdiction. In such cases, a UAE trust could be deemed tax resident in another country and made liable for payment of tax, as well as reporting and filing obligations in that other jurisdiction. Such laws tend to make the foreign trustee jointly liable with other parties (such as the settlor or beneficiaries that may be resident in the other country). Even if the tax authority collects from such other parties, joint liability means that the other parties may then be able to claim against the trustee for compensation.

 

Also, as a general matter, citizens and residents of other countries should be aware that a UAE trust could be “deemed resident” for tax purposes in that other country on the basis of there being a settlor, beneficiary, trustee, or on some other grounds.

 

The importance of professional advice cannot be overstated as dealings with trusts can be quite complex.

 

Conclusion

There are some questions that remain to be answered about the new regime and its practical implementation, many of which should be addressed in a Cabinet decision by which the UAE Trusts Law contemplates will follow, which will set out some further implementing rules (the Cabinet Decision). Among other things, the Cabinet Decision is expected to address:

 

  • The creation of, and rules applicable to, the trusts register;
  • how a trustee can become licensed to provide trustee services;
  • additional clarity on trustee duties; and
  • special provisions around charitable trusts, pension trusts, and investment trusts.

 

We will provide a further update once the Cabinet Decision is issued.

 

Note that many of the benefits, and accompanying risks, which are noted above apply equally to DIFC, ADGM and RAK foundations, and to DIFC and ADGM trusts. The question will be, in practice: what advantages, if any, does the UAE Trusts Law regime offer to distinguish itself from the DIFC, ADGM and RAK? The uses for DIFC, ADGM and RAK foundations to date has tended to be limited to holding UAE-based assets. If the UAE can establish itself among the traditional “offshore” financial structuring hubs by attracting foreign assets as well, the UAE stands to benefit greatly from the influx of capital, investment, and the growth of the professional service community that surrounds such activity (trustees, agents, investment managers, advisors). ■

 

[1] Articles 168 and 169 of the UAE Insolvency Law

COVID-19 measures in Dubai and Abu Dhabi

New measures to curb the “second wave” of COVID-19 cases have been introduced by the Dubai Supreme Committee of Crisis and Disaster Management (the Dubai Committee) and the Abu Dhabi Emergency Crisis and Disasters Committee for COVID-19 Pandemic (the Abu Dhabi Committee).

 

On 1 February, the Dubai Committee announced that, effective the following day and for the duration of the month of February, all pubs and bars in Dubai must close, while restaurants and cafes must close by 1:00 am. Shopping malls, hotels, private beaches in hotels and swimming pools may operate at 70% capacity. Theatres, other indoor venues and sports venues must operate at a maximum capacity of 50%. Entertainment activities in restaurants and cafes are no longer permitted.

 

The Dubai Committee has urged the public to report violations by calling the Dubai Police or by using the Dubai Police App. There have been reports of recent prosecutions for violations, including the imposition of fines.

 

On 7 February, the Abu Dhabi Committee announced that, effective the same day and until further notice, parties and gatherings are prohibited and theatres shall be closed. No more than 10 persons may attend a marriage ceremony or a family gathering, and no more than 20 may attend a funeral or mourning service.

 

Malls are limited to 40% capacity, and gyms, private beaches and swimming pools are limited to 50% capacity. Restaurants, coffee shops, hotels, public beaches and parks may operate at 60% capacity. Taxis and buses may operate at 45% and 75% capacity, respectively.

 

The Abu Dhabi Committee also announced new rules on entry into the Emirate of Abu Dhabi, effective 1 February. Any individual entering Abu Dhabi from another Emirate must enter Abu Dhabi within 24 hours of taking the DPI (Diffractive Phase Interferometry) test instead of 48 hours. The same DPI test result cannot be used for two consecutive entries into Abu Dhabi. Those who entered Abu Dhabi on the basis of a DPI test and who plan to continue their stay for more than 48 hours must take a PCR test on 3rd day following entry and another PCR test on the 7th day.

 

The validity of the PCR test result to enter Abu Dhabi continues to be 48 hours; however, another PCR test must be performed on the 4th day and on the 8th day following entry. The day of entry into Abu Dhabi is considered as day 1. These requirements are not applicable to volunteers in clinical trials or to persons who have been vaccinated.

 

Moreover, all employers in Abu Dhabi have been directed to require their personnel who have not been vaccinated to undergo a PCR test at least once a week.

 

In addition, Abu Dhabi has updated the “green list” of countries for travelers arriving by air. The new “green list” as of 7 February 2021 is:

 

• Australia

• Bhutan

• Brunei

• China

• Greenland

• Hong Kong

• Iceland

• Mauritius

• Mongolia

• New Zealand

• Saudi Arabia

• Singapore

 

Individuals travelling from these countries are not required to quarantine upon arrival; however, they must perform a PCR test on arrival and repeat another PCR test on day 6 following arrival. Persons arriving from other countries as must quarantine for 10 days following arrival and must also take a PCR test on arrival and again on day 8 following arrival.

 

Finally, Ministerial Resolution 21 of 2021, promulgated by the Federal Minister of Health and Prevention and effective 7 February 2021, provides that PCR tests will be given free of cost at all Ministry centers. The provision applies to all UAE nationals and all persons holding UAE visas. ■

 

 

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Please note that new rules and developments are occurring in the UAE on a very frequent basis. These are subject to change without prior notice or formal/public announcement.