Category: inBriefs

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. 

 

 

Acquisition of UAE Nationality

The Government of the UAE made another milestone announcement on 30 January 2021, announcing a procedure for the granting of citizenship to foreign nationals in a bid to retain talent in critical sectors and to expand and diversify the economy.

 

Nationality and citizenship in the UAE are governed by Federal Law No. 17 of 1972 Concerning Nationality and Passports, as amended by Federal Law No. 10 of 1975 and Federal Decree-Law No. 16 of 2017 (the Nationality Law), pursuant to which UAE nationality may be obtained by law, citizenship or naturalisation.

 

The recent announcement, as reported, would amend the Nationality Law to make the following categories of individuals eligible for UAE nationality by naturalisation:

 

• Leading artists and intellectuals;

 

• Authors;

 

• Doctors and specialists in unique scientific fields with significant contributions and experience of at least 10 years;

 

• Engineers;

 

• Investors who own property in the UAE;

 

• Inventors who have been granted at least one patent approved by the UAE Ministry of Economy;

 

• Scientists with at least 10 years of experience who are active researchers and have made substantial progress in science as recognised by prestigious scientific awards or funding; and

 

• Members of the immediate family (i.e., spouse and children) of a person who is naturalised under one of the foregoing provisions.

 

The process of naturalisation would begin with a nomination by the Federal Cabinet or by the Ruler’s Office or Executive Council in an Emirate. Letters of recommendation are also required for nominations in most categories. The detailed criteria for each category have yet to be announced. Reports indicate that a person who acquires nationality under the new rules will not be required to renounce his or her earlier citizenship, but instead may remain a dual national; this is a departure from the previous rules for acquiring nationality under the Nationality Law.

 

This is the latest in a series of recent measures that aim to attract and retain talent. Others include the introduction of the “golden visa,” the “retirement visa,” and the “remote working visa.” Another new visa category is the “student family visa,” whereby a foreign student in the UAE may obtain a residence visa while also sponsoring residence visas for family members. ■

 

UAE Majority Shareholder No Longer Required

In what appears to be a seismic move, His Highness Sheikh Khalifa bin Zayed Al Nahyan, President of the UAE, has passed a decree allowing foreign investors to own 100 per cent of UAE companies based on the mainland (i.e. outside of the free zones). This change is expected to come into effect as early as December 2020.

 

This is a remarkable change, removing the requirement to have a majority Emirati shareholder (i.e. at least 51 per cent). Certain sectors such as oil and gas, transport and utilities and strategic areas are exempt.

 

The UAE Commercial Companies Law is set to be amended to allow for such changes.

 

The transformation will certainly enhance the UAE’s position in the global market. The doors are open to foreign investors.

 

We will provide more updates as the story develops. ■

The separability of an arbitration clause – the Sharjah Court of Appeal sets limits

The Sharjah Court of Appeal recently declined to apply the principle of separability of an arbitration clause, on the basis that the underlying agreement (i.e. in which the arbitration clause was contained) was not defective or argued to be invalid by the appellant. This judgment has potentially significant implications for parties who intend to rely on an agreement which contains an arbitration clause to assert claims in court.

 

The separability of an arbitration clause is the legal principle that allows an agreement to arbitrate to be considered independently from the contract in which the agreement to arbitrate is contained. The effect of this principle is that even if the underlying agreement is held to be invalid, the arbitration clause in the agreement will remain valid (unless the agreement to arbitrate itself is found to be invalid for reasons other than the invalidity of the underlying agreement). However, as specific authority is required to create a valid arbitration agreement under the laws of the UAE, it is common to see this principle being relied on to bring claims in court, on the basis that the arbitration clause is invalid for want of authority, but the rest of the agreement is sound and may be relied upon to assert claims.

 

The principle of separability is recognised in the UAE’s Federal Arbitration Law (Federal Law No 6 of 2018), and the recognition of this principle was considered one of the highlights of the law. Article 6(1) of the Federal Arbitration Law provides as follows:

 

An arbitration clause shall be treated as an agreement independent from the other terms of contract. The nullity, recission or termination of the contract shall not affect the arbitration clause if it is valid per se, unless the matter relates to an incapacity among the parties.

 

The dispute before the Sharjah Courts arose in relation to a commercial agreement between a foreign company (the plaintiff) and a UAE company based in Sharjah (the defendant). The plaintiff instituted proceedings before the Sharjah Court of First Instance asserting certain contractual claims based on the agreement. The defendant took the position that the Sharjah Court had no jurisdiction because the agreement contained an arbitration clause.

 

The plaintiff argued that the individual who signed the agreement on its behalf had no authority to agree to arbitration on its behalf. The plaintiff sought to advance this argument by reference to the standards applicable under UAE law to establish the authority to agree to arbitration (or in this case, the lack thereof). The defendant took the position that the issue of authority to agree to arbitration should be determined with reference to the law applicable to the plaintiff (i.e. the law applied in the plaintiff’s country of incorporation), and not UAE law.

 

Although the question of authority was the principal issue addressed in the parties’ pleadings, the Sharjah Court of First Instance issued judgment dismissing the plaintiff’s case for the want of jurisdiction. The court held that the plaintiff may not simultaneously rely on the agreement as the basis of its claims and seek to dispute the validity of the arbitration clause contained therein. The plaintiff thereafter filed an appeal to the Sharjah Court of Appeal, and its principal argument was based on the separability of an arbitration clause. The Court of Appeal held against the plaintiff/appellant on the basis that the plaintiff/appellant has taken the position that the agreement is binding in asserting its claims and, as the agreement itself was not defective or invalid, the arbitration clause cannot be separated from the rest of the agreement.

 

It therefore appears from this judgment that a party asserting a claim in court may not seek to rely on the separability of an arbitration clause if it does not also assert that the underlying agreement itself suffers from some form of invalidity. It is likely that this judgment will be appealed to the Union Supreme Court. Until such time the Union Supreme Court issues its judgment, this judgment will give pause to parties who intend to assert contractual claims in court on the basis that the arbitration clause in their agreement is defective. ■