Insurance claims for damage caused by the torrential rain and floods

Early last week, the UAE experienced its most severe rainfall in the past 75 years. A large number of homes and business premises across the UAE suffered damage from the effects of the rain or floods, including the many motor vehicles that were stalled or otherwise impaired.

 

Those who are covered by home insurance policies may, depending on the terms of the policy, ordinarily expect to be compensated for the cost of repairs or replacement for certain types of damage including: (a) structural damage caused to premises and damage to the plumbing or electrical systems; and (b) damage to contents such as personal belongings, furniture, and electronic appliances. Businesses covered under property all risk and business interruption (PAR & BI) may, depending on the terms of the policy, ordinarily expect to be covered for the cost of repair or replacement of the damages as well as the loss suffered due to the interruption in business.

 

Careful review of the terms and conditions of a policy is essential in order to assess the extent, limits, and exclusions, applicable under the coverage of the policy.

 

Policyholders intending to submit a claim under a home insurance or PAR & BI policy should in the ordinary course:

 

(a) gather clear and contemporaneous evidence of the damage suffered and the exact cause(s) of such damage;

 

(b) take necessary measures to mitigate the damage, ideally with prior notice to the insurer providing sufficient details;

 

(c) inform and obtain prior approval from the insurer if there is a necessity to repair the damage pending the submission or approval of a claim;

 

(d) record and retain evidence of all costs incurred in the process of repairing the damage;

 

(e) be mindful that insurers may reject claims if steps taken by policyholders result in worsening the damage; and

 

(f) submit all claims to the insurer as expeditiously as possible following the claims procedure stipulated in the policy.

 

Dispute resolution

 

Insurance policies will generally be governed by Federal Decree Law No. 48 of 2023 On the Regulation of Insurance Activities (the Insurance Law). Pursuant to Article 101 (2) of the Insurance Law, if a dispute arises relating to an insurance claim, a complaint must be submitted to the Banking and Insurance Dispute Resolution Unit (BIDRU) instituted pursuant to Article 121 of Federal Decree Law No. 14 of 2018 (the Old Insurance Law). BIDRU is now known as the “Sanadak”. In terms of Article 2 of the Central Bank’s Regulation on the Establishment of an Ombudsman Unit for the United Arab Emirates (the Sanadak Regulation), the principal mandate of “Sanadak” is “to receive, handle, review and resolve Complaints in a thorough, timely, transparent, fair and legally sound manner.” Submitting a complaint to “Sanadak” is now the mandatory first step in any dispute concerning an insurance policy, and is a cost-effective option for policyholders who are dissatisfied with the manner in which an insurer has responded to a claim.

 

Determinations made by “Sanadak” concerning insurance disputes may be appealed to the Insurance Dispute Resolution Committee (IDRC) within 30 days from the issuance of the determination. In terms of Article 101 (5) of the Insurance Law, an insurer may not appeal decisions of the IDRC if the value in dispute does not exceed AED 50,000: such decisions are deemed final and enforceable immediately upon issuance. Where the value exceeds AED 50,000, the insurer may appeal the decision before the Court of Appeal within 30 days from the date of its issuance or when the insurer became aware of it. The insured may appeal a decision of the IDRC, before the Court of Appeal, irrespective of the claim value, within 30 days from the date of issuance of the decision or when the insured became aware of it.

 

Lastly, it is important to be mindful that “Sanadak” will not have jurisdiction over a complaint where the insurance policy provides for an alternative forum for dispute resolution. Article 7 (6) of the Instructions Concerning the Code of Conduct and Ethics to be Observed by Insurance Companies issued by the Insurance Authority pursuant to Board Resolution No. 3 of 2010 permits non-compulsory insurance policies to incorporate arbitration clauses. Apart from this, Article 2 (2) of the Insurance Law also provides that its provisions shall not apply to companies operating in Financial Free Zones i.e., the Dubai International Financial Centre and the Abu Dhabi Global Market.

 

Although the Sanadak mechanism came into existence quite recently, Afridi & Angell has assisted clients to make claims on this platform, which has been an efficient online service. The dispute resolution team at Afridi & Angell is well-equipped to advise on disputes arising out of insurance claims. ■

Capital Gains Tax Increase: Impact on Planning

The Canadian federal budget was tabled on 16 April 2024. It included, among other things, a proposal to increase the capital gains inclusion rate for the first time since 2001, from one half to two thirds, with the increase coming into effect for dispositions (or deemed dispositions) occurring on or after 25 June 2024 (and for individuals, the increase applies to capital gains over CAD 250,000 in any year, with capital gains below that amount remaining subject to the existing 50 percent inclusion rate).

 

Taxable capital gains (or losses) are realized when a Canadian resident sells a capital asset outside of a registered plan or qualifying insurance policy, and subject to some exemptions (e.g. lifetime capital gains exemption, principal residence exemption, reductions of inclusion rate on charitable donations). It is a common goal in Canadian tax planning to characterize as much personal and corporate income as possible as capital gains rather than other forms of income, because of the 50 percent inclusion rate (the other 50 percent being received tax free). Such planning will remain relevant as long as the capital gains inclusion rate is less than 100 percent; however, the increase to the inclusion rate will erode the benefit of doing so.

 

Examples of events or transactions which will be impacted by the increase include corporate surplus stripping transactions (which aim to extract corporate surplus as capital gains rather than dividends), estate freezes, taxes on death, and taxes on becoming non-resident of Canada. In addition, many professionals in Canada practice their profession through a professional corporation and accumulate and invest their savings in those corporations, virtually always pursuing a capital growth strategy because dividend income is taxed aggressively. The increase will impact the taxation of capital gains realized in those corporations.

 

Canadians may wish to consider deliberately triggering accrued capital gains prior to 25 June 2024 while the existing 50 percent inclusion rate is still applicable. This could entail crystalizing gains in investment accounts, carrying out an estate freeze, making lifetime gifts of capital property to family members or charities, or expediting plans to become non-resident of Canada (which triggers a deemed disposition of certain capital property upon exit).

 

Individuals with intentions to accumulate investment assets in private corporations and who would have otherwise planned to invest and grow their wealth in the corporation may now find that investing in corporate-owned life insurance is comparatively more attractive as well.  Such policies and their in-policy growth continue to be tax-sheltered, and their comparatively conservative investment returns (versus unrestricted investment accounts) are less of a disadvantage in view of the higher capital gains inclusion rate.

 

Details of how the capital gains inclusion rate increase will be administered have not yet been released, particularly with respect to which transactions will be deemed to fall before and after 25 June 2024, and with respect to the inclusion rate for capital losses. It appears from the initial budget release that there will be an effort to match the inclusion rate for capital losses to capital gains at the same rate, likely to forestall triggering gains at the lower rate and losses at the higher rate on the same type of asset, such as public securities.

 

If you would like to pursue transactions to take advantage of the current 50 percent capital gains inclusion rate prior to 25 June 2024, or discuss becoming non-resident of Canada and related planning, please contact us and we will be glad to assist. ■

DIFC Court of Appeal to revisit its jurisdiction to grant freezing orders in support of foreign proceedings

On 2 April 2024, the DIFC Court of Appeal granted permission to appeal to determine whether the recent case of Sandra Holding [2023] DIFC CA 003 (6 September 2023) was wrongly decided. Permission was granted to appeal on the question of:

 

“…whether the rulings of the Court of Appeal in Sandra Holding with respect to the jurisdiction of the Court to make freezing orders in support of pending foreign proceedings should not be followed because:

 

(a)        [They] were per incuriam; and/or

 

(b)        They were wrong.”

 

In Sandra Holding, the Court of Appeal held that the DIFC Court does not have jurisdiction to grant a freezing order in support of proceedings which are pending before a foreign court unless it has jurisdiction over the defendant under Article 5A(1)(a) to (e) of the Judicial Authority Law (JAL).

 

The appeal arises from a judgment of the DIFC Court of First Instance which held (when determining an application to set aside a freezing order) that it was bound by the decision of Sandra Holding. The Court of First Instance, while allowing the defendant’s set-aside application, stayed the operation or effect of the set-aside application and granted permission to appeal its own decision on the following grounds:

 

1 – The meaning and effect [of] paragraph 99 of the decision of the Court of Appeal in Sandra Holding.

 

2 – Whether the rulings of the Court of Appeal in Sandra Holding with respect to the jurisdiction of the Court to make freezing orders in support of pending foreign proceedings were obiter dicta and therefore not binding on judges at first instance.

 

The Court of First Instance also granted the claimant leave to apply to the Court of Appeal for permission to appeal on the additional ground as to whether Sandra Holding was wrongly decided and/or per incuriam.

 

Justice Sir Peter Gross, in his reasons for granting permission, noted that a number of important policy issues arise from the appeal:

 

  • “The power of the DIFC Courts, established (inter alia) to assist international trade, to grant freezing orders in circumstances where such relief could be crucial to avoid the dissipation of assets.

 

  • The need to guard against the assertion by the DIFC Courts of an exorbitant jurisdiction.

 

  • The proper limits of judicial (as distinct from legislative) development of the law by the DIFC Courts, whose jurisdiction is based on statute.”

 

Justice Sir Peter Gross also highlighted the potential general importance of the appeal to the jurisdiction and jurisprudence of the DIFC Courts, together with the development of DIFC law in this area, as reasons for granting permission to appeal and directed that the Court would benefit from considering comparative common law authorities on the relevant points.

 

The Court of Appeal will now hear the appeal on all grounds for which permission has been granted, and will also consider (arguably for the first time) whether it is open to the Court of Appeal to revisit and, if so minded, depart from its own previous decisions.

 

Afridi & Angell acts for the Claimant-Appellant in the proceedings. ■

ADGM Distributed Ledger Technology Foundations Regulations 2023

Introduction

 

Following the issuance of Consultation Paper 3 of 2023 and the consultation process that followed, on 2 October 2023 the Abu Dhabi Global Market (ADGM) enacted the DLT Foundations Regulations 2023 (the Regulations), aimed at providing a regulatory framework for the creation and operation of specialised foundations for distributed ledger technology (DLT) and decentralised autonomous organisations (DAO).

 

Background

 

Despite growing global demand for a licensing regime for an entity that can hold and manage digital assets, DLT networks, blockchain and token issuance, there has been a lack of options (prior to the Regulations) to promote DAO in a manner that provides legal certainty while supporting the concept of decentralised governance. The Regulations are a first step in bridging this gap by providing a legal entity that supports a decentralised operating model.

 

DLT Foundations differ from the already-established ADGM foundations regime (one which has been increasingly relied upon for wealth management and legacy planning) in that they cater to foundations established for a particular purpose, being: to use, deploy, develop, facilitate or support DLT and/or the issuance of tokens.

 

However, DLT Foundations retain many of the corporate governance and statutory requirements of the already existing traditional ADGM foundations regime. This includes the requirement to: (a) in most cases and subject to very limited exceptions, appoint a company services provider (CSP) with which a registered address must be maintained and (b) prepare and file a charter setting out the specific rules regarding governance, rules for token issuance (including types, purposes and rights attached to tokens) and provisions relating to the DLT Foundation’s assets (this is not an exhaustive list). Interestingly, the Regulations also include provisions allowing for the migration of DLT Foundations to and from ADGM, subject to certain criteria.

 

Governance

 

The key office-holders of a DLT Foundation are council members, guardians, and tokenholders:

 

i. There must be a minimum of 2 and no more than 16 council members who are responsible for the management of a DLT Foundation’s affairs. Council members are also granted certain statutory veto rights which cannot be narrowed by the charter (being the primary constitutive document) of a DLT Foundation.

 

ii. A guardian is appointed by the founder or council members and is responsible for ensuring compliance with a DLT Foundation’s objectives.

 

iii. If the DLT Foundation issues tokens, it shall have tokenholders. The Regulations specify that a tokenholder is not, merely by virtue of being a tokenholder, liable for any acts and/or omissions of the DLT Foundation. Subject to the provisions of the charter, tokenholders may be able to approve or reject certain matters concerning the affairs of a DLT Foundation.

 

DLT Foundations must also keep accounting records and prepare annual accounts, which must be audited by an independent auditor, published on the DLT Foundation’s website, and lodged with the ADGM Registration Authority. DLT Foundations must also conduct periodic security audits of the DLT Foundation’s data protection and security systems and share the results of such security audits with the ADGM Registration Authority.

 

Looking Ahead

 

The Regulations are yet another step taken by ADGM to provide an adaptable framework for non-traditional business sectors.

 

Whilst we can expect the ADGM to reply to industry developments in the form of amendments and/or sub-ordinate regulations, the present framework not only provides a structure for DLT Foundations but also a supportive regulatory system with sufficient flexibility for DLT, DAO and ADGM’s regulatory ecosystem to grow together with the market. ■

Developments in Corporate Tax Compliance

In the past week, guidance has been provided by both the Ministry of Finance and the Federal Tax Authority (FTA) regarding deadlines for Corporate Tax registration.

 

The new deadlines have the potential to significantly reduce the time left for meeting the deadlines for Corporate Tax registration. For example, certain applicable taxable persons will be required to submit the Corporate Tax registration applications by 31 May 2024 in order to avoid a violation and the applicable penalties.

 

Previous guidance from the FTA stated that taxable persons would have until the due date of their first tax return to register. For example, if a taxable person had a financial year ending on 31 May 2023, they would have a registration period of 26 months available until 28 February 2025. Similarly, for taxable persons with a financial year ending on 31 December 2022, a registration period of 33 months would be available until 30 September 2025.

 

Federal Tax Authority Decision No 3 of 2024 (FTA Decision) was issued on 22 February 2024 mandating specific application deadlines to register for Corporate Tax applicable to both juridical and natural persons, that are either resident or non-resident persons, to be effective from 1 March 2024.

 

We emphasise that the deadlines are applicable for the submission of Corporate Tax registration applications, as distinguished from completion of the registration process and possession of a registration certificate.

 

The deadlines specified by the FTA Decision are determined by a combination of the month of issuance of the taxable person’s Trade License, whether a juridical person was incorporated prior to 1 March 2024, and the residency of the taxable person.

 

Tax Registration Deadlines of Resident Juridical Persons

 

A juridical person that is a Resident Person, incorporated or otherwise established or recognised prior to 1 March 2024, shall submit the Tax Registration application, in accordance with the following:

Date of License Issuance Irrespective of Year of Issuance

Deadline for submitting a Tax Registration application

1 January – 31 January

31 May 2024

1 February – 28/29 February

31 May 2024

1 March – 31 March

30 June 2024

1 April – 30 April

30 June 2024

1 May – 31 May

31 July 2024

1 June – 30 June

31 August 2024

1 July – 31 July

30 September 2024

1 August – 31 August

31 October 2024

1 September – 30 September

31 October 2024

1 October – 31 October

30 November 2024

1 December – 31 December

31 December 2024

Where a person does not have a License at the effective date of the FTA Decision

(3) three months from the effective date of the FTA Decision

 

A juridical person, that is a Resident Person incorporated or otherwise established or recognised on or after 1 March 2024, shall submit the Tax Registration application, in accordance with the following:

Category of Juridical Persons

Deadline for submitting a Tax Registration application

A person that is incorporated or otherwise established or recognized under the applicable legislation in the UAE, including a Free Zone Person

(3) three months from the date of incorporation, establishment or recognition

A person that is incorporated or otherwise established or recognized under the applicable legislation of a foreign jurisdiction that is effectively managed and controlled in the UAE

(3) three months from the end of the Financial Year of the person

 

Tax Registration Deadlines of Non-Resident Juridical Persons

 

A juridical person, that is a Non-Resident Person prior to 1 March 2024, shall submit a Tax Registration application in accordance with the following:

Category of Juridical Persons

Deadline for submitting a Tax Registration application

A person that has a Permanent Establishment in the UAE

(9) nine months from the date of existence of the Permanent Establishment

A person that has a nexus in the UAE

(3) three months from the effective date of the FTA Decision

 

A juridical person, that is a Non-Resident Person on or after 1 March 2024, shall submit a Tax Registration application in accordance with the following:

Category of Juridical Persons

Deadline for submitting a Tax Registration application

A person that has a Permanent Establishment in the UAE

(6) six months from the date of existence of the Permanent Establishment

A person that has a nexus in the UAE

(3) three months from the effective date of the FTA Decision

 

Tax Registration Deadlines of Natural Persons

 

A natural person conducting a Business or Business Activity in the UAE shall submit a Tax Registration application in accordance with the following:

Category of Natural Persons

Deadline for submitting a Tax Registration application

A Resident Person who is conducting a Business or Business Activity during the 2024 Gregorian calendar year or subsequent years whose total turnover derived in a Gregorian calendar year exceeds the threshold specified in the relevant tax legislation

31 March of the subsequent Gregorian calendar year

A Non-Resident Person who is conducting a Business or Business Activity during the 2024 Gregorian calendar year or subsequent years whose total turnover derived in a Gregorian calendar year exceeds the threshold specified in the relevant tax legislation

(3) months from the date of meeting the requirements of being subject to tax

 

Penalties for Non-Compliance

 

On 27 February 2024, the Ministry of Finance issued Cabinet Decision No 10 of 2024 (amending the schedule of violations and administrative penalties of Cabinet Decision No 75 of 2023) that specifies that an administrative penalty of AED 10,000 will be imposed for failure to meet the deadlines provided for the submission of a tax registration application.

 

Points for Consideration

 

We suggest that you review and understand the registration timelines, and commence any necessary action to ensure compliance. Furthermore, Corporate Tax registration will now form part of any new corporate establishment process as, unlike VAT registration for which certain thresholds are required to be met, resident juridical entities will have only three months from the date of incorporation, establishment or recognition to submit an application for their Corporate Tax registration. ■

Unification of Federal and Local Judicial Principles: key decisions relating to civil procedure and cheques

The Commission for the Unification of Federal and Local Judicial Principles (the “Commission”) recently issued a number of decisions aimed at harmonising certain “judicial principles”. Since the doctrine of stare decisis is not followed in the UAE, there have been instances of incongruities in the application of law by the UAE courts. The Commission was established under Federal Law 10 of 2019 (the “Federal Law”), recognising a need to avoid such inconsistencies.

 

In terms of Article 18 of the Federal Law, decisions of the Commission are binding on all on-shore courts of the UAE, including courts of emirates which are not part of the federal judicial system (Abu Dhabi, Dubai, and Ras Al Khaimah) – with the fail-safe that an inconsistency between a judgment and a “judicial principle” recognised by the Commission may constitute a ground for appeal of a judgment which otherwise would be final. Requests for unification of judicial principles can be submitted by the heads of supreme courts in the UAE, the federal public prosecutor, and local prosecutors.

 

The following are some of the key decisions issued by the Commission.

 

Scope of Article 667 of the Commercial Transactions Law (enabling direct execution proceedings for cheques dishonoured for insufficient funds) expanded to include cheques dishonoured due to account closure

 

  • In terms of Article 667 of Federal Decree Law 50 of 2022 (the “Commercial Transactions Law”), the bearer of a cheque which was dishonoured due to “unavailability” or “insufficiency” of funds is able to rely on the cheque as a writ of execution to file execution proceedings (as opposed to asserting a substantive claim) against the drawer of the cheque. This provision was introduced following the decriminalisation of the act of drawing a cheque without having a sufficient balance in the account to honour the cheque. Readers are reminded that not all acts concerning cheques were decriminalised.

 

  • The Commission has expanded the scope of Article 667 of the Commercial Transactions Law to include instances where a cheque is dishonoured due to an account being closed. Therefore, bearers of cheques which are dishonoured for this reason are now able to file execution proceedings directly against the drawer for the value of the cheque.

 

  • It should be noted that the act of closing an account prior to issuing a cheque or presenting it to the drawee for payment still constitutes an offence punishable by a term of imprisonment of up to two years. Therefore, until further clarification is provided, the prudent view is that this act has not been decriminalised.

 

Federal Supreme Court / Courts of Cassation power to reverse judgments extended to criminal matters

 

  • In terms of Article 190 of Federal Decree Law 42 of 2022 (the “Civil Procedure Law”), the Federal Supreme Court or Court of Cassation (as applicable), is empowered to ‘reverse’ final civil judgments issued by it, on its own volition or upon an application being made by the party against whom the judgment was issued, in any of the following circumstances:

 

– if the judgment contains a procedural error committed by the court or its auxiliary bodies and such error affected the outcome of its decision or judgment;

 

– if the decision or judgment is based on an abrogated law, and the application of the correct law would have materially altered the court’s judgment; or

 

– if the judgment is issued in violation of any judicial principles prescribed by the Commission, among others

 

  • The Commission has widened the ambit of Article 190 of the Civil Procedure Law to cover judgments issued by the Federal Supreme Court or Court of Cassation (as the case may be) in criminal cases.

 

Court of Appeal to decide on the substance of the claim if it declines to grant a payment order

 

  • Payment Orders are mechanisms that enable a creditor to obtain summary relief where, among others, there is a confirmed debt owed to it. Prior to the current decision of the Commission, a judgment on an application for a Payment Order could be appealed to the Court of First Instance (if the value of the claim is less than AED 50,000), or to the Court of Appeal (if the value of the claim exceeds AED 50,000). If the Court of Appeal found that a Payment Order should not be granted, and absent an appeal to the Court of Cassation (available only on issues of law and where the claim exceeds AED 500,000) the applicant was required to file ordinary proceedings anew to claim its debt.

 

  • Following the current decision of the Commission, if the Court of Appeal finds that a payment order should not have been granted, it must proceed to adjudicate the applicant’s claim against the counter-party as it would in ordinary proceedings.

 

  • While this is advantageous to a creditor in the sense it no longer has to incur the time and expense to file ordinary proceedings anew in the Court of First Instance, it also means that the parties lose one level of appeal, unless the value of the claim exceeds AED 500,000 (thus enabling an appeal to the Court of Cassation on an issue of law). ■

The Participation Exemption – Dividends and Capital Gains

Ownership of shares by companies usually results in tax being payable for dividends received or capital gains realised upon sale. However, in the UAE, the Corporate Tax law (Federal Decree No. 47 of 2022) (“CT Law”) provides an exemption to Corporate Tax in a certain scenario referred to as the Participation Exemption.

 

Article 23 of the CT Law states:

 

“Participation Exemption”

 

1. Income from a Participating Interest shall be exempt from Corporate Tax, subject to the conditions of this Article.

 

2. A Participating Interest means, a 5% (five percent) or greater ownership interest in the shares or capital of a juridical person, referred to as a “Participation” for the purposes of this Chapter where all of the following conditions are met:

 

a.) The Taxable Person has held, or has the intention to hold, the Participating Interest for an uninterrupted period of at least (12) twelve months.

 

b.) The Participation is subject to Corporate Tax or any other tax imposed under the applicable legislation of the country or territory in which the juridical person is resident which is of a similar character to Corporate Tax at a rate not less than the rate specified in paragraph (b) of Clause 1 of Article 3 of this Decree-Law.

 

c.) The ownership interest in the Participation entitles the Taxable Person to receive not less than 5% (five percent) of the profits available for distribution by the Participation, and not less than 5% (five percent) of the liquidation proceeds on cessation of the Participation.

 

d.) Not more than 50% (fifty percent) of the direct and indirect assets of the Participation consist of ownership interests or entitlements that would not have qualified for an exemption from Corporate Tax under this Article if held directly by the Taxable Person, subject to any conditions that may be prescribed under paragraph (e) of this Clause.

 

e.) Any other conditions as may be prescribed by the minister.

 

This Article provides that income from a Participating Interest, such as dividends and capital gains, is exempt from Corporate Tax. A Participating Interest is defined as a significant, long-term ownership interest in a juridical person (the Participation) that suggests some degree of control or influence over the Participation and that meets the conditions of this Article 23. With respect to dividends, Article 23 is usually used for dividends received by a UAE company (which is a Resident Person) from a foreign company. Dividends received from a UAE company (which is a Resident Person) are exempt from Corporate Tax with no further conditions (Article 22 (1) of the CT Law).

 

As an example, if a UAE Company owns a German Company (Participating Interest) and it receives dividends and later sells these shares and receives capital gains, then the dividend income and the capital gains income can be exempt from Corporate Tax if the following condition are met:

 

a.) the UAE company has held, or has the intention to hold, the Participating Interest for an uninterrupted period of at least (12) twelve months. The UAE Company should hold the shares of the German Company (Participating Interest) for an uninterrupted period of 12 months.

 

b.) The Participation must be subject to Corporate Tax (or equivalent) of 9% or more. This condition requires the Participation (ownership of shares by the UAE Company in UAE Company) to be subject to Corporate Tax or any other tax imposed under the applicable legislation of the country or territory in which the juridical person is resident which is of a similar character to Corporate Tax. In this case, it would be subject to Corporate Tax if it were not for this exemption and it would be subject to a similar or higher tax rate in Germany. Hence this test is satisfied.

 

c.) The ownership interest of the UAE Company in the Participation entitles the UAE Company to at least 5% of the profits and liquidation proceeds. In this case, the UAE Company would be entitled to 100% of the profits and liquidation proceeds of the German Company as the 100% owner. The ownership interest must entitle the UAE Company to at least 5% of the Participation’s profits available for distribution and at least 5% of the liquidation proceeds upon cessation of the Participation. As a result, this test is satisfied. Note that if the acquisition of the Participating Interest exceeds AED 4 million then this test is also satisfied (Ministerial Decision 116 of 2023).

 

d.) 50% or less of the assets of the Participation consist of non-qualifying ownership interests. An ownership interest in a Participation will be deemed a passive or portfolio investment that does not qualify for the Participation Exemption if 50% or more of the Participation’s assets, on a consolidated basis, consist of ownership interests or entitlements that by themselves do not meet the conditions of this Article had they been held directly by the Taxable Person.

 

Assets that would not qualify for the Participation Exemption include, for example, ownership interests in foreign juridical persons that are not subject to a corporate income tax in the relevant foreign jurisdiction, unless such ownership interests meet the conditions of Clause 3, or any other conditions as may be prescribed by the Minister under Clause 2(e).

 

In this case, the assets of the UAE Company that are shares in the German Company would be subject to tax in the UAE. Hence, the shares in the German Company are qualifying ownership interests which should satisfy this condition.

 

e.) The Participation Interest must meet any other conditions as may be prescribed by the Minister. As of the date of this memorandum, the other prescribed conditions are not relevant to these facts.

 

Based on the above, the following income (as specified under Article 23(5) of the CT Law) being capital gains and dividend income shall not be taken into account by the UAE Company in calculating its Taxable Income for Corporate Tax:

 

  • Dividends and other profit distributions received from a foreign Participation that is not a Resident Person under paragraph (b) of Clause 3 of Article 11 of this Decree-Law.

 

  • Gains or losses on the transfer, sale, or other disposition of a Participating Interest (or part thereof).

 

  • Foreign exchange or impairment gains or losses in relation to a Participating Interest.

 

For the sake of illustrating the use of the Participation Exemption, the above analysis does not discuss the effects of any applicable double taxation treaty.

 

*****

 

Please contact Shahram Safai (ssafai@afridi-angell.com) if you require advice with respect to Corporate Taxation in the UAE. ■

Dubai Court of Cassation Issues Directions on the Imprisonment of Judgement Debtors in the UAE

Article 319(1) of the UAE Civil Procedure Law authorises an execution judge to imprison a debtor who fails to satisfy a judgment debt, unless the debtor is able to prove that he is insolvent.

 

Although the text of Article 319(1) places the burden of proving insolvency on the judgment debtor, this appears to have been reversed following a decision of the General Assembly of the Dubai Court of Cassation issued in October 2023. A judgment creditor is now required to prove that the judgment debtor is solvent before an order of imprisonment may be issued under Article 319. In its decision, the Court of Cassation refers to and codifies the principle of Islamic Sharia’ which presumes the insolvency of a debtor.

 

However, the decision maintains that Article 319(2) provides that a plea of insolvency cannot be maintained in the following circumstances:

 

a) if the debtor deliberately smuggled or concealed their assets; or

 

b) if the debt is due in instalments that the debtor has defaulted on, or if the debt arises out of a guarantee given to the court on behalf of a different debtor, except where the debtor provides evidence of new circumstances which did not exist before and which have adversely affected his financial situation.

 

This poses a significant evidentiary burden on judgment creditors, who must now prove that (a) the judgment debtor is solvent, or (b) that one of the exclusions in Article 319(2) applies in order to obtain an order for imprisonment. It also remains to be seen whether this decision would disincentivise parties from invoking the processes set out in the UAE’s bankruptcy and insolvency legislation.

 

Orders issued by the court under Article 319(1) prior to this decision have been vacated. ■

Navigating the Jurisdiction: Key UAE Court Decisions from 2023 Shaping the Arbitration Landscape

The UAE’s arbitration landscape continues to evolve and, as 2023 draws to a close, we summarise some of the more significant judgments issued by the UAE on-shore Courts in relation to arbitration this year. While the trend of the judgments reinforces the ‘arbitration-friendly’ approach of the UAE Courts of late, 2023 has not been without its outlier cases.

 

1) It may no longer be possible to circumvent an arbitration agreement by joining third parties to court proceedings

 

A popular strategy deployed by parties wishing to bypass an arbitration agreement and invoke the jurisdiction of the UAE Courts (ordinarily a claimant) is to add parties who are not party to the arbitration agreement, as in cases which involve multiple defendants, a UAE court which has jurisdiction over one defendant has jurisdiction over all the defendants.

 

In Dubai Court of Cassation Case No. 1078/2023, the court upheld a Court of Appeal decision rejecting this strategy. In its judgment, the Dubai Court of Appeal laid down several clear principles:

 

  • while a claimant may add multiple defendants, and while a court which has jurisdiction over one defendant will have jurisdiction over all the defendants, there must be ‘real claims’ against each of the defendants;

 

  • what constitutes ‘real claims’ is a matter to be determined by the trial court based on the evidence and any applicable presumptions of law (in this case, the court found that the claimant’s cause of action was clearly a contractual one, and there were no ‘real claims’ against individuals who were not party to the contract); and

 

  • adding parties solely for the purpose of invoking the court’s jurisdiction is not permitted.

 

2) Amendments to contracts need not expressly refer to an arbitration clause in the initial contract

 

In the same case, the Dubai Court of Appeal (Case No. 911/2023) also held that an amendment to a contract which contains an arbitration does not need to expressly refer to the arbitration clause in the initial contract, provided that the amendment clearly forms part and parcel of the contract which contained the arbitration clause (i.e. as opposed to standard terms or a different contract containing an arbitration clause which is incorporated by reference). However, the prudent approach remains to replicate or clearly refer to the arbitration agreement between the parties in the initial contract.

 

3) An agreement to arbitrate in a contract will extend to subsequent contracts between the same parties, provided that (a) there is a sufficiently close factual connection, and (b) there is no subsequent agreement to resolve disputes in a different forum

 

In Dubai Court of Cassation Case No. 828/2023, the court considered an appeal relating to a construction dispute. The parties had entered into a contract containing an arbitration clause, however, the dispute between the parties arose pursuant to purchase orders between the parties issued subsequent to the initial contract. One of the parties contended as the purchase orders do not contain an arbitration clause, disputes arising in connection with the purchase orders must be determined by the courts.

 

The Court of Cassation rejected this argument. After an analysis of the documents, it was determined that the arbitration clause in the initial contract applied to the purchase orders. This decision was based on the close connection between the initial contract and the purchase orders, involving not only the parties but also the subject matter of the contract. Following the ‘accessory follows the principal’ principle, the Court of Cassation held that “based on the implicit will of the parties deduced from all previous elements, all disputes regarding subsequent contracts are subject to the arbitration clause”. The court also took into consideration the nature of contracts entered into in the construction industry, holding that “taking into account the technical nature of the construction industry, which makes it unlikely that the parties intended to limit arbitration to specific matters and resort to state courts in other matters, which may be technically related to the matters subject to arbitration given the single nature of the subject matter of those contracts”.

 

However, the court made it clear that had there been an agreement to refer disputes to a different forum in the purchase orders, such an agreement would prevail. Where the subsequent instrument is silent, there now appears to be a presumption that the agreement of the parties to arbitrate (or other such agreement as to forum) in an earlier related contract will prevail.

 

However, the prudent approach remains to replicate or clearly refer to the arbitration agreement between the parties in the initial contract.

 

4) An arbitration agreement may be assigned and is binding on the assignee, even if there is no agreement in writing by the assignee to be bound by the arbitration agreement

 

In March 2023, the Dubai Court of Cassation (Cassation No. 1603/2022) held that an agreement to arbitrate contained in an agreement can be assigned to a third party, even where the third party had not expressly agreed to arbitrate.

 

The dispute arose in the context of a reverse factoring agreement. The defendant purchased goods from a supplier and agreed to make payment within 120 days from the date of the invoice(s). The plaintiff made early payment of the invoices to the supplier on behalf of the defendant. As a result, the right to receive payments for the goods purchased by the defendant was assigned to the plaintiff and the defendant was duly notified of such assignment. The contract between the defendant and the supplier contained an agreement to arbitrate. However, there was no arbitration agreement between the plaintiff and the defendant. The point of dispute arises from the defendant’s position that as a result of the assignment of invoices to the plaintiff, the arbitration agreement has also been assigned.

 

The Dubai Court of Cassation held upon the assignment of the right to receive payment to the plaintiff, the arbitration agreement between the supplier and the defendant was also transferred to the plaintiff.

 

The rationale of the court was that the assignment does not create new rights, but merely transfers existing rights that were vested with another party. On this basis, the court held that the arbitration agreement shall also be deemed to be assigned unless the assignment agreement expressly states otherwise.

 

5) An indirect claimant may rely on an arbitration agreement entered into by the party on behalf of whom the indirect claim is being made

 

In a dispute involving a claim asserted by a subcontractor in the context of a construction dispute, the Abu Dhabi Court of Cassation held that the subcontractor (who was asserting an indirect claim pursuant to Articles 392 and 393 of the UAE Civil Code) could resort to arbitration under the contract between the main contractor and the employer. Articles 392 provides that “every obligee …may exercise, in the name of the obligor, all of the rights of that obligor, save those that relate particularly to his person or which are not capable of being attached”, and Article 393 provides that “the obligee shall be regarded as a proxy for his obligor in exercising his rights”.

 

The Abu Dhabi Court of Cassation, in interpreting and applying Articles 392 and 393, found that they extend to a right to resolve disputes through arbitration. Consequently, a party representing another’s rights, in the context of Articles 392 and 393, may resort to arbitration under the original contract between the debtor and the creditor.

 

6) The Dubai Court of Cassation recognized the distinction between jurisdiction and admissibility and held that a question of inadmissibility does not result in the annulment of an arbitral award

 

In its judgment in Cassation Case No. 1514 of 2022 issued in July 2023, the Dubai Court of Cassation for the first time drew a distinction between the concepts of jurisdiction and admissibility.

 

The underlying dispute between the parties arose from an International Federation of Consulting Engineers (FIDIC) construction contract. The respondent in the arbitration sought to set aside the arbitral award against it on the basis that the claimant had failed to comply with the conditions precedent stipulated in the contract prior to referring the dispute to arbitration.

 

In dismissing the Respondent’s appeal, the Dubai Court of Cassation held that pre-arbitral conditions precedent does not pertain to the question of jurisdiction or competence of arbitral tribunal, i.e., they are not determinative of whether arbitration is the proper forum to hear the dispute or not. Rather, they go to the question of admissibility, i.e., whether the claims raised can be heard at that point in time, or whether such claims have been referred for arbitration prematurely.

 

Significantly, the court addressed the consequences that may flow from a finding of inadmissibility. The court stated that where an issue of inadmissibility is correctly invoked, the most likely result is that the arbitration proceedings may be adjourned pending the fulfilment of the conditions precedent by the parties, though arbitration remains the proper forum to resolve the dispute (i.e. the tribunal remains vested with jurisdiction). This is a departure from previous cases where the courts held that the failure to follow pre-arbitral questions go to the issue of jurisdiction, and annulled awards on that basis.

 

7) Non-payment of advances on costs do not result in the exhaustion of an arbitration clause

 

The same judgment of the Court of Cassation is also significant as it held that the court does not become seized with jurisdiction over disputes that do not proceed to arbitration due to the parties’ failure to pay advances on costs. This represents a departure from previous cases where the court held that non-payment of arbitration fees results in the exhaustion of the arbitration clause.

 

This was reinforced in November 2023 by Decision No. 10/2023 of the Dubai Court of Cassation which directed that the previous principle of considering an arbitration agreement be exhausted if an arbitration does not commence/proceed due to the parties’ failure to pay advances on costs must no longer be followed.

 

8) Notwithstanding the DIAC 2022 Rules, specific authority to agree costs may still be required

 

It is a long-settled principle of UAE law that arbitral tribunals require express authority to award legal costs. This remains the case even following the enactment of the Federal Arbitration Law, which was expected to dispense with this requirement. Possibly in response to this, the Dubai International Arbitration Centre (DIAC) Rules of 2022 (Article 36) appeared to suggest that tribunals are empowered to award legal costs by including the “fees of the legal representative” within the costs of arbitration. The Federal Arbitration Law does not require tribunals to possess the express authority to award the costs of the arbitration.

 

However, the Dubai Court of Cassation, in a matter involving the ICC Rules (in which Article 38 make provision similar to Article 36 of the DIAC Rules), set aside the part of the award in which the tribunal awarded legal costs on the basis that “Article 38 of the International Chamber of Commerce Rules, which the arbitrator relied upon, did not explicitly empower the arbitral tribunal to decide on the legal fees of the parties’ legal representatives in the arbitration.”. On the face of it, this appears to be an incorrect finding by the court, as Article 38.1 of the ICC Rules expressly provides that the “costs of the arbitration shall include the fees and expenses of the arbitrators … and the reasonable legal and other costs incurred by the parties for the arbitration.

 

Given the similarity between the DIAC 2022 Rules and the ICC Rules, there now appears to be a question whether Article 36 of the DIAC 2022 Rules (of itself and without express agreement by the parties empowering the tribunal) is sufficient to empower a tribunal to award legal costs.

 

9) There is a risk that a finding of invalidity of a contract could extend to an arbitration clause in the contract, notwithstanding that the Federal Arbitration Law recognizes the separability of an arbitration clause.

 

In Court of Cassation No. 585/2023, the Dubai Court of Cassation held that a finding of invalidity of a contract extends to an arbitration clause contained in the same contract. The dispute arose in the context of a dispute between shareholders of a limited liability company established in the 1990’s. As required under law at the time, the majority shareholder was an Emirati national, and this was reflected in the company’s Articles of Association. However, at the same time, an addendum was executed to the Articles to provide that, among others, the Emirati national did not own any shares in the company.

 

The Emirati shareholder successfully asserted certain claims arising out of the addendum in an arbitration conducted under the DIAC Rules. The respondent sought to set aside the award, and the Court of Appeal set aside the award on public policy grounds as provided for in Article 53(2)(a) of the Federal Arbitration Law.

 

The Court of Appeal went on to hold that “the arbitration agreement as well as filing the arbitral proceedings on the basis of such invalid contract is against public policy” and, in doing so, appears to have linked the invalidity of the contract with the invalidity of the arbitration agreement. The judgment of the Court of Appeal was upheld by the Court of Cassation which found that a decision to invalidate a contract extends to all its terms including the arbitration clause.

 

This was a surprising outcome, given that the Federal Arbitration Law expressly recognizes the separability of an arbitration clause.

 

10) Parties choosing to resolve disputes through arbitration under the ICC Rules in the UAE may find the ADGM deemed to be the seat of arbitration.

 

Earlier this year, the Abu Dhabi courts ruled that they lacked supervisory jurisdiction over an arbitration conducted under the ICC Rules, even though the agreement stated that the seat would be in Abu Dhabi. However, the agreement did not specify whether the seat would be in the Abu Dhabi Global Market (ADGM) or on-shore Abu Dhabi. The Abu Dhabi Court of Cassation held that, because the parties chose the ICC Rules, and that because the ICC maintains a representative office in the ADGM, the ADGM should be taken to be the seat of arbitration, thereby vesting the ADGM Courts with jurisdiction to hear applications related to the arbitration. It is relevant to note that following this judgment, the ADGM Courts have accepted jurisdiction in matters arising out of arbitrations conducted under the ICC Rules and where the seat was specified to be Abu Dhabi.

 

A similar judgment was issued approximately two years ago by the Dubai Court of Cassation, in which it held that it had no jurisdiction over claims arising from a Dubai International Financial Centre (DIFC) and London Court of International Arbitration (LCIA) arbitration seated in Dubai and that as the DIFC-LCIA was a DIFC establishment, the DIFC Courts are the courts vested with jurisdiction. While this issue is no longer likely to arise as the DIFC-LCIA no longer exists, it highlights the need to specify the seat of arbitration with care, particularly in the Emirates of Abu Dhabi and Dubai, given that four jurisdictions exist within the two Emirates. ■

New Maritime Law in the UAE

The UAE issued a new Maritime Law this week. The new Maritime Law, Federal Decree-Law No 43 of 2023 will come into force six months from publication and will repeal the 1981 Maritime Law.

 

As expected, the new Maritime Law significantly improves the maritime landscape in the UAE, and will no doubt seal the UAE as a shipping-hub in the region.

 

On the precautionary arrest of a vessel front, the new law requires the applicant seeking an arrest of the vessel to provide security to cover the expenses of the crew, and to maintain the vessel. The new law also appears to have broadened the definition of a “maritime debt” to include claims arising out of damage caused by the vessel to the environment and coastline, wreckage removal and port fees. Arrest of a sister vessel is also permitted, provided that the sister vessel was owned by the debtor at the time of submitting the application for arrest. This is a departure from the position under the 1981 law which permitted the arrest of a sister vessel if the sister vessel was owned by the debtor at the time the debt arose.

 

The Afridi & Angell maritime team is closely reviewing the new law and will continue to provide further updates. ■