Category: inBriefs

Termination of employment in the UAE – can an employer terminate an employee’s employment at will?

Under the employment law that was previously in force in the UAE, employers were not permitted to terminate an employee’s employment (even with notice) absent a “legitimate reason” and if “the reason for such termination has no connection with work”. In other words, the concept of termination “at will” was not recognised as an enforceable right in the context of an employer-employee relationship.

 

This inBrief will examine whether the new labour law (Federal Decree 33/2021) (the New Law) which replaced the 1980 Federal Law (the Old Law) has changed this position, and how the Abu Dhabi and Dubai Courts have interpreted the relevant provisions on termination of employment with notice.

 

What does the New Law say about termination with notice?

 

The relevant provision for termination with notice is contained in Article 43 (1) of the New Law, and provides that either party may terminate the employment contract, with notice, for any “legitimate reason”. This position is no different to what was in place in Article 117 of the Old Law. Significantly, both the Old Law and the New Law require termination to be for a “legitimate reason” [لاي سبب مشروع]. Neither the Old Law nor the New Law provide a definition for what constitutes a “legitimate reason”. Some guidance was available in Article 122 of the Old Law which provided that a termination of employment of an employee would be deemed “arbitrary” if the reason for termination had no connection with the work of the employee. However, there was no definite interpretation of what a “legitimate reason” could entail, which was a point of concern for both employers and legal practitioners.

 

What about arbitrary termination of employment?

 

There appears to have been a significant departure as to what constitutes arbitrary termination of an employee’s employment under the New Law. A comparison of the relevant provisions is set out below:

 

 

Article 122 of the Old Law Article 47 (1) of the New Law
 

The termination of service of a worker by an employer shall be considered to be arbitrary if the reason for such termination has no connection with work. In particular, the termination shall be considered arbitrary if it is caused by the worker submitting a serious complaint to the competent authorities or making a claim against the employer which is proved to be correct.

  

The termination of the worker’s service by the employer shall be illegal if such termination is due to his filing a serious complaint with the ministry or filing a lawsuit against the employer that has been proven to be valid.

 

Under the Old Law, termination of employment was considered arbitrary if “the reason for such termination has no connection with work”. What might have been deemed as arbitrary termination therefore was potentially broad in scope, and could conceivably be for any reason that was not work-related. This was reinforced by the wording of the Old Law providing: “[i]n particular, the termination shall be considered arbitrary if it is caused by the worker submitting a serious complaint to the competent authorities or making a claim against the employer which is proved to be correct” (emphasis added).

 

In contrast, the mirroring provision in the New Law appears to indicate a departure from the position under the Old Law. The most notable departure is the absence of the language that the termination of employment would be considered arbitrary if “the reason for such termination has no connection with work”. Instead, the New Law restricts circumstances where termination of employment would be considered arbitrary to only “if such termination is due to his filing a serious complaint with the ministry or filing a lawsuit against the employer that has proven to be valid.” Importantly, the New Law has done away with the concept that any termination that is unrelated to the employee’s work will be deemed arbitrary.

 

Therefore, any discretion available to a judge under the Old Law in assessing whether or not the termination was work-related or arbitrary appears to have been removed by the New Law. It would seem that the drafters might have made a conscious attempt to limit the circumstances that would be deemed arbitrary dismissal by confining its application only to instances where an employee is terminated for filing a complaint with the Ministry of Human Resources and Emiratisation (MoHRE), or for filing a lawsuit against the employer.

 

How have the courts interpreted this?

 

The courts seem to have addressed the question of what can amount to arbitrary termination. In a recent decision of the Dubai Court of First Instance, the court referred to a “settled” position in law, as follows:

 

It is also settled in the precedents of the Dubai Court of Cassation that as per the provisions of Article 47 of Federal Decree-Law 33 of 2021 termination of an employee’s service by an employer is unlawful if the termination of the employee’s service is due to filing of a serious complaint to the Ministry or filing of a valid claim (lawsuit) against the employer. This means that the termination of the employment contract by an employer is considered termination without lawful reason if it aims at harming the employee due to submission of a serious complaint to the Ministry of Human Resources and Emiratisation or filing of a valid claim (lawsuit) against the employer. (Emphasis added)

 

The Court also cited with approval a judgement given by the Abu Dhabi Court of Cassation in late 2022 where the Abu Dhabi Court determined that the effect of the new provisions was to restrict what is deemed arbitrary dismissal or unlawful termination only to the two instances specified in Article 47 (1). The Court also found in that case that if arbitrary termination had been established by an employee, an employee would be entitled to compensation regardless of whether or not notice of termination was given.

 

In this case, the court cited an extract of a judgment of the Abu Dhabi Court of Cassation delivered in late 2022. The judgment of the Abu Dhabi Court of Cassation is important for two reasons. One, it recognised the intention of the drafters of the labour law to restrict arbitrary dismissal or unlawful termination to two instances specified in Article 47 (1). Second, it held that where either of the two circumstances are concerned, employees will be entitled to compensation even where the employer had given notice of termination. The relevant extract of this judgment referred to by the Dubai Court of First Instance is as follows:

 

The legislators, in the new law on regulating labour relations, restricted employees’ entitlement to fair compensation for arbitrary termination to two cases only, first, where the employer’s termination of the employee’s employment was due to the employee filing a serious complaint and termination was a result of the complaint. The court of first instance shall assess the seriousness of the complaint and whether a settlement took place or whether it was referred to court. The second is where termination was a result of the employee filing a case against the employee, of any type, provided its validity is proved from a procedural aspect without waiting for the outcome thereof.  The employee shall be entitled to compensation in both cases even if the employer abides by the obligation to give notice.

 

Significantly, the Dubai Court of First Instance, in this case, also opined that “[i]t is also settled that whoever claims that unlawful termination has occurred shall bear the burden of proving his claim, considering that he is claiming contrary to the general rule which provides that each use of a right is a legitimate use unless evidence to the contrary is established.”

 

Based on the above, it would appear that a claim for unlawful termination has now been restricted to a great extent as the courts have taken the position that termination can only be considered arbitrary where either of the two circumstances stipulated in Article 47 of the labour law are applicable. Furthermore, the burden of proof will be on the employee claiming unlawful termination.

 

What about the requirement for a “legitimate reason” under Article 43 (1)?

 

Unfortunately, the Dubai Court of First Instance did not provide any guidance on what constitutes a “legitimate reason” for termination with notice. However, the Dubai Court of First Instance made the following observation:

 

In relation to the prayer for notice pay, the labour law has stipulated provisions on termination of employment contracts in order to achieve a balance between the interests of the parties, by granting both the employee and the employer the right to terminate the contract subject to certain controls. Article 43 (1) of the labour law provides that either party to an employment contract may terminate the contract for any legitimate reason, provided the other party is notified in writing and provided the notice period is not less than 30 days and not more than 90 days. Article 43 (3) provides that the party that does not abide by the notice period shall pay to the other party the notice pay as compensation, even if the absence of notice does not cause damage to the other party. The compensation shall be equal to the employee’s salary for the full notice period or the remaining period thereof. (Emphasis added)

 

The reference to “certain controls” in the judgment could allude to the requirement that a termination should have a “legitimate reason” or, alternatively, the duty to give notice (or both).  However, where Article 43 (3) specifically stipulates a sanction for failing to comply with the notice requirement, there is nothing in the New Law that mandates any penalty where a termination is not for a “legitimate reason”. This indicates that the legislature has placed more emphasis on the notice obligation, and less emphasis on the requirement for a “legitimate reason”.

 

What does this mean for employers and employees?

 

It would still be unsafe to conclude that the UAE has adopted the concept of “employment-at-will”.  In certain jurisdictions, employers are able to terminate employees without cause, but that is not the case under the New Law. Employers are still required to base any termination on a “legitimate reason” and to give due notice in terms of the law and the contract of employment. However, it is clear that the New Law has brought about a greater balance to the employer-employee relationship as far as termination of employment is concerned. The labour law places a high burden on employers as far as termination without notice is concerned. But, when it comes to termination with notice, the position appears to be far less onerous for employers now. ■

Amendment to the UAE Federal Labour Law

Article 54 of the Labour Law (Federal Decree-Law 20 of 2023 on the regulations of labour relations, as amended) dealing with employment disputes has been amended to give greater powers to the Ministry of Human Resource and Emiratisation (the Ministry). The amended provision shall come into effect from 1 January 2024.

 

Authority to issue a decision

 

Under the Labour Law, in case of an employment dispute, before filing a case before the Court of First Instance, the employer or the employee is required to file an application to the Ministry. The Ministry is required to examine the application and take appropriate actions it deems necessary to amicably settle the dispute between the parties.

 

In case the parties fail to amicably settle a dispute, while earlier the Ministry was required to refer the matter to the courts (i.e., the Court of First Instance), now the Ministry has been given powers to decide a dispute with a final decision:

 

i.  if the claim amount in the dispute is less than AED 50,000; or

 

ii. where a dispute relates to failure by either party to comply with an amicable settlement decision previously issued by the Ministry (irrespective of the claim amount).

 

The party in whose favour the Ministry has issued its decision can directly proceed with execution (a mechanism for enforcement of a decision) of the said decision as per the rules of execution under the UAE Civil Procedure Law.

 

The requirement to file an application to the Ministry is not applicable to free zone companies (employers) and its employees wherein an aggrieved party is required by the relevant free zone authority’s rules to first approach the free zone authority instead of the Ministry. Although a free zone employer/employee is still required to approach the Ministry in order to obtain a referral letter to the court (stating that the employee can file a case before the court), the Ministry does not look into the substance of the dispute and its role is just to issue the referral letter. It will be interesting to see if the applicability of these provisions will also be extended to apply to disputes between free zone companies (employers) and its employees.

 

Right to file the claim before the Court of Appeal

 

Within 15 working days from the date of notification of the Ministry’s decision, either party may file a case directly before the Court of Appeal (and not the Court of First Instance). The Court of Appeal shall set a date for hearing within three working days and issue its decision within 15 working days from the date of starting the proceedings before the Court of Appeal. The decision of the Court of Appeal shall be final.

 

If proceedings have commenced before the Court of Appeal, there will be a stay on the execution of the decision issued by the Ministry.

 

Failure to Amicably Settle a Dispute or Claim Amount of more than AED 50,000

 

If the parties fail to amicably settle a dispute (within the timeframe provided under the law) and if the claim amount in the dispute is more than AED 50,000, the Ministry shall refer the dispute to the competent court (i.e., the Court of First Instance) together with a memorandum which shall include a summary of the dispute, the arguments of the parties and the Ministry’s recommendation. Within three working days from the date of receipt of the application from the aggrieved party, the competent court is required to set a date for the hearing and promptly decide on the dispute.

 

These are welcome amendments to the Labour Law which will result in quick resolution of disputes where the claim amount is low and will reduce the workload of the UAE Court of First Instance. ■

DIFC Courts to oversee disputes in all free zones?

A survey published by the Dubai Statistics Center has called for input from the public in what appears to be research relating to the application of ‘Common Law’ in all free zones in Dubai. The survey is not about the use of ‘Common Law’ in a general sense. Instead, the Dubai government is focused on integrating DIFC laws and giving jurisdiction to the DIFC Courts for overseeing civil and commercial disputes within the free zones.

 

The DIFC

 

The DIFC is governed by its own body of laws with an independent judicial authority, the DIFC Courts. The DIFC Courts currently have jurisdiction to hear disputes in connection with an entity established in the DIFC, disputes which are connected to the DIFC or disputes in which the parties have agreed to the jurisdiction of the DIFC Courts.

 

The rules of procedure in the DIFC Courts largely follow the Civil Procedure Rules followed by the English courts. The DIFC Courts apply DIFC laws in disputes before it, unless there is an agreement to the contrary. DIFC laws are largely a codification of English common law. The DIFC Courts can also apply any other law agreed among the parties to the dispute, such as UAE law.

 

Under the current legal framework in Dubai, unless a free zone company agrees to resolve its dispute through arbitration or through the DIFC Courts, all disputes will have to be referred to the on-shore Dubai Courts. The on-shore Dubai Courts operate under a civil law system and apply UAE laws by default. Proceedings before the Dubai Courts are conducted exclusively in Arabic, whereas in the DIFC Courts they are conducted in English.

 

The Survey

 

The survey published by the Dubai Statistics Center appears to suggest that the Dubai government is considering two possible means by which the jurisdiction of the DIFC Courts and the laws of the DIFC may be extended to all free zones in Dubai: a hybrid system and a standalone system.

 

a) Hybrid System: DIFC Courts having jurisdiction with UAE laws as default

 

Under this framework, the DIFC Courts would be responsible for overseeing civil and commercial disputes within the free zone. UAE laws will be applicable by default to the dispute. However, for matters concerning litigation procedures and evidentiary rules, the DIFC laws will take precedence. This means that while disputes will be adjudicated by the DIFC Courts, the foundational laws of the UAE would influence and guide the decisions in court cases.

 

b) Standalone System: Extended jurisdiction of DIFC to selected free zones

 

In this setup, the entire legal framework of DIFC’s civil and commercial laws (excluding licensing regulations) would extend to the selected free zone. This would mean that companies in these zones will function entirely under DIFC laws and regulations (e.g. company law, bankruptcy law, employment law, etc.), with the DIFC Courts handling all respective disputes.

 

Outcomes

 

As noted above, if the Hybrid System is implemented, the DIFC Courts will have jurisdiction over any entity in any free zone in Dubai without the need for agreement among the disputing parties to submit to the jurisdiction of the DIFC Courts. However, the DIFC Courts will only apply UAE law (and not DIFC law) unless there is an agreement among the parties to apply a specific different law. In other words, the lex fori (the law of the Court) would be common law.

 

Under the Standalone System, the DIFC Courts will, in addition to having jurisdiction over disputes concerning other free zone entities, also apply DIFC Laws by default. In effect, this system will determine disputes under common law, through a common law process of court (lex fori and lex loci). It is unclear whether a non-DIFC free zone entity engaged in financial services will be subject to the supervision of the Dubai Financial Services Authority in the same manner that applies to DIFC entities. ■

DFSA Decision Notices not Findings of Fact in the DIFC Courts

The DIFC Courts have recently confirmed that Decision Notices issued by the Dubai Financial Services Authority (DFSA) are not binding on the Court as findings of fact.

 

Decision Notices

Under Article 116(2) of the Regulatory Law 2004 (as amended), the DFSA may publish, in such form and manner as it regards appropriate, information and statements relating to decisions of the DFSA, the Financial Markets Tribunal and the DIFC Court, sanctions, and any other matters which the DFSA considers relevant to the conduct of affairs in the DIFC. These include Decision Notices issued under Article 5 of Schedule 3 of the Regulatory Law in respect of Authorised Individuals who are defined as individuals who have been authorised by the DFSA to perform one or more Licensed Functions for an Authorised Firm.

 

The DIFC Claim

In the Court of First Instance case of [2018] DIFC CFI 080, the Claimant initiated proceedings against the Defendant, alleging, among other claims, that the Defendant had misappropriated funds invested by the Claimant in connection with a DFSA Authorised Firm (the Relevant Entity).

 

The Claimant sought to rely on a Decision Notice issued against the Defendant by the DFSA (and unconnected to the DIFC Claim) which referred to a series of misdoings on the part of those engaged in the business of the Relevant Entity and failures to abide by the DFSA Rules and Regulations which applied to financial advisers and investment managers as well as the Defendant’s personal responsibility for breaches.

 

The Defendant contested the admissibility and relevance of the Decision Notice in respect of the DIFC Claim.

 

The Judgment

Issuing the judgment consequent to trial, Justice Sir Jeremy Cooke held, among other things, that:
• the DFSA proceedings were “adversarial” and “disciplinary” in nature; and
• the “conclusions reached by others cannot bind [the DIFC] Court, absent the application of res judicata or specific exceptions to the rule in Hollington v Hewthorn which is binding on English Courts”.

 

The Court also referred to the English cases of Conlon and another v Simms [2006] EWCA Civ 1749 and Three Rivers DC v Bank of England (No.3) [2001] UKHL 16, [2003]2 AC 1 in support of its conclusions and confirmed that the principles set out in those cases “reflect the law of the DIFC” and apply in relation to Decision Notices issued by the DFSA.

 

Conclusion

The case is an important precedent from the DIFC Courts which considers the evidential burden to be met in establishing a claim. It also provides individuals against whom Decision Notices are issued by the DFSA an opportunity to defend themselves in claims brought against them based on the merits of each case.

However, it remains to be seen whether the DIFC Courts would take a different view if the findings in a DFSA Decision Notice directly related to a specific claim in the DIFC Courts, and were properly substantiated by direct witness evidence in relation to the Decision Notice. ■

Recent Amendments to the Arbitration Law

The UAE recently enacted Federal Decree Law 15 of 2023 (the Amendment) making certain changes to the provisions of the law governing arbitration, Federal Law 6 of 2018 (the Arbitration Law). These changes are consistent with the UAE’s forward-looking approach to arbitration. Some of the key amendments are highlighted below.

 

 

An individual who is a member of the administration of an arbitration institution may now act as an arbitrator subject to certain safeguards

 

The Amendment relaxes the outright prohibition contained in Article 10 (2) of the Arbitration Law against a member of the administrative branch of an arbitration institution from acting as an arbitrator. However, this is subject to eight conditions which must be satisfied, the contravention of which would result in the award becoming invalid. This change paves the way for the UAE to attract highly skilled professionals to contribute to the administration of arbitral institutions, who will not be prevented from sitting as an arbitrator in a UAE-seated arbitration.

 

Arbitration institutions are required to provide the necessary technological infrastructure

 

With the onset of COVID-19, the UAE was quick to adapt to virtual hearings for both litigation and arbitration. Since then, virtual arbitration hearings have become the norm rather than the exception. However, getting the necessary technological support in place prior to commencing hearings (including the virtual platforms and transcription services), could be a time-consuming and expensive process as the parties were required to engage third-party service providers. Article 28 (3) of the Arbitration Law, as amended, now requires arbitration institutions to provide the technology necessary to conduct arbitrations, in accordance with the standards and controls applicable in the UAE.

 

This should not only make matters more convenient for the parties (and hopefully less costly), but also enhances privacy and confidentiality by restricting the involvement of third parties in arbitration proceedings. The positive impact of this amendment will be augmented by the publication of guidelines for virtual hearings by arbitration institutions in the UAE that do not already have such rules in place.

 

Discretionary power of tribunals to determine the applicable rules of evidence now subject to party autonomy and public order

 

Article 33 (7) of the Arbitration Law, as amended, has modified the language so as to limit the discretionary power on arbitral tribunals to determine the applicable rules of evidence (where the rules of evidence that are applicable do not have provisions that are relevant). The amended provision indicates that parties would be able to agree to exclude such discretion from tribunals, enhancing party autonomy. Additionally, the exercise of this discretion is now subject to a public order proviso. Accordingly, a rule of evidence applied by a tribunal, in the exercise of its direction, must not be contradictory to the UAE’s public order. This proviso may apply in the context of admissibility of evidence. For instance, it could operate to bar the admissibility of evidence gathered by means which are deemed unlawful under the UAE law.

 

The provisions of the Arbitration Law will only apply to arbitrations seated in on-shore UAE. ■

New Commercial Transactions Law: Amendment to the Period of Limitation

The new commercial transactions law (Federal Decree Law 50/2022), which abrogated Federal Law 18/1993, has significantly reduced the period of limitation for initiating action relating to commercial transactions between ‘merchants’ from ten years to five years.

 

Application of the new commercial transactions law

The new commercial transactions law applies to merchants and all forms of commercial activities. The new commercial transactions law has broadened its ambit to include virtual commercial activities as well, i.e., commercial activities carried out by any person (even if the person is not a trader) through modern mediums of technology or in the technological sphere. The term ‘merchants’ is broadly defined and includes every person performing acts of commerce, and every company engaging in commercial activity in a form specified by Federal Decree Law 32/2021 on Commercial Companies.

 

The period of limitation

Under the now-repealed 1993 commercial transactions law, parties could bring actions relating to the commercial obligations of merchants within ten years from the breach of a contractual obligation (Old Period of Limitation). However, the new commercial transactions law prescribes that parties must initiate action within five years from the date the cause of action arises (New Period of Limitation). It is pertinent to note that the New Period of Limitation is shorter than the limitation period prescribed by the laws of England and Wales, which is six years from the date the cause of action arises.

 

What effect does the new limitation period have on a cause of action that arose before the new law?

An important question that would arise is, what would happen to those transactions where the cause of action arose prior to the effective date of the new commercial transactions law? The answer may be found in Articles 6 and 7 of the UAE Civil Code:

 

a) If the application of the New Period of Limitation would result in the expiry of a party’s right to commence action prior to the new commercial transactions law coming into force (2 January 2023), the Old Period of Limitation will be applied. For example, if the cause of action arose in 2014, in accordance with the Old Period of Limitation, the party would have the right to institute action until 2024. On the other hand, if the New Period of Limitation were to be applied, the party’s right would have lapsed in 2019 (prior to the new commercial transactions law coming into force). In such circumstances, the Old Period of Limitation will be applicable in order to prevent prejudice being caused to such party

 

b) If, on the effective date of the new commercial transactions law, the duration of a party’s right to commence action is longer than the New Period of Limitation, the duration of such right will be reduced in accordance with the New Period of Limitation. For instance, if on 2 January 2023, a party has the right to bring an action within eight years, such right will be reduced to five years.

 

c) If, on the effective date of the new commercial transactions law, a party has the right to commence an action within three years (shorter than the New Period of Limitation), the period of three years will continue to apply. ■

Executive Regulations concerning the UAE Consumer Protection Law

The UAE Cabinet recently issued Cabinet Decision 66 of 2023 (the Executive Regulations) concerning the executive regulations of the Federal Law 15 of 2020 on Consumer Protection (Consumer Protection Law). The Executive Regulations shall come into effect on 14 October 2023.

 

While the Consumer Protection Law previously laid down a broad framework for consumer protection in the UAE, the Executive Regulations appear to be not only a major step forward in the actual and practical implementation of this framework, but also cover additional elements of consumer rights, introduce a detailed mechanism for addressing consumer complaints, and impose heavy sanctions on suppliers. For example, an obligation has been imposed on suppliers to inform a consumer of any anticipated discount to be offered on a commodity, if such discount is expected to be offered within one week of the consumer’s purchase of the commodity.

 

It is pertinent to note that the definition of “Consumer” under the Consumer Protection Law does not differentiate between an individual and a company, and hence suppliers must be cautious to adhere to the applicable regulations while dealing with both: end-consumers utilizing the products/services for personal (non-commercial use) and also commercial consumers, obtaining products/services from suppliers for their business.

 

This inBrief sets out key features of the Executive Regulations.

 

Supplier’s accountability in e-commerce transactions

The Consumer Protection Law did not have much to offer in terms of consumer protection in relation to products or services availed through e-commerce platforms. Now, protection has been offered to consumers buying products online, by making the supplier responsible for any failure in the commodity offered by any third-party that uses the supplier’s platform for sale of such commodities.

 

This ensures greater accountability on e-commerce platforms while listing commodities for sale and may call for a back-end due diligence by the supplier on third party sellers before listing their products or services.

 

Detrimental conditions null and void

The Executive Regulations have detailed a list of terms and conditions, which may be considered detrimental to the consumers’ interests including, granting the supplier unilateral rights to amend or terminate contracts, obligating consumers to choose particular finance or insurance companies, etc. To offer further protection, the Executive Regulations clarify that such conditions will be null and void whether provided under any contract, invoice, documents or other manner relating to contracting with the consumer. This aims to protect consumers from falling prey to detrimental conditions imposed by suppliers with higher bargaining powers or detrimental conditions often included in the fine print of an invoice or terms and conditions while making a purchase.

 

Protection against misleading descriptions

While legislating misleading descriptions and advertisements of a commodity or service, the Executive Regulations define such descriptions and advertisements of commodities or services to be “deceptive” if they contain a misleading claim which creates a false or misleading impression to the consumer, including by way of deceptive trademarks, statements or logos. Moreover, the Executive Regulations prescribe a heavy fine of up to AED 250,000 for such misleading descriptions. This may be a significant measure to curb passing off of products having logos or trademarks of other manufacturers or brands.

 

Protection for children, the disabled and the elderly

The Executive Regulations go beyond the general disclosure requirements on packaging of commodities to specifically requiring suppliers to indicate the categories and age groups of consumers which may be susceptible to any risks upon using the commodity, in particular children, the disabled and the elderly.

 

Regulator’s power to counteract exorbitant price increases

A contingency measure has also been introduced under the Executive Regulations whereby the regulator has been given the power to take interim measures to curb exorbitant price increases (including by way of inflation). These measures include, among others, determination of prices of commodities and services, prohibitions on exports, and determination of quotes for sales.

 

Hefty Sanctions by the regulator

Hefty penalties and sanctions have been prescribed for any violation (by suppliers) of the Consumer Protection Law and/or the Executive Regulations. Penalties under the Executive Regulations range from a minimum of AED 50,000 to a maximum of AED 1 million. Under the Consumer Protection Law, penalty limits are higher with the possibility of imprisonment. Additionally, the regulator has the power to revoke the license of the supplier and order to strike off its name from the commercial registry.

 

Timeline for resolution of complaints

The Consumer Protection Law briefly touched upon the power of the regulator to receive consumer complaints and the Executive Regulations further describe the form in which a consumer complaint is to be submitted. There is no specified time period prescribed under the Executive Regulations (or the Consumer Protection Law) within which such complaints should be disposed of by the concerned regulatory authority. The regulatory authority is obligated to respond to the complainant depending on the nature of the complaint. ■

 

The Tax Benefits of using a UAE Free Zone Company as a Holding Company

UAE companies can offer significant tax benefits when used as holding companies in certain scenarios.

 

As an example, assume that an Italian limited liability company (“ItalianCo”) holds a 90% stake in a Moroccan operating subsidiary (“MoroccanCo”) and does not have a permanent establishment in Morocco. The ItalianCo is considering transferring its ownership in MoroccanCo to a wholly-owned holding entity located in the United Arab Emirates (“UAE HoldCo”).

 

Refer to the attached PDF for the full image of illustration

 

In this scenario, the ownership by a UAE free zone holding company (UAE HoldCo) of shares of a company that is established in another jurisdiction can be advantageous from a tax perspective, subject to the provisions of the applicable double taxation treaty. This is because in such holding of shares scenario, it is advantageous from a tax perspective (i.e. 0% tax rate on dividends, interest payments and capital gains received by the UAE HoldCo) for the UAE HoldCo to be a UAE free zone company, and specifically and according to the UAE Corporate Tax Law (Federal Decree Number 27 of 2022) (“CT Law”), for it to be a Qualifying Free Zone Person (with Qualifying Income).

 

The reasoning for the above is described below:

 

0% Tax Rate

 

Article 3 of the CT Law states:

 

“Corporate Tax shall be imposed on a Qualifying Free Zone Person at the following rates:

 

a.) 0% (zero percent) on Qualifying Income.

 

b.) 9% (nine percent) on Taxable Income that is not Qualifying Income under Article 18 of this Decree-Law and any decision issued by the Cabinet at the suggestion of the Minister in respect thereof.”

 

Hence the UAE HoldCo should be incorporated, firstly, as a Qualifying Free Zone Person (QFZP) that, secondly, should derive Qualifying Income to qualify for the 0% tax rate.  We review both of these requirements in turn below.

 

Qualifying Free Zone Person

 

To be a Qualifying Free Zone Person, the provisions of Article 18 of the CT Law must be satisfied which state:

 

“Qualifying Free Zone Person

 

1. A Qualifying Free Zone Person is a Free Zone Person that meets all of the following conditions:

 

a) Maintains adequate substance in the State.

 

b) Derives Qualifying Income as specified in a decision issued by the Cabinet at the suggestion of the Minister.

 

c) Has not elected to be subject to Corporate Tax under Article 19 of this Decree-Law.

 

d) Complies with Articles 34 and 55 of this Decree-Law. [our note: Article 34 of the CT Law relates to Requirement of Arm’s Length Principle as between Related Parties) and Article 55 of the CT Law relates to Compliance with Transfer Pricing with Related Persons or Connected Persons of the CT Law].

 

e) Meets any other conditions as may be prescribed by the Minister.”

 

Accordingly, the definition of QFZP must also be satisfied by UAE Holdco as a Free Zone Person (a juridical person incorporated, established or otherwise registered in a UAE Free Zone). The most important practical component of the above definition is the deriving of Qualifying Income.

 

Qualifying Income

 

Qualifying Income is defined as follows in Cabinet Decision 55 of 2023 (“Cabinet Decision 55”):

 

“Article 3 – Qualifying Income.  

 

1. For the purposes of application of Article (18) of the Corporate Tax Law, Qualifying Income of the Qualifying Free Zone Person shall include the below categories of income, provided that such income is not attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment in accordance with Article (5) of this Decision or to the ownership or exploitation of immovable property in accordance with Article (6) of this Decision:

 

(b) Income derived from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities that are not Excluded Activities …”

 

Accordingly, and pursuant to Article 3(1)(b) of Cabinet Decision 55, Qualifying Income of UAE HoldCo (as a QFZP) shall include income derived from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities that are not Excluded Activities (which should not be attributed to a Domestic Permanent Establishment, a Foreign Permanent Establishment or to the ownership or exploitation of immovable property).

 

As a result, income derived from UAE HoldCo’s ownership of MoroccanCo’s shares is Qualifying Income because it is income derived from transactions with MoroccanCo as a Non-Free Zone Person in respect of the Qualifying Activities of holding of shares of the MorrocanCo. Qualifying Activities are defined in Ministerial Decision No. 139 of 2023 (“Ministerial Decision 139”) as including the “holding of shares and other securities”.

 

Excluded Activities

 

As discussed, such Qualifying Activities should not be Excluded Activities, pursuant to Article 3(1)(b) of Cabinet Decision 55. Article 3 of Ministerial Decision 139 defines Excluded Activities to include activities related to (subject to certain exceptions) transactions with natural persons, banking activities that are subject to regulatory oversight, insurance activities that are subject to regulatory oversight, ownership or exploitation of immovable property and ownership or exploitation of intellectual property assets.

 

The holding of the MorrocanCo shares by UAE HoldCo is none of the foregoing which means that it is not Excluded Activities.

 

Hence in summary, and based on the above, UAE Holdco should derive Qualifying Income because it conducts Qualifying Activities (holding of shares of MoroccanCo) which are not Excluded Activities, and such income should not be attributable to a Domestic Permanent Establishment, a Foreign Permanent Establishment or immovable property.

 

***

 

Such UAE CT Law tax benefits provide significant opportunities for using UAE free zone companies as holding companies for foreign shares in order to reduce applicable taxes (i.e. possibly to 0% tax rate on dividends, interest payments and capital gains received by the UAE HoldCo with respect to ownership of such foreign shares) that may have otherwise been much higher in the foreign jurisdiction. ■

 

Off-Plan Real Estate: Risks and Rewards

Dubai’s real estate market has experienced significant growth in prices in the past few years. The average sales prices for residential properties in Dubai increased by 12% between 2021 and 2022 to reach AED 1,203 per sq ft. This is expected to increase even more by the end of 2023. In this market, off-plan properties appear to be a more affordable option to many purchasers as compared to completed properties. For the end user, low first payments and attractive payment plans mean affordability. This has been an important factor in boosting the off-plan market in Dubai over the past few years.

 

However, it is critical that prospective buyers do their homework; conduct due diligence; engage a reputable lawyer who understands the off-plan market in Dubai and can protect their rights; and ensure that they purchase a quality off-plan investment.

 

While the Dubai Land Department (DLD) recorded 14,712 off-plan sales in Q2 2023, memories of the 2008/2009 market crash still loom large. As a result, it is important to be aware of applicable real estate laws.

 

Legal Protection

 

Off-plan real estate investment in Dubai is governed by a set of real estate laws and regulations aimed at protecting buyers’ interest, the most important of which are discussed below.

 

The Interim Registration law (Law 13 of 2008 (as amended)) requires all sales (and all other disposals) of off-plan units to be registered on the interim real estate register maintained by the DLD. If a sale is not registered, it is considered null and void.

 

The Interim Registration law also governs the developer’s right to terminate a sale contract for an off-plan unit in the event that the buyer defaults, and sets out (i) the termination procedure to be followed; and (ii) the monies that may be retained by the developer in the event of termination which is linked to the percentage of completion of the off-plan unit as follows:

 

  • if the percentage of completion of the unit exceeds 80%, the developer may retain up to 40% of the price of the unit specified in the off-plan sale contract;

 

  • if the percentage of completion of the unit is between 60% and 80%, the developer may retain up to 40% of the price of the unit specified in the off-plan sale contract;

 

  • if the developer has commenced construction work on the project pursuant to the designs approved by the competent authorities and the percentage of completion of the real estate unit is less than 60%, the developer may retain up to 25% of the price of the real estate unit specified in the off-plan sale contract; and

 

  • if the developer has not commenced the execution of the project for reasons beyond his control and without negligence on his part, the developer must refund all purchase price amounts paid by the buyer.

 

Furthermore, the Trust Account law (Law 8 of 2007) protects buyers by requiring developers selling off-plan units to be registered with the Real Estate Regulatory Agency (RERA), and to deposit all amounts paid by purchasers into an escrow account with an escrow agent (bank) accredited by the DLD. The amounts deposited in the escrow account are exclusively allocated for the purposes related to the development of the particular real estate project (and directly related activities) and may only be withdrawn by the developer on application to RERA in accordance with the law.

 

Although off-plan buyers can take comfort in the protections afforded by the legislation described above, we recommend that purchasers check that:

 

  • the real estate project is registered with RERA;

 

  • there is an escrow account for the real estate project;

 

  • the percentage of completion of the real estate project and the expected date of completion;

 

  • the developer is registered with RERA;

 

  • the developer owns the land or there is a development agreement between the owner and the developer; and

 

  • the developer has the required permits and approvals from the DLD and RERA to sell units off-plan in that particular real estate project.

 

Dubai on the Rise

 

Dubai’s off-plan real estate laws and regulations serve to increase investor confidence and attract more foreign investment.

 

With respect to the market, there are attractive deals to be had from developers in Dubai today and off- plan enquiries remain high. However, today’s off-plan buyers should shop around and choose a quality product that will deliver long term sustainable returns, or provide a stable, affordable home.

 

Dubai remains a very attractive proposition for domestic and international investors alike with globally high rental yields and reasonable prices per square foot. Dubai itself continues to attract hard working and entrepreneurial people from across the world and the prospects of the market are very bright as more people choose to settle and live in the UAE. There is much to be positive about regarding the future of the Dubai property market and the off-plan sector will continue to play a big role in such market. ■

UAE: New End of Service Benefits Scheme for Employees in the Private Sector

The UAE Cabinet recently approved a scheme for the establishment of savings and investment funds for employees primarily in the private sector (including free zones). This scheme is an alternative to the current system of payment of end-of-service benefits (gratuity) to an employee at the end of his employment.

 

Participation in the scheme will be optional for employers. Under this scheme, the participating employer will be required to make a monthly contribution to the selected fund.

 

The funds will be supervised by the UAE Securities and Commodities Authority in coordination with the Ministry of Human Resources and Emiratization.

 

The scheme is likely to have three investments options: (i) risk-free investment option (which will maintain the capital), (ii) low, medium or high risk-based investment options; and (iii) sharia-complaint investment option.

 

An employee will be entitled to receive his savings (contributions made by the employer) and returns on investments (as per the investment option selected) at the end of his employment. If employment has been terminated, it is likely that an employee will have the option to continue with the fund (without additional contribution from the previous employer) by not withdrawing his savings and returns.

 

Participating employers will not be required to pay end-of-service gratuity to the employees at the end of their employment. However, other benefits such as return ticket/air fare, payment of unused annual leaves and other contractual benefits will still be required to be paid by the employers at the end of an employee’s employment.

 

Additionally, employers are currently not required to make a provision in their accounting books for their end-of-service benefits liability. End-of-service benefits are only due and payable to an employee at the end of his employment. In case an employer is in financial difficulties, such an employer is often unable to make payment of the end of service benefits to its employees. However, under the new scheme, employers will be required to make monthly contribution. Even if an employer is facing financial difficulties, if the said employer has already made monthly contributions, at least certain part of the end-of-service benefits of its employees will be protected.

 

There is currently no similar scheme in the UAE except for the pension scheme that is only applicable to GCC national employees and the DIFC Employee Workplace Savings Scheme (DEWS).

 

Detailed legislation regarding the scheme and its implementation is expected in due course. ■