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Under the now-repealed 1993 commercial transactions law, parties could bring actions relating to the commercial obligations of merchants within ten years from the breach of a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. ■


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. ■

Private Equity in the United Arab Emirates: Market and Regulatory Overview

A Q&A guide to private equity law in the United Arab Emirates.


The Q&A gives a high level overview of the key practical issues including the level of activity and recent trends in the market; investment incentives for institutional and private investors; the mechanics involved in establishing a
private equity fund; equity and debt finance issues in a private equity transaction; issues surrounding buyouts and the relationship between the portfolio company’s managers and the private equity funds; management incentives; and exit routes from investments. Details on national private equity and venture capital associations are also included.

ESG in the UAE: Has it arrived?

Over the past few years, the United Arab Emirates has witnessed an increase in awareness and significance of environmental, social and governance (ESG) issues. While businesses in the UAE have begun to acknowledge that conscious efforts towards ESG compliance is imperative for growth and longevity of their business, the question remains whether ESG compliance can truly be said to now form a part of the UAE compliance ecosystem.


ESG significance on the rise: Key Factors


M&A has been on a steady rise in the MENA region (with the UAE continuing to demonstrate resilience despite global headwinds). ESG compliance has become a point of concern for investors, who are frequently concerned to fully investigate and understand the nature and extent of ESG compliance by UAE targets.


In cases where such compliance can be successfully demonstrated, investors derive comfort regarding sustainable financial performance and the ability of the management to identify and account for long term business risks. On the other hand, a lack of transparency concerning ESG compliance often results in questions regarding the sustainability of the business and management’s lack of sensitivity to an issue that is increasingly important to investors and stakeholders.


As a consequence, ESG rating agencies are often engaged by potential investors for the purposes of conducting an ESG diligence which has led to the “ESG Score/Ratings” becoming increasingly significant in evaluating, and to an extent negotiating certain contours of an investment. In most cases, the ESG score/rating will have a direct impact on the valuation of a target.


Good-to-have or must-have: Where do we stand?


While the UAE business ecosystem awaits further and more granular regulation of ESG matters, the question arises whether UAE businesses should of their own initiative, take cognizance of an issue that is now at the core of many investment mandates. Improved capability of risk management, higher brand value, advantage over non-compliant competitors and potentially reduced business costs resulting in higher valuation are only a few of the factors that influence the decision-making process. ■

Emiratisation deadline for the private sector set at 30 June for 2023 half yearly targets

The Ministry of Human Resources and Emiratisation has announced 30 June 2023 as the deadline for private sector companies with 50 employees or more to achieve their half-yearly Emiratisation targets, set at 1% of skilled jobs. This is in addition to the 2% Emiratisation that companies should have achieved by the end of 2022.


Organizations that failed to meet the 2022 targets were subject to a fine of AED 6,000 a month or AED 72,000 a year for each Emirati national not hired as per the Emiratisation norms. Post June 2023, fines will be applied on non-compliant companies for not achieving the required half-yearly rate for 2023 as well as the 2022 targets. A penalty of AED 42,000 (on half yearly basis) will be applied for every Emirati national not hired as per the Emiratisation norms by 30 June 2023. The calculation is based on a penalty of AED 7,000 per month for 2023 and will increase by AED 1,000 annually for each year until 2026.


Please refer to our earlier inBrief, where we had provided an overview of the Emiratisation requirements, applicability thresholds and the consequences of non-compliance, for further details. ■

Corporate Tax: Threshold for “small business relief” set at AED 3 million or less

The UAE Ministry of Finance today issued a new ministerial decision providing the threshold for “Small Business Relief”. Accordingly, taxable persons that are resident persons can claim “Small Business Relief” pursuant to Article 21 of the Corporate Tax Law if their revenue in the relevant tax period is below AED 3 million for the taxable period. If however the revenue threshold of AED 3 million for each tax period is exceeded, the “Small Business Relief” will not be available. This means that a taxable person that generates revenue of AED 3 million or less for each taxable period may elect to be treated as not having derived any taxable income.


The AED 3 million revenue threshold will apply to tax periods starting on or after 1 June 2023 and subsequent periods ending on or before 31 December 2026. ■

Termination of a Commercial Agency Contract under the (New) Commercial Agency Law

The importance of the UAE as a trading and consumer goods hub resulted in a protective approach of the authorities towards distributors and franchisees. The UAE Federal Law No. 18 of 1981 on Commercial Agencies (Old Law) was drafted with the intent of protecting the interests of UAE nationals (and companies wholly owned by UAE nationals), and was protective towards the interests of registered commercial agencies. In the last few years, there has been a gradual shift away from such protectionist measures and this shift has now led to the issuance of a new Federal Law No. 3 of 2022 Regulating Commercial Agencies in December 2022 (New Law).


The New Law repeals the Old Law and will come into effect in June 2023. Kindly refer to our inBrief of 26 January for a snapshot of the key changes to the regime. In this inBrief, we focus on the termination of commercial agency contracts and disputes that may arise.


1 – Term and termination: Expiry or termination of a registered commercial agency has been the most contentious issue under the Old Law. The Old Law provided that the principal is not permitted to terminate or refuse to renew a commercial agency contract unless there is mutual consent of both parties or there is a fundamental reason justifying the termination. The term ‘fundamental reason’ was not defined and was determined by the court or the Commercial Agencies Committee (Committee) at their discretion. The New Law has proposed major amendments in this regard and provides that:


(a) Unless otherwise agreed between the parties, if the contract requires the agent to establish display buildings, commodity stores, or maintenance or repair facilities, there shall be a default contract term of five years.


(b) The commercial agency contract shall expire in any of the following cases:


  • upon expiry of the contract term unless renewed;


  • pursuant to the terms of the contract;


  • by mutual agreement of the principal and the agent; or


  • by court order.


The ability of the principal to terminate the contract in accordance with its terms or at expiry of the term is a deviation from the Old Law which had very restrictive termination provisions.


2 – How to terminate? The party intending to terminate the agency pursuant to the terms of the agency contract is required to:


(a) send a termination notice to the other party of their wish to early terminate the agency contract. Unless otherwise agreed in the agency contract, the notice period for the termination notice should be not less than one year notice prior to the effective date if termination or prior to the lapse of one half of the contract term, whichever is less. This requirement can be dispensed with if agreed by the parties; and


(b) either party may submit a detailed report prepared by a specialized professional body on the settlement of dues, guarantees of non-interruption of after-sales services, estimation of assets and expected damages, consequent to the termination.


In case of non-renewal of the contract, the party wishing to not renew the contract is required to notify the other of non-renewal one year before expiry of the term or before the lapse of one half of the term, which is less, unless the two parties agree otherwise.


3 – How to challenge termination: A party may challenge the termination notice before the Committee. The Committee is required to give its decision within 120 days from the date of the request. If it does not give its decision within this timeline, the challenge is deemed rejected. The ability to terminate / not renew and the strict timelines for resolution of the challenges to termination are very principal friendly. This is a major departure from the earlier regime which practically saw a timeline of four to six months for the Committee to issue its decision on such matters.


4 – Compensation on termination: The New Law lays down certain provisions relating to the compensation that may be claimed upon termination/expiry of the agency contract. The New Law permits the parties to agree to ‘no compensation’ provisions in the contract in the event the contract is terminated due to expiry of the contract term. This however appears only to relate to circumstances  where the contract terminates due to the expiry of the contract terms. In circumstances where the agency contract is terminated pursuant to the terms of the contract, the agent shall be entitled to compensation, if it proves that their legitimate activity has contributed to the achievement of visible and significant success of the products of the principal, has led to the promotion of such products or the increase in the number of customers and that the termination of the contract would deprive the agent of their lost profit.


5 – Commercial Agencies Committee: In line with the Old Law, the New Law also provides that disputes in relation to commercial agencies shall be referred to the Committee prior to being referred to Court. This however does not appear to be the case if the parties have agreed to arbitration. The New Law introduces a timeline of 120 days for the Committee to issue its decision. Failure to comply with the timeline grants the parties the right to approach courts within 60 days of lapse of the deadline.


6 – Arbitration: In a major departure from the Old Law, the New Law recognises the parties’ right to agree to arbitration. While the default seat of arbitration has been identified as ‘within the UAE’, the parties are free to agree on a different seat. Note however that this provision does not apply to agency contracts in respect of which a dispute is being heard before the Committee or the competent courts before the New Law is issued. Also, if a party initiates arbitration after the issuance of the Committee’s decision, the Committee’s decision shall be disregarded and have no effect or consequences. The effect of this is likely to be that the Committee could be circumvented by a party, if the agency contract contains an arbitration clause.


7 – Application of termination provisions to existing agencies: In order to protect the existing agencies, the provisions relating to termination due to expiry of term or termination in accordance with the contract terms shall apply to existing agency contracts only after two years from the effective date of the New Law. Further, in case of agencies that have been registered for the same agent for more than ten years or agencies in which the volume of the agent’s investment exceeds AED 100 million, such provisions shall only apply ten years after the New Law comes into effect in June 2023.


Further clarity is awaited on penalty provisions, release of certain activities from the requirement of being undertaken only through commercial agency and provisions relating to import of goods and services into the UAE during the period of dispute between the parties.


Overall, the New Law introduces much expected changes. The provisions on commissions and exclusivity have been retained and existing agents have been protected from termination for a specified time. This would soften the blow on the existing agents who enjoyed full protection and advantages under the Old Law. ■

Cross-Border Holding Companies: The New Normal

Holding companies are an important part of almost any deliberately planned corporate structure. By “holding company” we are referring to a legal entity whose primary, or possibly sole, function is to own other assets. They are important for asset protection, segregating lines of business or assets, limiting liability, tax planning and estate planning, among other things. This inBrief discusses the continued utility of holding companies against the backdrop of a heightened regulatory focus in recent years.


For those operating in higher tax jurisdictions like Canada, the United States, the UK and the EU, establishing holding companies in tax-preferential jurisdictions has been a popular strategy, as there were legitimate tax advantages available by doing so. Those tax advantages would have generally involved either accessing a benefit (reduced rates) under a tax treaty, or deferring the tax on income accumulated in the holding company.[1] There is a misconception that holding companies operate to conceal ownership or tax information from tax or law enforcement authorities or that they otherwise facilitate illegal activity, or that a taxpayer can simply decline to disclose foreign assets or holdings thereby shielding them from tax. While that may once have been true (perhaps before the internet era), it is not true now and has not been for many years.


There has also been a perception that holding companies have facilitated a practice known as profit-shifting: the practice of deliberately shifting revenue from being earned in a high tax jurisdiction where the substantial business actually takes place, to a company established in a low/no-tax jurisdiction where the business has little or no substantial economic activity. This was indeed a common and lawful practice and was usually not considered to be abusive.[2] Over the last seven to eight years, such arrangements have been recharacterized as abusive as a result of OECD initiatives in that regard, most notably what is known as the BEPS project (which stands for base erosion and profit shifting). The BEPS project is an OECD initiative that is aimed at promoting policy and legislative changes globally that are designed to increase tax revenues for OECD nations by combatting what they characterise as abusive practices.[3] The use of holding companies has been a major focus of the BEPS initiative and the holding company landscape has radically changed as a result.


The arrival of “economic substance” requirements in low/no-tax jurisdictions is perhaps the most important change, as such requirements have made prior profit-shifting practices difficult or infeasible. One of the action items under the BEPS project (Action 5)[4] is to deal with what the OECD has identified as “harmful tax practices”, which includes profit-shifting to low/no-tax jurisdictions. To prevent profit-shifting, low/no-tax jurisdictions were required to implement “economic substance” rules, which operate essentially as follows: if a company is foreign-owned and carries on activities that are typically associated with passive income (such as holding investments or IP, or acting as a regional headquarters, or offering passive financing, among other things), then such companies must demonstrate that they have adequate economic substance in the country of incorporation, failing which they will be fined and ultimately shut down. Adequate economic substance is demonstrated by having physical premises in the country, local full-time employees, local assets, local expenditures, a local bank account, and physically present local board and management activity.[5] Put another way, if the entity meets the economic substance test, it is no longer really a holding company in the traditional sense, it is simply an active company.


For an entity that solely carries on “holding” activities as narrowly defined in economic substance legislation and has no other function (acting as a region headquarters or owner of group intellectual property, for example), the level of economic substance required is significantly reduced. The economic substance rules (including the lesser requirements for pure holding entities) adopted into law are generally consistent across all conventionally popular low/no-tax jurisdictions, as they follow OECD guidance.[6]


The general expectation several years ago was that the BEPS initiatives would cause companies to move their assets and operations back to the higher tax jurisdictions in which the parent company or group was physically based, rather than seeking out the most tax-efficient location. Instead, the more common reaction was for companies to develop the required economic substance (genuine active business, full time employees, physical offices, etc.) in the low/no-tax jurisdictions, in order to continue to legitimately benefit from preferential tax regimes. The landscape has changed so that companies in tax-preferential jurisdictions are only useful if they actually carry on an active business and meet the economic substance requirements, or, in the case of pure “holding” companies as defined in the legislation, they meet the reduced economic substance requirements. These developments have made offshoring more expensive than it used to be, but it is clearly still a worthwhile proposition for many businesses for which at least some of their active business can be conducted in preferential jurisdictions.


Another area in which holding companies have been affected by the BEPS initiative is with respect to eligibility for tax treaty benefits. Access to treaty benefits has been limited for holding companies, pursuant to BEPS Action 6 (Prevention of Tax Treaty Abuse).  Previously, a holding company established in a country with which Canada[7] has a tax treaty was treated as a resident of the treaty country and was therefore entitled to the treaty benefits. That typically means that payments to the holding company from Canadian entities or sources were subject to reduced withholding tax rates, and capital gains in the holding company could often be realised entirely tax free. It became popular to establish holding companies in treaty countries specifically to access the treaty benefits for a particular transaction or category of transaction and for no other reason; a practice viewed by the Canadian courts, incidentally, as consistent with the purpose of the treaties, and not abusive.[8] As was the case with profit-shifting, the use of a mere holding entity without adequate economic substance whose purpose was primarily to access a tax benefit was recharacterised as abusive pursuant to BEPS Action 6. The OECD addressed this form of “abuse” by introducing the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI), which has one primary effect: to amend existing tax treaties to deny the application of benefits under the treaties if “one of the principal purposes” of any arrangement was to access the treaty benefits.[9] The MLI is controversial as there is significant uncertainty around how the “principal purpose test” will be applied in practice.  Pending further clarity on this, the availability of treaty benefits will be uncertain in almost any circumstances, and any planning that relies on treaty benefits will be riskier. For further discussion of the potential conflicts and uncertainty caused by the MLI in Canada, please see our earlier inBrief here:  Tax Minimization is Every Canadian’s Right:  Supreme Court of Canada.


To recap, holding companies have been the focus of global tax reforms, resulting in the advent of economic substance requirements in low/no-tax jurisdictions, and the introduction of the MLI which is aimed at preventing “treaty shopping”.  Today, as a result, foreign-owned companies established in low/no-tax jurisdictions are only beneficial from a tax perspective if they can demonstrate the required economic substance through people, premises, assets, and expenditures.  Passive holding companies with no local presence in such jurisdictions are no longer viable, and while it is open to debate, it is generally acknowledged that this is a positive step towards global tax fairness.


There remain many situations in which a holding entity is necessary as part of a corporate or family wealth structure where no tax advantage is being sought or realised, and as such, they should arguably not be subject to the same economic substance requirements as holding companies which do result in tax advantages. For example, it is often advisable for a family trust to establish one or more holding companies that are owned by the trust and which are useful for legitimate asset protection, segregation and management.  Such holding entities also enable the adoption of bespoke family governance mechanisms at the holding company level through the use of shareholders’ agreements, board structures, and a family charter, for instance. If the trust has been established in a tax-effective manner (e.g., if the trust assets originated from persons resident in a tax-preferential jurisdiction, and depending on the domestic tax treatment of its beneficiaries), the purpose of the holding company would likely not be tax-driven beyond simply a wish to avoid making the position worse. However, in the current landscape, the addition of a holding company under the trust can have negative consequences, even though such consequences do not arise for the trust itself.  These sorts of holding companies have been caught in the crossfire, so to speak.  Where the trust has EU or US beneficiaries, for example, the mere introduction of a holding company may trigger punitive sets of rules known as “controlled foreign affiliate” (or CFC) rules, where such rules would not have otherwise applied if the trust held the assets directly, even though the use of a holding company provides no tax advantage to the trust.[10]


A potential solution in the above example of a trust that requires a holding vehicle for non-tax reasons is the use of tax-transparent “flow through” entities, such as limited partnerships and certain limited liability companies. Such entities are typically established in high-tax jurisdictions like Canada and the United States, where economic substance rules have not been adopted. Generally speaking, such entities allow for a tax-neutral result while interposing a layer of segregation, management and control, and a limitation of liability, and can therefore often present an effective alternative to conventional offshore holding vehicles.[11]


Cross-border tax planning has always been complex, and the rapidly changing environment has only made it more so.  It is essential to obtain fact-specific professional advice before implementing any such planning.  Please contact us if you wish to explore whether international planning for yourself, your business, or your estate can be beneficial for you. ■


[1] The deferral advantages have not been available for several years in most jurisdictions due to comprehensive domestic legislation in every high-tax country, and the treaty advantages are quickly disappearing as a result of the BEPS initiative (discussed below).


[2] It was generally not an abusive practice because such practices were already very heavily monitored and regulated by domestic tax legislation which applies to interests in foreign entities, transfer pricing, thin capitalization, along with many anti-avoidance and attribution rules.


[3] More information about BEPS can be found here:


[4] The BEPS project consists of 15 separate “Actions”, each focused on a particular issue or category of issues.


[5] A physically present board is no longer achieved with a “fly in, meet, fly out” approach, as was the case (and continues to be) for purposes of the company’s “residency”.  A company may be tax resident in the country of incorporation but still not meet the economic substance tests.


[6] We note that some low/no-tax jurisdictions have not yet adopted economic substance legislation, such as Nevis or the Cook Islands, although most have.


[7] We are using Canada as an example, although the concept is applicable to many other countries.


[8] See Canada v. Alta Energy Luxembourg S.A.R.L, 2021 SCC 49.


[9] The list of signatories to the MLI can be found here:


[10] This is a general statement meant to illustrate the problem.  The rules are complex and there can be exceptions if there is adequate opportunity to plan at the outset, and each set of facts should be reviewed on their own merits.


[11] As noted, each specific set of facts should be reviewed on its own merits, and professional advice is essential in such planning.