Tag: Corporate and Commercial

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. ■

UAE Commercial Agencies Regime (2023)

The UAE commercial agency regime has been a central pillar of commerce since the issuance of UAE Federal Law 18 of 1981 (the 1981 Law). While piecemeal amendments to the 1981 Law have been introduced from time to time, the UAE government has now issued UAE Federal Law 3 of 2022 concerning commercial agencies (the New Agencies Law) which repeals and replaces the 1981 Law in its entirety.

 

The New Agencies Law represents a substantial modernisation of the 1981 Law and will no doubt contribute further to the development and expansion of the UAE economy and its integration into global commerce. This inBrief considers some of the salient issues concerning registration and termination of commercial agencies under the New Agencies Law.

 

Requirement for registration as a commercial agent

 

The New Agencies Law provides that the following shall be permitted to act as “commercial agents”:

 

– natural persons who are UAE nationals; or

 

– a body corporate that is wholly owned by:

 

(a) one or more natural persons who are UAE nationals; or

 

(b) a public company (subject to what is stated below).

 

A separate regime is contemplated for UAE incorporated public joint stock companies that are (or propose to be) registered as commercial agents under the New Agencies Law. Such companies may be registered as commercial agents notwithstanding that they do not have 100 per cent UAE national participation (but provided that UAE national participation is not less than 51 per cent) however, additional specific implementing regulations are contemplated.

 

In addition, the New Agencies Law provides that the UAE Federal Cabinet may, upon the recommendation of the Minister of Economy, permit an “international” business not owned by UAE nationals to promote and sell its own products in the UAE (and presumably to be registered as its own “commercial agent” in accordance with the New Agencies Law) provided that:

 

– there is no commercial agent registered for the relevant product(s) in the UAE; and

 

– there has not previously been a commercial agent registered for the relevant product(s) in the UAE.

 

The scope of this carveout for a foreign principal is anticipated to be supplemented by a decision of the UAE Federal Cabinet and we look forward to further clarity on what is no doubt going to be an issue of interest.

 

As with the 1981 Law, a written contract is required to be entered into and default jurisdiction for commercial agency disputes is reserved for the commercial agencies committee within the Ministry of Economy and subsequently the onshore courts of the UAE. However, the New Agencies Law allows for the parties to a commercial agency contract to provide for the resolution of disputes by arbitration. This is an important change to the 1981 Law which did not provide for such an alternative.

 

Expiry or termination of  registered commercial agencies

 

It is common knowledge that the 1981 Law provided substantial safeguards against termination to a registered commercial agent. The New Agencies Law provides that a commercial agency shall “expire” upon the expiry of the contractual term stated in the contract of commercial agency. The New Agencies Law also provides that a commercial agency contract may be terminated unilaterally by either principal or agent in accordance with the provisions of the commercial agency contract. Both of the foregoing concepts concerning expiry and termination are new and fundamentally change the previous position with respect to termination, as stated in the 1981 Law.

 

In addition, the New Agencies Law provides that a party wishing to terminate a commercial agency contract at the end of its term (i.e., a “non-renewal”) shall serve notice on the other party not less than either:

 

(a) one year prior to the expiry of the term of the underlying commercial agency contract; or

 

(b) prior to the lapse of half of the stated contractual term,

 

whichever of (a) and (b) is shorter.

 

Application of the New Agencies Law to existing commercial agencies

 

The New Agencies Law is stated to come into effect six months after the date of its publication in the Official Gazette. The New Agencies Law was published in the Official Gazette on 15 December 2022 and accordingly will come into effect in June 2023.

 

Notably however, the New Agencies Law provides that the stipulation concerning the expiry of a commercial agency (as summarised above in this inBrief) shall not immediately apply to commercial agency contracts in force at the time of the issuance of the New Agencies Law and shall only apply to such contracts after the lapse of two years of the date of application of the New Agencies Law (i.e., two years from June 2023). Equally importantly (and by way of exception to the two-year period above), where a commercial agency has been registered for a period of ten years or a commercial agent’s investment into the development of the relevant agency exceeds AED 100 million, the provisions of the New Agencies Law concerning expiry of a registered commercial agency shall only apply after the lapse of ten years from date of its application (i.e., ten years from June 2023) in relation to such agencies. Further implementing regulations concerning this carveout are contemplated in the New Agencies Law.

 

Key takeaways

 

As noted, the New Agencies Law represents a substantial modernisation of the 1981 Law. New provisions concerning the expiry and termination of registered commercial agency contracts have been introduced and will be very important in any negotiations concerning commercial agency contracts proposed to be entered into. A number of key provisions remain subject to further supplementary rules and legislation. As with all legislative updates, the application and enforcement of the New Agencies Law will determine the further development of the UAE commercial agencies regime. ■

Beneficial Ownership Registers for Ontario Corporations

As of 1 January 2023, all privately held corporations in Ontario must maintain a register of their beneficial owners, namely individuals who exercise “significant control” over these corporations. The changes were introduced as amendments to the Business Corporations Act (Ontario)[1] which were introduced in Bill 43 (Build Ontario Act, Budget Measures, 2021). In this note, we look at the implications of the new rules, both practically speaking and in the context of the global transparency movement.

 

Backdrop

 

Like other OECD countries, Canada is making efforts to tackle money laundering and abusive tax structures by enhancing the transparency of ownership and control of Canadian corporate entities. The relative ease of establishing corporations anonymously in Canada was highlighted by Transparency International in 2015. In 2019, federally registered private corporations were required to begin keeping a register of individuals with significant control, to be made available to certain tax and law enforcement authorities upon request. Several provinces have followed suit in respect of provincially incorporated entities, Ontario being most recent.  Importantly, the registries are not available to the public. The focus on beneficial ownership transparency in Canada and worldwide is being driven by OECD anti-money laundering and tax avoidance initiatives in recent years.[2] The establishment of beneficial ownership registers in particular reflects 2020 revisions and guidance to FATF Recommendations number 24 and number 25 (which relate to ensuring that accurate and up to date beneficial ownership information is available to appropriate authorities).

 

Ontario requirements

 

Under the new rules, a person with “significant control” is someone who is the registered or beneficial owner of, or who has direct or indirect control or direction over 25 per cent of the corporation’s shares by votes or value.    It also includes any individual who has any direct or indirect influence that if exercised would result in de facto control of the corporation as well as an individual whose circumstances meet the definition as set out in the regulations (not yet established). What is “direct or indirect control or direction over” shares, or “control in fact” are not defined but further guidance may be set out in the regulations; however, it is clear that joint ownership arrangements, ownership by family members, voting agreements and shareholders’ agreements and any comparable contractual arrangements will qualify.

 

The register must include names, birthdates, tax jurisdiction and a description of how the individual meets the definition of significant control. The corporation must ensure the register is kept up to date by taking steps to refresh the information in the register at least once every financial year. There are penalties (monetary and potential imprisonment) for directors and officers who knowingly allow the corporation to fail to maintain correct records and for shareholders who knowingly fail to provide accurate information in response to requests for information from the corporation. That is, Ontario corporations are required to request such information from their shareholders, and the shareholders are required to respond.

 

The register must be kept at the corporation’s registered office and be made available to requests from tax authorities, regulatory bodies and law enforcement.

 

It should be noted that no such similar requirements have been introduced in respect of partnerships or limited partnerships in Ontario as of the date of writing.

 

Are public registries next?

 

Although the new Ontario rules place a greater burden on corporations to ensure that they hold accurate records about their beneficial owners, the fact that such information must be available to authorities upon request is not a particularly novel concept given the existing powers of such authorities to require disclosure from corporations. Pragmatically speaking, the new rules can be viewed as somewhat cosmetic. A far more dramatic and controversial issue is whether such records will be required to be made available to the public (and the press), but it seems unlikely for now that this will occur in Ontario (or other Canadian provinces, with the possible exception of Quebec) without substantial further debate and the allocation of significant funding from the federal and/or provincial budgets.

 

The federal government had previously announced a publicly accessible beneficial ownership registry of federally registered corporations to be established by end of 2023. However, it has yet to announce any details of when and how this will occur or to allocate the required budgeted funding. In the intervening years the controversy around making such beneficial ownership registers public has grown, as doing so raises potentially serious privacy concerns and questions about whether making such information public carries benefits that outweigh those concerns (particularly when such information is already available to relevant tax and law enforcement authorities). The UK was the first to implement such a public registry, which continues to operate now. On the other hand, a recent landmark ruling of the Court of Justice of the European Union[3] invalidated a provision of the EU Anti-Money Laundering Directive guaranteeing public access to beneficial ownership information on the basis that such public access violated privacy rights. While it is far from certain, it may be that the Canadian government and many others around the world will reconsider the establishment of such a public registry for similar reasons.

 

The implementation of publicly accessible beneficial ownership registries in Canada remains controversial and, for now, not imminent in the near term.

 

–

[1] Implemented in sections 140.2, 140.3, 140.4 and 258.1 of the Business Corporations Act (Ontario).

 

[2] In particular the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes (transparency focused); the Financial Action Task Force (FATF) (anti-money laundering focused); and, a third major work stream, known as the base erosion and profit shifting (BEPS) initiative, which is led by the OECD Committee on Fiscal Affairs (tax avoidance focused).

 

[3] The full ruling can be found here:   https://curia.europa.eu/juris/document/document.jsf?text=&docid=268059&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=1291

The Economic Substance Test: directed and managed in the UAE

The UAE introduced the Economic Substance Regulations in April 2019 (later amended by Cabinet Resolution 57 of 2020 (ESR) and Ministerial Decision 100 of 2020).

 

The relatively new regulations have imposed a number of reporting requirements for virtually all private companies in the UAE. Despite this relative infancy, the Ministry of Finance has already started issuing heavy fines for companies which are not compliant with the regulations.

 

In applying these fines, the Ministry of Finance will apply the Economic Substance Test set out in Article 6 of the ESR. In essence, a company must demonstrate that:

 

(a) it conducts the necessary core income-generating activity within the UAE;
(b) the relevant activity is directed and managed in the UAE; and
(c) there is an adequate presence (employees, assets) within the UAE.

 

The regulations specifically require an entity to show that the relevant activity is “directed and managed” in the UAE. In order for a relevant activity to be “directed and managed” in the UAE, an adequate number of board meetings must be held and attended by directors in person in the UAE. The ESR does not specifically set out what would constitute an “adequate” number of board meetings for the purposes of the “directed and managed” limb. The only guidance provided is that what is adequate will depend on the relevant activity being carried on as well as the level of income earned by the company in question.

 

The Ministry of Finance has recently fined a company tens of thousands of dirhams for failing to meet the “directed and managed” test, apparently due to the lack of evidence of the company (a subsidiary of a larger group) holding substantial board meetings. It appears that “cosmetic” board meetings held in view of satisfying this test may not be sufficient to convince the Ministry of finance that a company was being directed and managed in the UAE.

 

A subsequent appeal on the issue was also rejected. Penalties for subsequent failings can be hundreds of thousands of dirhams.

 

In order to avoid such pitfalls, it is recommended that companies genuinely attempt to direct their businesses from within the UAE rather than becoming satellite holding companies for businesses conducted in other countries. The UAE Ministry of Finance is expected to increase their supervision on companies situated in the UAE as it becomes a global financial hub in line with international reporting standards. ■

Dubai Development Authority – Filing of audited financial statements

All entities (free zone limited liability companies and branch offices) registered under the jurisdiction of Dubai Development Authority (DDA) are required to file their most recent audited financial statements along with a summary sheet (to be generated through their AXS portal account) on or before 31 October 2022. Entities are required to make these filings through their respective AXS portal accounts.

 

The following notification can be seen on the AXS portal accounts of entities:[1]

 

“In compliance with the Private Companies Regulations of 2016, FZLLCs and branch offices are required to submit their most recent Audited Financial Statement along with the summary sheet (as per the DDA template) by or before 31st October 2022.”

 

Free zone limited liability companies incorporated under the jurisdiction of the DDA are required to maintain audited financial statements. As per our discussions with DDA representatives, branches of foreign companies may not be required to maintain separate audited financial statements if the accounts of such branches have been included in their parent companies’ audited financial statements.

 

As per the Private Companies Regulations of 2016, free zone limited liability companies were always required to file, with the DDA Registrar of Companies, audited financial statements. Branches of foreign companies were required to file annual returns which were filed in the jurisdiction of incorporation of the parent companies. The DDA, however, has only recently started to enforce these requirements.

 

Certain free zones of the UAE such as Jebel Ali Free Zone and Dubai Multi Commodities Centre already require entities established in such free zones to file their audited financial statements.

 

With the introduction of corporate tax and other laws to closely monitor the activities of entities established in the UAE, it is likely that other free zones in the UAE as well as UAE mainland licensing authorities will start requiring the filing of audited financial statements on an annual basis. ■

 

***

 

[1] We expect the DDA to circulate guidance/clarification on the requirements and/or changes to the deadlines in coming weeks. The DDA may send specific notification to entities depending on their financial year end.

UAE Economic Substance Requirements (ESR) – New Penalties imposed by the Federal Tax Authority

Last year we had reported that the Federal Tax Authority (the FTA) has started to impose penalties on entities that have failed to submit their economic substance notifications by the set deadline of 30 June 2020 for the financial period ended on 31 December 2019, and the economic substance reports by the set deadline of 31 December 2020 for the financial period ended on 31 December 2019.

 

The FTA has now started imposing penalties on entities that had conducted a relevant activity but failed to meet the economic substance test (for example, by failing to demonstrate that the relevant activity was directed and managed in the UAE) for the financial period ended on 31 December 2019. Pursuant to the Cabinet of Ministers Resolution 57 of 2020 concerning the Economic Substance Requirements (Decision), the FTA is imposing a penalty of AED 50,000 for failing to meet the economic substance test. If a licensee commits the same offence in the following year, the FTA can impose a penalty of AED 400,000.

 

Article 17 of the Decision provides that a licensee may appeal against a penalty by filing an appeal to the FTA.

 

A licensee conducting a relevant activity (as per the Decision) is annually required to file a notification within six months from the end of the relevant financial period, and an economic substance report within 12 months from the end of the relevant financial period.

 

For a licensee whose financial year ended on 31 December 2021, the deadline to file a notification is 30 June 2022, and the deadline to file an economic substance report will be 31 December 2022. The notification and/or the economic substance report is required to be filed on the Ministry of Finance’s portal:

(www.mof.gov.ae/en/StrategicPartnerships/Pages/ESR.aspx).

 

Additional information on Economic Substance Requirements can also be found on the Ministry of Finance’s website.

 

 

 

Shareholders’ rights in private and public companies in the United Arab Emirates

A Q&A multi-jurisdictional guide to shareholders’ rights in private and public companies law in the United Arab Emirates. This Q&A gives an overview of types of limited companies and shares, general shareholders’ rights, general meeting of shareholders (calling a general meeting; voting; shareholders’ rights relating to general meetings), shareholders’ rights against directors, shareholders’ rights against the company’s auditors, disclosure of information to shareholders, shareholders’ agreements, dividends, financing and share interests, share transfers and exit, material transactions, insolvency and corporate groups.