Tag: Corporate and Commercial

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.

International Estate Administration for Canadian Executors

The administration of an estate can be a complex and intimidating process at the best of times.  If the estate in question has international components to it, the complexity increases and professional guidance will almost certainly be essential.  This article will provide an overview of some of the issues that arise in the context of estate administration with international elements, from the perspective of a Canadian executor or a Canadian beneficiary.

 

There are a number of things that can make an estate administration “international”.  These include:  foreign assets that form part of the estate; the existence of foreign beneficiaries; the non-Canadian domicile[1] of the deceased at the time of death or at the time of making his/her will; a foreign executor; or some combination of the foregoing.  When an estate has one or more of these characteristics, there are certain questions that need to be addressed.  The remainder of this article will be guided by these key questions and answers.

 

What laws apply to the estate?

 

As a starting point, movables in an estate are governed by the laws of domicile at the time of death, and immovables (real property and certain intangible assets) are governed by the laws of the place in which they are located.  The practical application of this concept can be much more complex than it appears at first blush, particularly if there is a will that was executed during an earlier stage of life when the deceased may have been domiciled elsewhere, or if the will only addresses part of the estate assets (partial intestacy), or where outcomes based on the laws of one country must be enforced in another country which may have its own administrative or substantive requirements. The issue of which country’s laws apply is very important, as it determines the scheme of distribution (on intestacy) or how the will will be applied and how it may be challenged (if there is a will). This includes spousal or dependant relief claims and other challenges to a will or intestate distribution. For example, if the deceased was found to be domiciled outside of Canada at the time of death, the Canadian (provincial) laws that give preferential rights to spouses and dependents would not apply.  The issue of domicile and determining whose laws apply is therefore central and must be considered as a first step.  Note that a Canadian court may still agree to take jurisdiction and issue a grant of probate for the estate even if the deceased was not domiciled in Canada, but whether this would be appropriate is a case by case decision based largely on where the deceased’s assets are located (more on issues of probate and asset location below).  The issue of which laws apply to which aspects of an international estate can be difficult and do not always have perfect solutions, particularly when the laws of multiple countries need to work together. The cooperative efforts of professional legal advisors in all relevant countries is usually a necessity in order to agree on how to achieve the best practical outcomes.

 

Where should you apply for probate?

 

Where to apply for the “original grant” of probate will be driven largely by which assets in the estate require probate in order to enable the executor to deal with them, and where those assets are located.  Assets that require probate are usually assets that are subject to a third party’s control or consent, like bank accounts (the bank), land (land registry), public company shares (the company or the relevant exchange).  As such, once an inventory of assets and their locations has been taken, inquiries should be made with the foreign third parties and authorities in order to confirm their particular requirements.  Those requirements will be one of the following:  a certified copy of the will; a fully attested copy of the will (possibly translated)[2]; a grant of probate in the jurisdiction of domicile; or, the original grant of probate submitted to the local courts to obtain a local court endorsement to enable local parties to rely on it; a local ancillary grant of probate (i.e., a fresh probate application in the local courts).  Which of these documents will be required in each instance will need to be confirmed with each relevant asset registry or authority.  Note that assets that do not require probate in Canada may require it in other jurisdictions.  If there is foreign real property to deal with, local probate will almost certainly be required (either re-sealing an original grant or issuing an ancillary grant locally).  Probate fees may therefore apply in more than one jurisdiction as well.

 

In most cases, obtaining the original grant of probate in the place of the deceased’s domicile at the time of death is advisable as that is normally where the majority of matters requiring administration emanate from.

 

In general, even if probate is not strictly required, it is often advisable for an executor to obtain a grant of probate anyway as it offers protection against claims against the executor.  In the context of an international estate administration this should be a material consideration for any executor.

 

Are there special tax issues with an international estate?

 

From the perspective of a Canadian executor that needs to distribute assets to foreign heirs, there are some additional tax compliance requirements.  Most importantly there is an obligation on the executor to withhold what is known as Part XIII withholding tax (referring to Part XIII of the Income Tax Act) of 25 percent, or less if reduced by a tax treaty between Canada and the other country.  If the distribution of assets consists of Canadian real property or amounts derived from it, the executor may also need to obtain a special clearance certificate from the CRA before making the distribution (a section 116 clearance certificate). Note  this  is  different  from  the  clearance  certificate  that  the  executor should obtain from the CRA to protect him/herself from liability for tax in respect of estate distributions in any event, even domestically[3].

 

For assets located in other jurisdictions, local advice will be required as to whether any tax liabilities or filing obligations are applicable in respect of such assets, such as estate tax (as in the United States) or transfer taxes or stamp duties or similar.

 

For a Canadian beneficiary that receives distributions from a foreign estate, there are generally no tax consequences of the receipt itself.  However, an information return may still need to be filed with the CRA[4].  If the distribution results in the Canadian owning foreign assets worth CAD 100,000 or more, this will give rise to an additional filing requirement with the CRA[5].  Note that if a Canadian resident owns (or acquires by inheritance) any foreign asset that generates income, that income will be taxable in Canada and will need to be declared going forward.

 

It is worth pointing out an opportunity for tax planning when a foreign benefactor wishes to leave an inheritance for a Canadian resident.  If the foreign benefactor is not a Canadian resident, and has not been a Canadian resident for the past 18 months prior to death[6], then they will be able to establish a trust in their will in a foreign jurisdiction (i.e., a low/no tax jurisdiction) using the inheritance.  The Canadian beneficiary(ies) can receive distributions from the trust tax free, forever.  The benefit of this structure is with respect to the income generated by the trust settlement, not the trust capital itself (which would not have been taxed in Canada in any event when transferred to the heirs).  The income generated by the trust can be accumulated, capitalized, and paid out to Canadian beneficiaries as capital on an ongoing basis, attracting no tax.

 

What should you do to plan your international estate in advance?

 

Having a well-planned estate will make its administration much easier on your executors, and will help to ensure your wishes are in fact carried out in the way you intended and not thwarted by unforeseen legal or administrative obstacles.  Some key elements of good planning that you may wish to consider are:

 

1. Keep your will(s) up to date as your assets grow or change in type, value or location, or your family (or other beneficiary) circumstances change, or as your country of residence changes.  An out of date will can result in unnecessary and entirely avoidable difficulties and a distribution of your estate in a manner you did not intend.

 

2. Have multiple wills where appropriate on a country by country basis, or sometimes by asset type, so they can be probated and administered locally, or so that probate can be avoided for some assets.  This can help to avoid the international attestation requirements, translation requirements, and international recognition or enforcement issues that can arise and which can be very time consuming.  If multiple wills are used, be sure they are drafted in express contemplation of one another and do not operate to invalidate the other(s).  Consider preparing an explanatory note to your executor regarding how the multiple wills are intended to operate, and what formalities are expected to be required to implement them so your executor does not need to struggle to work out your intentions.

 

3. Confirm whether you are subject to any forced heirship regime, as is the case for some EU nationals  (e.g. Germany, France),  and  Middle  Eastern  nationals  (e.g. Saudi Arabia, the UAE), and plan your estate with an awareness of which assets, if any, will be subject to the forced heirship regime.  You can plan your will(s) accordingly so as to avoid a conflict between your wishes and what is required by law, or, you may be able to plan to effectively exclude some or all of your assets from the regime.

 

4. Keep a document that will be easily located by your heirs upon your death which sets out what documents you have prepared (i.e. your wills and any instructional memos) and where they can be located, and the best lawyers or other professionals who were involved in their preparation or other estate planning.

 

5. Consider establishing a trust during your lifetime which can hold some of your assets in order to avoid the probate and estate administration issues that would otherwise arise.  Since ownership of the assets will have passed to the trust already, the only administration that is necessary is to provide the trustees with proof of death, whereupon the trustees will deal with the trust assets in whatever manner is provided in the trust deed.  This provides ease of administration, avoidance of probate (and probate fees), and immediate access to assets for your heirs (or limited or delayed or conditional access, according to what you had provided in the trust deed).  The use of trusts can dramatically ease the burden on your estate administrators.

 

International estate administration can be daunting.  The support of professionals who are experienced in dealing with international issues and who are part of a strong network of professionals in other jurisdictions is essential.  If you require assistance or have any questions about domestic or international estate administration issues, please do not hesitate to reach out to us. ■

 

 

[1] The term “domicile” is not always the same as “residence”, although they usually are the same.  Domicile requires a higher level of permanence, where one has their permanent home.  For many people the answer is obvious, but for recent immigrants or emigrants of Canada, or for people with significant residential ties in multiple countries, the determination of domicile can require further analysis.

[2] The attestation process typically consists of notarization in the place of origin, attestation by the Ministry of Foreign Affairs or equivalent, then finally attestation (or legalization) by the consulate or embassy of the country in which the document will be used.  This can be an onerous process for those unaccustomed to it.  Consideration should be given to the translation requirements in the local jurisdiction, which may include the necessity to use only licensed translators in that jurisdiction.  It is usually more efficient to have the translation done in the foreign jurisdiction.

[3] Such clearance certificates are required under section 159(2) of the Income Tax Act, as opposed to the section 116 clearance certificates for distributions of taxable Canadian property (mainly real property) to foreign beneficiaries.

[4] Form T1142 (Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust).

[5] Form T1135 (Foreign Income Verification Statement).

[6] Note the same tax-efficient offshore trust structure can be used during the life of the benefactor too, but they must have been non-resident for at least 5 years rather than 18 months.

Succession Planning for a Family Business

Planning for the succession of a family business is something that is too often delayed or addressed on an ad-hoc basis without a cohesive strategy.  Considering that the business is likely the most valuable asset in a business owner’s estate, and probably the most complex, it is very much worth the time and effort to develop and implement a plan for succession before life circumstances take these decisions out of your hands.  This article will provide an overview of some of the tools available for family business succession planning, with an emphasis on what is known as an estate freeze.  This article does not address the advantages and disadvantages of providing for the succession using a will, and focusses only on lifetime succession plans.

 

This article will assume the business is incorporated.  If it is not, it is possible to transfer an unincorporated business to a newly formed corporation on a tax-deferred basis, so achieving corporate form is not usually a major obstacle.

 

The simplest approach to succession is for the business owner to make a simple gift of some, or all shares in the company to the intended successors during his/her lifetime.  The gift approach keeps the shares out of the transferor’s will and is simple and has virtually no cost associated with execution, but has little other benefit associated with it.  It is the blunt instrument of wealth transfer.  There are drawbacks to this approach, such as the fact that the gift will be treated as disposition at fair market value for tax purposes and tax will be payable on any capital gain that is deemed to have been realized.  Also, the transferor would be giving up the value and control associated with the gifted shares, and there may be no way to backtrack once the gift is made.

 

Gifts can be made of only some of the shares, or new classes of shares can be created and issued to the successors in order to better customize their voting rights, participation in growth and entitlement to dividends. You may not wish to give your successors voting rights, or possibly even dividend entitlements, until you are prepared to exit from a leadership role in the company. In any scenario in which the company will have multiple shareholders, putting in place a shareholders’ agreement is strongly recommended in order to avoid conflict.  A shareholders’ agreement should give clarity on matters of company governance, board participation, exit rights, what happens if the company is to be sold, what happens on death of a shareholder, how dividends will be dealt with, any expected contributions to the company from the shareholders, key issues for which unanimous or super-majority voting may be required, and how disputes will be managed (among many other things).   In the family business context, a good shareholders’ agreement can act almost like a family constitution, and can be critical to both the business and family harmony.

 

One popular succession planning technique is the estate freeze.  An estate freeze is a restructuring of a corporation in which a business owner exchanges his/her shares in the company for preference shares that have a fixed redemption value and certain other specific attributes required by the CRA.  The fixed value is usually equal to the fair market value of the company at the time.  At the same time, common shares are issued to the intended successors.  The growth in the company from that point forward will accrue to the common shares only, not the preference shares, which remain at their fixed redemption value (and may or may not have dividend entitlements, as desired).  As such, the value of the business owner’s interest (the preference shares) is said to have been “frozen” as of the time of the freeze.  The share exchange is designed to occur on a rollover basis so that no taxable event is triggered, as the business owner has not actually extracted any remuneration from the corporation (just exchanged shares for shares).[1]  On death, or upon an earlier disposition of the preference shares, the business owner will realize a taxable capital gain on the value of the preference shares.  The estate freeze has several important advantages, which include:

 

  • The value of the business owner’s interest is frozen, so his/her tax exposure on death or disposition is known and will not increase (so this can be predictably insured against with life insurance, for instance);
  • The future growth in value of the company is transferred to the successors, and this “transfer” occurs without tax because the value of the common shares issued to the successors is close to zero at the time of issue (the present value of future growth potential is not taxed, under current CRA practices);
  • The lifetime capital gains exemption can be effectively multiplied among the successors, assuming the corporation’s shares qualify for the exemption (meaning the corporation meets certain Canadian ownership and Canadian business and asset requirements, qualifying it as a “qualified small business corporation”);
  • Income splitting among the successors is possible if their shares are entitled to dividends (and if certain attribution rules are avoided);
  • The successors are directly and personally invested in the continued success and growth of the business; and/or
  • The business owner gets to enjoy witnessing the successors benefitting during his/her lifetime as opposed to dealing with the succession in a will.

 

An estate freeze is very often structured using a trust to hold the growth shares (common shares) for the benefit of the successor family members, rather than issuing the common shares to the family members directly.  The trust then controls the shares subject to the terms of the trust instrument.  This can be very useful as it allows the trust to act as a conduit through which the family members’ respective interests in the underlying common shares is divided, and the nature of the division can continually change as needed.  For instance, the trust can distribute dividend income among the beneficiaries in a manner that is most tax efficient in view of the different income brackets of the beneficiaries (income splitting, but not during the lifetime of the settlor/freezor as the TOSI (tax on split income) rules would apply) and this can change from year to year, and can withhold benefits during periods when a beneficiary is subject to creditor claims (asset protection).  The use of a trust also allows the settlor/freezor to retain more control over how the shares will ultimately be distributed to beneficiaries, if indeed a distribution is intended at all, and to help protect the shares from potential spousal claims.  It may not be obvious at the time of the freeze which of the beneficiaries is the appropriate successor(s), which ones have an interest in the business, the aptitude for it, etc.  A trust allows for deferral of such decisions without deferring the economic transfer and crystallization of the tax benefits.  Essentially, the trust facilitates continued flexibility in decision making in ways that direct gifting or direct ownership does not.  As of the date of writing, the lifetime capital gains exemption can still be multiplied among the beneficiaries even when the growth shares are held through a trust.   A shareholders’ agreement should be put in place between the settlor/freezor and the trust.

 

There are many permutations on the estate freeze to accommodate a wide range of goals and circumstances.  For instance, as part of the share exchange that occurs, a settlor/freezor may also choose to take back low value, super-voting shares along with the fixed value preference shares, so that he/she maintains voting control during his/her lifetime.  These shares can be made to cease to carry such voting rights upon the settlor’s/freezor’s death so that control passes automatically to the family (or as provided in the shareholders’ agreement).  Another permutation is that the freeze can be structured in such a manner that only some of the future growth is transferred to successors (say, up to the amount of the lifetime capital gains exemption for each beneficiary, and no more), and the settlor/freezor retains the rest.  Or, the settlor/freezor can retain the ability to receive dividends or to take back some of the growth shares in what amounts to a partial unwinding of the freeze (aptly known as a “thaw”), if circumstances change.  This can be achieved by making the settlor/freezor a discretionary beneficiary of the trust.  It is also possible to execute a second freeze on an already frozen company, known as a refreeze, which may be advisable if the value of the company declines after the first freeze, or if the recipients of the growth shares themselves wish to freeze the value of those in favour yet further recipients (the next generation, for instance).  There are several other named permutations which are need not be addressed here, the point having been made that the estate freeze is an adaptable structure.

 

When structuring an estate freeze, particularly when using a trust, it is important to be very careful to structure it in a manner that adheres to the CRA’s guidance on acceptable estate freezes, and does not trigger any of the so-called attribution rules in the Income Tax Act, and it is therefore important to execute a freeze only with the guidance of professionals who focus on trusts and have experience with estate freezes.  The potential for inadvertent error is high, and the consequences of an error could be disastrous from a tax perspective (i.e., inadvertent attribution of all income and capital gains on trust property – being the common shares – back to the settlor/freezor, or the inadvertent application of the TOSI rules, or the inadvertent application of the corporate attribution rule).  When executed correctly, the structure is safe and is not controversial from a CRA perspective; hence its popularity.

 

An estate freeze should be viewed as a flexible, customizable way of transferring ownership, control and economic benefits (as much or as little of each as is desired over time) in a family business to the next generation, in a tax efficient manner and with the added benefit of the continued flexibility offered by the use of a trust.

 

There are further permutations on the estate freeze that can benefit from the use of foreign trust and/or corporate structures established in low/no tax jurisdictions.  For instance, foreign trusts can avoid being subject to the mandatory deemed disposition of all assets that applies to Canadian trusts every 21 years, and can therefore be made to last much longer than a Canadian trust, creating a much longer legacy.  If the trust/corporation is established in a jurisdiction with which Canada has a tax treaty, there are potential additional benefits with respect to capital gains realized by the trust/corporation (e.g., Barbados and the United Arab Emirates).  As always, planning with offshore trusts requires the assistance of professionals experienced in the area, as it is complex, but the advantages can be worth the additional planning in the right circumstances.  It is worth noting that the media’s unfortunate portrayal of “offshore” structures as illegal or immoral is misleading.  Such vehicles have always been, and they remain as of the date of the writing, entirely legitimate planning vehicles under Canadian law when used correctly.

 

The above presents a selective review of potential succession planning techniques relevant to a private or family business.  Within each option, there is large scope for customization according to individual needs and goals and family composition.  The terms of any shareholders’ agreement or trust instrument, or the rights attaching to any class of shares, can all be tailored to suit your specific circumstances.  While there are tried and true structures that provide good basic starting points, succession planning for a business is not a cookie cutter process and always benefits from bespoke professional guidance.

 

If you have any questions or wish to discuss any issues around family business succession, please do not hesitate to contact us. ■

 

 

[1] If a business owner does wish to extract cash from the company, a tax liability will be incurred on the payment of such amount.  It is often possible to extract such amount in the form of a capital gain.

 

UAE FDI: latest developments

Since our 4 July inBrief on the UAE permitting 100 per cent foreign ownership for certain activities, there have been some significant developments which we will discuss below.

 

List of Strategic Impact Activities

The UAE Cabinet has now issued a list of strategic impact activities and the rules for licensing companies that engage in any of the listed strategic impact activities.

 

Cabinet Decision 55 of 2021 on the Determination of the List of Strategic Impact Activities (the Cabinet Decision) identifies the following broad strategic impact activities:

 

  1. Security and defence activities and activities of a military nature.
  2. Banks, money exchange, finance companies, and insurance activities.
  3. Printing currencies.
  4. Telecommunications
  5. Hajj and Umrah services.
  6. Quran memorisation centres.
  7. Fisheries-related services.

 

For each activity, depending on its nature, a specific UAE authority has been identified as the regulatory authority. For example, the Ministry of Defence and the Ministry of Interior are the relevant regulatory authorities for the activities in the security and defence sector.

 

Each regulatory authority has been provided with a broad range of powers to determine the percentage of permitted foreign direct investment (FDI) and enact rules and conditions applicable to the strategic impact activities under the purview of the regulatory authority. This is with the exception of the fisheries-related services activity which is the only activity listed in the Cabinet Resolution which requires 100 per cent UAE national ownership.

 

An investor must submit an application to the local licensing authority (i.e., the Economic Department) of the Emirate in which such an investor wishes to conduct the desired activity. The local licensing authority will then submit an application to the appropriate regulatory authority.

 

The regulatory authority will consider the application and will then issue a decision either (i) approving the application and determining the percentage of the national contribution together with any conditions attached to such approval or; (ii) reject the application.

 

The regulatory authority will notify the local licensing authority of its decision and will then communicate the decision to the applicant and if permitted, implement such decision. The Cabinet Decision also provides certain timelines within which a local licensing authority and the relevant regulatory authority are required to process a complete application.

 

Abu Dhabi Department of Economic Development (Abu Dhabi DED)

Pursuant to the Cabinet Decision, the Abu Dhabi DED has issued Administrative Decision 320 of 2021 (Decision 320 of 2021) which contains a list of 85 strategic impact activities. These comprise of the actual activity descriptions which fall under the general descriptions of the strategic activities listed at numbers 1-7 above. Establishing a business in the Emirate of Abu Dhabi licensed to conduct one of these strategic impact activities will be governed by the process discussed above.

 

In addition to the issuance of a list of strategic impact activities, Decision 320 of 2021 also repeals Administrative Resolution 37 of 2021 concerning Activities available for Foreign Ownership. As such, Decision 320 of 2021 repeals the previous list of activities for which up to 100 per cent FDI was permitted. Decision 320 of 2021 instead provides that natural person(s) or entity(ies) are permitted to fully own or to own any percentage of companies to practice all commercial and industrial activities except for the strategic impact activities (emphasis added). This would suggest that the Abu Dhabi DED has now taken the position that all activities licensed by it, will now be permitted for foreign ownership with the exception of the activities which are designated as strategic impact activities. As such, it would appear that there will no longer be a specific list of such FDI activities similar to those that were contained in Administrative Resolution 37 of 2021.

 

Sharjah Economic Development Department (SEDD)

The SEDD has also published a list of approximately 1,200 activities for which up to 100 per cent foreign ownership is permitted together with a guide on foreign investment. At this time, we understand that (i) no specific conditions will be attached to a company in which foreign direct investment is permissible and; (ii) no additional fees will be imposed for the practice of an FDI activity. ■

 

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Afridi & Angell’s corporate department has extensive experience in advising on foreign direct investment and corporate restructuring matters. Should you have any questions, please contact the authors or your usual Afridi & Angell contact.

 

 

UBO registration: it’s time to comply or risk being penalised

The UAE has introduced new administrative sanctions on all entities that fail to comply with the requirements of Cabinet Decision 58 of 2020 concerning the Regulation of Real Beneficiary Procedures (Decision 58 of 2020).

 

Issued on 23 May 2021, Cabinet Decision 53 of 2021 (Decision 53 of 2021) empowers the Ministry of Economy and the relevant licensing authorities in the UAE to administer various penalties on violators of Decision 58 of 2020.

 

To provide our readers with a brief background, the UAE enacted Decision 58 of 2020 on 24 August 2020. The Decision places a number of obligations on all entities licensed to conduct business in the UAE (with the exception of those licensed in a financial free zone in the DIFC and the ADGM), including identifying, recording, submitting and maintaining details of the shareholder(s)/partner(s) (the Shareholders) and the real beneficiaries or the ultimate beneficial owner(s) (the UBO). Please refer to our October 2020 inBrief for further information on your obligations under Decision 58 of 2020.

 

Further to the issuance of Decision 58 of 2020, various licensing authorities in the UAE had issued a deadline of 30 June 2021 for all licensees to submit, amongst other things, details of their UBO and Shareholders. However, some authorities have issued different deadlines or none altogether.

 

We have set out below a summary of the key fines:

Under Decision 53 of 2021, entities that fail to create and maintain records of their UBO, will be issued a written notice in the first instance. If the entity does not rectify these failures, a fine of AED 50,000 will be imposed along with another notice to remedy the position within 30 days. If the entity fails to remedy its position within the 30-day period, the entity shall face a fine of AED 100,000 and the suspension of its licence for a minimum period of one year.

 

Entities that fail to create records of their Shareholder(s) will be issued a fine of AED 50,000 and will be given notice to remedy the position within 60 days. If the entity fails to remedy its position within the 60-day period, it shall face a fine of AED 100,000 and the suspension of its licence for a minimum period of one year.

 

A written notice will be sent to entities that fail to maintain the records of their Shareholder(s), after which a fine of AED 30,000, and a notice to rectify the failure within 15 days will be issued. If not rectified, it will result in a fine of AED 60,000 and a suspension of its licence for a minimum period of six months.

 

Similarly, entities that fail to submit the details of its UBO and its Shareholder(s) to licensing authorities, shall be issued a written notice in the first instance, and thereafter a fine of AED 15,000 will be issued along with a notice to rectify the non-compliance within 15 days. If the failure is not rectified after the second warning, a fine of AED 30,000 will be levied along with the suspension of the licensee’s licence for at least three months. On a practical level, we are aware of action being taken by the relevant licensing authorities to implement the provisions of Decision 53 of 2021, with notifications being sent to licensees that have not fulfilled these obligations.

 

Providing incorrect, incomplete, non-updated information or the omission of the information on the UBO as well as the manager(s) or nominee director(s), is subject to fines along with a suspension of licence. Such entities will be issued a written notice first. Thereafter, a fine between AED 10,000 to AED 20,000 will be levied on the second instance with a notice of 15 days to rectify the fault. A third recurrence will result in a fine of AED 20,000 to AED 40,000 and the suspension of licence for at least one month. At the same time, Decision 53 of 2021 states that the authorities or the Ministry shall also restrict the authority of the board of directors or managers of entities who have provided inaccurate, incomplete or non-updated information. We await to see how this will be implemented in practice.

 

Entities currently under liquidation or those which have been liquidated are also required to comply with the relevant provisions of Decision 58 of 2020. The liquidated entity (or entity under liquidation), or its liquidator, who fails to maintain the details of the UBO, the Shareholder(s), manager(s) and director(s) of such liquidated entity for a period of 5 years from the date of dissolution, shall firstly be issued with a written notice followed by a fine of AED 20,000 upon non-compliance and then a fine of AED 40,000 upon the third recurrence.

 

With these strict enforcement measures in place and the enactment of new legislation concerning anti-money laundering and economic substance, the UAE has affirmed its strong position to craft a robust legal framework to combat the modern-day economic and financial crimes. ■

 

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Afridi & Angell’s corporate department has extensive experience in advising on ultimate beneficial ownership obligations. Should you have any questions, please contact the authors or your usual Afridi & Angell contact.