Tag: Corporate and Commercial

DMCC Company Regulations 2020: Keeping up with international best practices

The Dubai Multi Commodities Centre (DMCC) Authority has recently issued new company regulations (the Company Regulations 2020). The Company Regulations 2020 came into effect on 2 January 2020 and they repeal and replace the previous DMCC Company Regulations 2003 (DMCC Regulation No. 1 of 2003, as amended by DMCC Regulation No. 1 of 2007, DMCC Regulation No. 1 of 2009 and DMCC Regulation No. 1 of 2013) (the Previous Company Regulations).

 

The Company Regulations 2020 provide for more clarity and flexibility for businesses wishing to conduct business in and from the DMCC. Note that Company Regulations 2020 are also applicable to branches of foreign companies established in the DMCC.

 

The Company Regulations 2020 expressly state that the provisions of Federal Law No. 2 of 2015 Concerning Commercial Companies (i.e. the Federal Companies Law applicable to mainland/onshore entities) do not apply to any DMCC company or branch in DMCC.

 

Transition and Compliance Requirements for Existing DMCC Companies

 

The Company Regulations 2020 do not impose an obligation on existing DMCC companies to take active steps for compliance unless their existing Articles of Association (Articles) are contrary to or inconsistent with the Company Regulations 2020. The Company Regulations 2020 allow the DMCC Authority to establish transitional provisions to facilitate the transition from the Previous Company Regulations (and any rule, regulation, policy or decision made under the Previous Company Regulations) to the Company Regulations 2020.

 

To the extent that the Articles of a DMCC company are contrary to, or inconsistent with the Company Regulations 2020, such a company must amend the non-compliant provisions by 2 January 2022 (being 24 months from the date the Company Regulations 2020 came into effect).

 

Important Changes in the Company Regulations 2020:

 

We have set out below an overview of the key changes and updates introduced by the Company Regulations 2020:

 

Articles of Association

 

Companies in the DMCC will now have more flexibility when drafting and adopting Articles. Under the Company Regulations 2020, DMCC companies have the following options when it comes to adopting Articles:

 

1) to adopt the template Articles prescribed by the Dubai Multi Commodities Centre Authority (DMCCA) (the Standard DMCC Articles);

2) to amend clauses of the Standard DMCC Articles; or

3) to adopt their own version of the Articles – provided that they meet the requirements as set out in the Company Regulations 2020.

 

If a DMCC company decides to adopt its own bespoke Articles, it must provide the Registrar of Companies (the Registrar) with a legal opinion that the new Articles do not contain any provisions which are contrary to or inconsistent with the Company Regulations 2020.

 

Furthermore, if at any time, the Registrar notifies a DMCC company that the Articles contain a provision deemed contrary to or inconsistent with the Company Regulations 2020, the said DMCC company must amend its Articles within a specified time frame and in such manner as the Registrar may direct.

 

It is important to point out that the Previous Company Regulations permitted minor amendments to the Standard DMCC Articles. However, amending the Standard DMCC Articles was not very common and shareholders of a DMCC company would often, along with the Standard DMCC Articles, generally rely on a separate shareholders’ agreement.

 

The ability to adopt bespoke Articles  may not have any benefit to a wholly owned subsidiary however if the DMCC company is a joint venture between two or more unrelated parties, adoption of  bespoke Articles can provide parties with an additional source of protection to ensure that the contractual provisions agreed to in their shareholders’ agreement are honored.

 

Share Classes

 

Companies in the DMCC will have the option to structure their shareholdings in the way that best suits their requirements. The Previous Company Regulations only allowed one class of shares. Under the Companies Regulations 2020, a DMCC company may issue different types or classes of shares, provided that the rights of each type or class of shares is stipulated in the Articles of the company.

 

Up until now, if parties wanted to prescribe different rights to shares (and therefore have more than one class of shares) their only option in the UAE was to look to the incorporation of a company in the Dubai International Financial Centre or the Abu Dhabi Global Market.

 

Issuance of different classes of shares is very common in other developed jurisdictions. Moreover, it is particularly relevant for start-up companies, as they require the ability to issue different classes of shares to founders and investors during various stages of their growth. With DMCC attracting more and more start-up companies, this will definitely be viewed as a positive development.

 

Share Capital Requirements

 

The Company Regulations 2020 have removed the AED 50,000 minimum share capital requirement.  Under the Company Regulations 2020, the incorporator may decide the share capital which is sufficient for the activities which it wishes to undertake pursuant to its license issued by the DMCCA. However, the Registrar may, from time to time, specify a minimum amount of share capital.

 

Although the minimum share capital requirement has been removed, practically, we may still see companies in DMCC and/or the Registrar using AED 50,000 as the benchmark for the share capital requirement as is the case onshore in the UAE.

 

In making this change, the DMCC has followed many other free zones in the UAE, such as the Jebel Ali Free Zone, which originally had minimum share capital requirement(s) (depending on the type of company).

 

Dormant Companies

 

The Companies Regulations 2020 introduces the concept of dormant companies. A DMCC company may request the Registrar to suspend its license for a period of up to 12 months or longer (as approved by the Registrar). A company whose license has been suspended by the Registrar must not conduct any business under the suspended license until such time the suspended license is reactivated.

 

The Registrar or the DMCCA has the authority to issue additional rules in respect of dormant companies.

 

If there are cost benefits (e.g. waiver from requirement(s) to pay the license fee or lease office space in the DMCC during the suspended period), DMCC companies which are going through financial difficulties or restructuring may consider requesting the Registrar to suspend its license.

 

Officeholders and Corporate Governance

 

Section 9 of the Company Regulations 2020 address corporate governance standards for officeholders by clarifying the roles and responsibilities of the director(s), the manager and the secretary of a DMCC company. Further, the DMCCA has also published Officer Rules which the directors, the manager and the secretary of a company are required to comply with.

 

While the director(s) and the manager must be natural persons, the Company Regulations 2020 provide that the secretary need not be a natural person, thus permitting the appointment of corporate service providers as the secretary of a company.

 

Among the changes in the Company Regulations 2020 is the introduction of provisions expressly dealing with the appointment of the company’s manager and a detailed explanation of his/her functions. A manager (whose name is mentioned on the company’s license) is viewed as the face/primary contact of the company. Most businesses rely on its manager to carry out day-to-day operations. Recognising the role of a manager and his/her responsibilities is a welcome introduction in the Company Regulations 2020.

 

The Previous Company Regulations provided that a DMCC company can have a maximum of six directors. The Company Regulations 2020 are silent on the maximum number of directors and state that the business and affairs of a DMCC company must be managed by one or more directors. Thus, the Articles of a DMCC company will have flexibility to determine the maximum number of directors.

 

It should also be noted that the Company Regulations 2020 prohibit a DMCC company from providing financial assistance to a director.

 

Audited Accounts

 

Under the Previous Company Regulations, a DMCC company was required to submit the auditor’s signed and stamped financial statement summary sheet and audited financial statements within 90 days after the end of each financial year. Many companies were unable to comply with this timeframe. The Companies Regulations 2020 provide a more reasonable timeframe (six months) within which a company is required to submit audited financial statements to the DMCCA.

 

Winding up

 

The Company Regulations 2020 have introduced detailed provisions on the winding up of a DMCC company. These provisions include situations wherein the DMCC company is undergoing a solvent winding-up, summary winding-up, insolvent winding up, or involuntary winding-up.

 

Additionally, the Company Regulations 2020 specifically state that the provisions of the Federal Law 9 of 2016 (the Federal Bankruptcy Law) shall be applicable to DMCC companies.

 

Transfer of Domicile/Jurisdiction

 

The Company Regulations 2020 have introduced the concept of transfer of domicile/jurisdiction of incorporation of a foreign company (i.e. a non-DMCC company) into the DMCC and transfer of domicile/jurisdiction of incorporation of a DMCC company into another jurisdiction. The transfer of domicile/jurisdiction regulations exists in some of the other free zones of the UAE.

 

Any foreign company who wishes to be incorporated in the DMCC and wishes to be regulated by laws as applicable to companies in the DMCC, may wish to transfer its current jurisdiction of incorporation (provided the laws of the current jurisdiction permit the transfer of domicile) to the DMCC (as the new jurisdiction of incorporation).

 

Conclusion

 

The Company Regulations 2020 have therefore introduced some welcomed changes to the features of companies incorporated in the DMCC.  All clients which have companies in the DMCC should review the company’s Articles to ensure compliance with the Companies Regulations 2020 prior to the end of the transitional period. ■

Recent measures implemented by the UAE authorities in response to COVID-19

The UAE authorities have been dynamic in implementing measures to control the spread of COVID-19 within the UAE. Please find below a non-exhaustive list of noteworthy measures that have been implemented by various UAE authorities to date.

 

Preventive Guidelines 

 

UAE Ministry of Health and Prevention (MOH): MOH has set up guidelines on preventive measures, as well as contact centres for medical support or inquiries on the coronavirus at the Department of Health, MOH and the Dubai Health Authority (DHA).

 

Remote Working System

 

The Dubai Executive Council: On 15 March 2020, the Executive Council issued a letter to Dubai authorities on the implementation of a remote working system with effect from 17 March until further notice. This letter sets out rules (among others) on how services are to be handled or prioritized, the required percentage of employees to work remotely, the requirement for all government employees to abide by the standards and controls approved by the Dubai Electronic Security Centre and that any suspension of services must be announced publicly with prior coordination with the Government of Dubai Media Office.

 

In compliance with the letter, certain authorities have implemented the remote working system with others to follow suit shortly. The noteworthy authorities that have implemented the remote working system are:

 

1. Dubai Courts:

 

• As of 17 March 2020, the Case Management Department has closed all doors to the public. To prepare a case before the Dubai Courts, individuals must now contact the Case Management Department via a BOTIM app, phone call or email.

• Pursuant to Resolution 30 of 2020 issued by the Dubai Courts dated 17 March 2020, all court hearings before the Court of Cassation, Court of Appeal and Court of First Instance will be postponed, and issuance of certificates and personal status documents will be suspended, from 22 March 2020 to 16 April 2020. The Dubai Courts will however continue to hear temporary and urgent matters, as well as criminal cases and appeals that relate to detainees. Courts will no longer accept claims and applications unless they are submitted electronically.

 

2. DIFC Courts:

 

• The DIFC Court and Registry Offices have also closed its doors to the public from 17 March 2020 until 26 April 2020 (or pending further notice), and will operate on a (generally) completely remote basis. Inquiries, urgent queries and applications must be made by email or telephone.

• Generally, hearings before the Court of First Instance and the Small Claims Tribunal will be done via teleconference (unless agreed otherwise).

• The pro bono clinic, DIFC Court’s library and other rooms shall be temporarily closed.

• Probate appointments will be suspended until 26 April 2020 or pending further notice.

 

3. The Federal Authority for Identity and Citizenship: Smart services are set up so that certain applications can be done online (e.g., renewal of Emirates ID cards and existing UAE residence visas) to reduce the number of visitors.

 

Distance Learning

 

Knowledge and Human Development Authority (KHDA): Pursuant to a Circular issued by the KHDA dated 8 March 2020, no students are permitted on the school premises from 8 March 2020 to 4 April 2020. Schools are required to implement distance learning from 22 March 2020.

 

Restrictions or Temporary Suspension on Businesses 

 

Dubai Municipality (DM):

 

• The DM issued multiple circulars on 11 March 2020 requiring various businesses to increase the frequency of cleaning and disinfection, to ensure the availability of hand sanitizers and hand soap and to document all cleaning and disinfection operations and to list the disinfectants used. Such businesses include (among others): schools, salons, residential buildings, hotels, malls, gyms. Since then, the DM has issued further circulars specifically addressing salons, restaurants and food delivery service providers with restrictions on operations, such as permanently closing the waiting areas of salons and restaurants, and requiring food delivery service providers to register their food delivery and transportation with DM’s FOODWATCH platform.

• In conjunction with the Dubai Department of Economic Development (DDED), the DM imposed a shisha ban on cafes. As of 17 March 2020, DM has closed nine cafes for violating this ban.

 

DDED:

 

• Pursuant to a circular posted on a social media site of the Government of Dubai Media Office, the DDED temporarily suspended all cinemas, theme parks, game centres, massage parlours and spas until the end of March 2020.

• The DDED Consumer Protection Department has directed retailers to ensure that retailers sell detergent products and sanitizers at normal prices. To date, it has inspected 203 commercial outlets, issued 35 warnings and nine violation notices to shops that were found to have increased prices for these products.

 

Dubai Culture and Arts Authority: Operations at museums, historical sites and public libraries are temporarily suspended until the end of March.

 

Department of Tourism and Commerce Marketing: Operations at

entertainment venues, hospitality establishments, wedding halls, theme parks, sea cruises, desert camps, tours (safaris) and floating restaurants are temporarily suspended until the end of March.

 

Abu Dhabi Department of Economic Development (ADDED): Pursuant to circulars issued by the ADDED, operations at entertainment game halls and cinemas are temporarily suspended. Similar to the DDED, shishas are also temporarily suspended from being served at restaurants and coffee shops. The Government of Abu Dhabi Media Office further provides that the main touristic attractions, theme parks and cultural destinations (such as the Louvre and the Presidential Palace) shall also be temporarily closed until the end of March.

 

Abu Dhabi Ports: As of 14 March 2020, cruise operations are suspended for all ships at Abu Dhabi Cruise Terminal in Zayed Port and Sir Bani Yas Cruise Beach until further notice.

 

Abu Dhabi Department of Culture and Tourism: Pursuant to a circular dated 13 March 2020, all events and operation of night clubs are temporarily suspended until the end of March.

 

Restriction on Travel / Transportation

 

UAE Ministry of Foreign Affairs and International Cooperation (MOFA):

 

There is currently:

 

• a travel ban on Iran, Thailand, Qatar and Karabakh Mountainous Region; and

• travel warnings with respect to China, Lebanon, Madagascar, Congo, Yemen and South Sudan.

 

Federal Transport Authority (FTA):

 

• Ferry services to and from Iran are suspended until further notice.

• Ship masters must: (i) send health declarations, along with an undertaking that no crew member is suffering from COVID-19, to UAE port authorities 72 hours prior to arriving in the UAE irrespective of the last port of call, and (ii) report any suspected cases on the vessel (whether during the vessel stay or anchorage at the berth) to the FTA and the relevant UAE health authority.

 

Dubai and Abu Dhabi International Airports:

 

Effective as of 17 March 2020 (until further notice), the issuance of UAE entry visas is temporarily suspended. This suspension however does not apply to individuals with diplomatic passports or passports from visa-exempt countries that are entitled to visas on arrival. Flights to and from certain countries (e.g., Saudi Arabia, Bahrain, Lebanon, Syria and Turkey) have been temporarily suspended.

 

As per the Dubai International Airport’s recent alert, all passengers will be required to go through a non-intrusive thermal screening process. Passengers from any of the following countries will undergo both thermal screening and a nasal swab carried out by the DHA’s medical team based at the airport: Egypt, Italy (Rome only), China (Beijing only) and Thailand. As per a video tutorial prepared by the Government of Dubai Media Office, passengers with a high body temperature will be sent to hospitals (and a medical swab will be taken for a lab test). If a passenger tests positive for COVID-19, the passenger will be required to stay at the quarantine facility until the passenger tests negative for COVID-19. This quarantine period is likely to take a few weeks. The DHA will also arrange for individuals that have been in contact with the affected person to be screened (and if required, quarantined) as well.

 

As per the Abu Dhabi International Airport’s recent alert, all passengers would be required to go through an advance polymerase chain reaction (PCR) testing at the airport, then self-isolate for four days. Following the four-day isolation period, the passengers will then be required to undertake another PCR test.

 

Economic Stimulus

 

The Dubai Crown Prince and Executive Council Chairman has launched an AED 1.5 billion stimulus package to support Dubai’s business sector over the next three months. This stimulus is anticipated to result in the following (among others):

 

• freezing the market fees levied on facilities operating in Dubai;

• reduction of license renewal fees or by permitting onshore entities to renew their licenses without renewing their lease contracts;

• reduction of municipality fees imposed on sales at hotels;

• exemption of charges incurred from the cancellation or postponement of events; and

• reduction of the water and electricity bill by 10% for Dubai residents for the next three months.

 

* * *

 

As stated above, new measures have been, and are expected to continue to be, introduced and implemented in very short notice. Afridi & Angell has been following and will continue to follow official sources for further updates and notices. ■

 

 

Slightly more clarity: Economic Substance Regulations in the DIFC

The DIFC has provided slightly more clarity as to how UAE Cabinet Decision 31 of 2019 (the Economic Substance Regulations, or ESR) will apply within Dubai’s financial free zone. Helpful as the guidance is, significant questions remain.

 

The DIFC held a presentation on 17 December to discuss the Economic Substance Regulations. The first point of note was that all businesses in the DIFC must file an ESR notification by 31 March 2020. The content of this notification is set out in the Economic Substance Regulations themselves. There are three components to the notification.

 

1. The business must declare whether or not it is engaged in one of the nine “Related Activities” set out in the Economic Substance Regulations;

 

2. If it does conduct one of the Related Activities, the business must indicate whether any of its income from such activity is subject to any sort of tax outside of the UAE; and

 

3. The dates of the business’s financial year.

 

The notification requirement will apply to financial service providers regulated by the DFSA, and also to all other non-regulated businesses, including DIFC branches of businesses that may be making similar notifications outside of the DIFC. Any entity registered with the DIFC’s Registrar of Companies will need to file these notifications. The format of the notification has yet to be decided, but it was suggested that the UAE’s Ministry of Finance (being the “Competent Authority” pursuant to the Economic Substance Regulations) will be standardizing the forms for ESR notifications and reports.

 

The second point of note is the DIFC’s Registrar of Companies will be the “Regulatory Authority” in the DIFC. Expectations (based on the wording of Cabinet Decision 58 of 2019) were that the DFSA would be the Regulatory Authority in the DIFC. There was a suggestion that the Registrar of Companies may delegate some of its responsibilities to the DFSA, but for the time being it appears that the Registrar will fulfill this important role. (It is the Regulatory Authority which decides if a business has met the economic substance requirements, and if not, reports the business to the Ministry of Finance.)

 

The DIFC made it very clear in their presentation that they would be adopting a “substance over form” approach when considering whether a business was conducting one or more of the Related Activities. This was a welcome clarification, as some market commentators had been suggesting that businesses would only be caught by the Economic Substance Regulations if their commercial license specifically mentioned one (or more) of the nine Related Activities.

 

The presentation ended with a Q&A session. This revealed that significant areas of uncertainty and concern remain. Of particular concern to businesses in the DIFC was whether all financial service providers would be considered to be undertaking a Related Activity. There was a suggestion that the DIFC and the DFSA would jointly host a further presentation in the new year to answer some of those questions.

 

Practical next steps

 

All businesses in the DIFC should diarise 31 March 2020 and note their obligation to file a notification with the Registrar of Companies by that date. In order to make that notification they will need to determine if they are undertaking a Related Activity. If they are undertaking a Related Activity, and deriving income from it, they will then need to file an ESR report. The ESR report must demonstrate that they meet the economic substance thresholds. Failure to meet these thresholds may result in significant fines and/or suspension of licenses. Any business with concerns about meeting such thresholds will have several months to take remedial action, as most businesses conducting a Related Activity in the DIFC will have until the end of 2020 before they need to make their first ESR report. Afridi & Angell is able to advise clients on the Economic Substance Regulations, although general uncertainty remains regarding the approach the Registrar of Companies will take when considering (a) the scope of the specific Related Activities and (b) what needs to be done to meet the economic substance thresholds. ■

Regulatory Authorities to Regulate Relevant Activities in Accordance with Economic Substance Regulations Announced

Further to our previous inBrief dated 7 July 2019, which discussed UAE Cabinet Resolution 31 of 2019 Concerning Economic Substance Regulations (the UAE Economic Substance Regulations or the Regulations), and inBrief dated 10 October 2019, which discussed the Guidance on UAE Economic Substance Regulations issued by the UAE Ministry of Finance, Cabinet Decision No. 58 of 2019 has now designated the regulatory authorities (the Regulatory Authorities) to regulate compliance with the UAE Economic Substance Regulations.

 

Background

 

Under the Regulations, a Licensee engaged in any one of the nine Relevant Activities listed therein must meet an Economic Substance Test in relation to each Relevant Activity carried on by such Licensee. This includes but is not limited to demonstrating that its State Core Income-Generating Activities are carried out in the UAE.

 

The Regulations contemplated that a yet-to-be designated Regulatory Authority (the Regulatory Authority under the Regulations is different from the Competent Authority) would regulate compliance with the Regulations. The Regulations read as if there would be a single Regulatory Authority for the entire UAE; however, the Guidance on Economic Substance Regulations, in certain places, contemplated the possibility of more than one Regulatory Authority.

 

Cabinet Decision No. 58 of 2019 has appointed a number of different authorities as the Regulatory Authority, depending on the nine Relevant Activities and where these Relevant Activities are undertaken.

 

The concerned Regulatory Authorities are as follows:

 

Relevant Activity           Regulatory Authority  
 

Banking Activities

  

– UAE Central Bank for banking activities regulated by the Bank.
– Competent authority in the Financial Free Zone for banking activities exercised in the latter.

 
 

Insurance Business

  

– Insurance Authority for the insurance business regulated by the Insurance Authority.
– Competent authority in the Free Zone for the insurance activities exercised in the latter.
– Competent authority in the Financial Free Zone for the insurance activities exercised in the latter.

 
 

Investment Funds Management

  

– Securities and Commodities Authority (SCA) for the investment funds management regulated by the SCA.
– Competent authority in the Free Zone for the activities of investment funds management exercised in the latter.
– Competent authority in the Financial Free Zone for the activities of investment funds management exercised in the latter.

 
 

Financial Leasing Activities

  

– UAE Central Bank for the financial leasing activities regulated by the bank.
– Competent authority in the Free Zone for the financial leasing activities exercised in the latter.
– Competent authority in the Financial Free Zone for the financial leasing activities exercised in the latter.

 
 

Headquarters Activities

  

– Ministry of Economy for the headquarters’ works and activities regulated by the Ministry.
– Competent authority in the Free Zone for the headquarters activities exercised in the latter.
– Competent authority in the Financial Free Zone for the headquarters activities exercised in the latter.

 
 

Shipping Activities

  

– Ministry of Economy for the shipping activities regulated by the Ministry.
– Competent authority in the Free Zone for the shipping activities exercised in the latter.
– Competent authority in the Financial Free Zone for the shipping activities exercised in the latter.

 
 

Holding Company Activities

  

– Ministry of Economy for the holding company activities regulated by the Ministry.
– Competent authority in the Free Zone for the holding company activities exercised in the latter.
– Competent authority in the Financial Free Zone for the holding company activities exercised in the latter.

 
 

Intellectual Property Activities

  

– Ministry of Economy for the intellectual property activities regulated by the Ministry.
– Competent authority in the Free Zone for the intellectual property activities exercised in the latter.
– Competent authority in the Financial Free Zone for the intellectual property activities exercised in the latter.

 
 

Distribution and Services Centres

  

– Ministry of Economy for the distribution and services centres activities regulated by the Ministry.
– Competent authority in the Free Zone for the distribution and services centres activities exercised in the latter.
– Competent authority in the Financial Free Zone for the distribution and services centres activities exercised in the latter.

Going Forward

 

The appointment of the Regulatory Authorities means that businesses licensed in the UAE should fast track an assessment to determine if they are subject to the UAE Economic Substance Regulations. It remains to be seen what approach such Regulatory Authorities will take in enforcing the UAE Economic Substance Regulations. ■

UAE Ministry of Finance issues guidance on Economic Substance Regulations

A previous inBrief dated 7 July 2019 discussed UAE Cabinet Resolution 31 of 2019 Concerning Economic Substance Regulations (the UAE Economic Substance Regulations or the Regulations).

 

The UAE Economic Substance Regulations designated the UAE Ministry of Finance as the Competent Authority. One of the responsibilities assigned to the Competent Authority under the Regulations is the issuance of guidance on how the Economic Substance Test (as defined in the Regulations and discussed below) may be met for the purposes of complying with the Regulations. The Ministry of Finance issued such guidance (the Guidance)1 on 11 September 2019.

 

Article 2.2 of the Guidance explains that the Regulations were issued pursuant to the global standard set by the OECD Forum on Harmful Tax Practices (FHTP), which requires companies to have substantial activities in a jurisdiction and also taking into account the standards developed by the European Union (EU), specifically the code of conduct developed by the EU Code of Conduct Group (a group responsible for the EU’s taxation policy).

 

Economic Substance Test

 

Under the Regulations, a Licensee (as defined below) engaged in a Relevant Activity (see the nine activities listed in bullet points below) must meet an Economic Substance Test in relation to each Relevant Activity carried on by such Licensee. This includes but is not limited to demonstrating that its State Core Income-Generating Activities are carried out in the UAE. The activities that constitute State Core Income-Generating Activities vary for each of the nine Relevant Activities to which the Regulations apply. Such Relevant Activities are:

 

  • Banking Businesses
  • Insurance Businesses
  • Investment Fund Management
  • Lease-Finance Businesses
  • Headquarters Businesses
  • Shipping Businesses
  • Holding Company Businesses
  • Intellectual Property Businesses
  • Distribution and Service Center Businesses

This inBrief highlights thirteen topics covered in the Guidance that may be of interest to businesses affected by the UAE Economic Substance Regulations.

 

1. More than one Regulatory Authority?

 

The Regulations contemplate that a yet-to-be designated Regulatory Authority (the Regulatory Authority under the Regulations is different from the Competent Authority) will regulate compliance with the Regulations. The Regulations read as if there will be a single Regulatory Authority for the entire UAE. However, the Guidance, in certain places, contemplates the possibility of more than one Regulatory Authority which raises the question as to whether the Regulatory Authority may be different in each Emirate?

 

A Cabinet Resolution appointing the Regulatory Authority (or Authorities) is awaited. For stylistic purposes, the remainder of this inBrief will assume a single Regulatory Authority.

 

2. Clarification regarding definition of Licensee

 

The Regulations apply to Licensees. Article 1 of the Regulations defines a Licensee as “any natural or juridical person licensed by the competent licensing authorit/(ies) in the UAE, to carry out a Relevant Activity in the UAE including a Free Zone and a Financial Free Zone.” The Guidance clarifies that every Licensee “that carries on a Relevant Activity and derives an income therefrom in the UAE, including a Free Zone or a Financial Free Zone must meet the Economic Substance Test.” This implies that a Licensee that does not derive any income from a Relevant Activity carried out in the UAE would not be required to meet the Economic Substance Test.

 

3. Majority-owned government owned companies exempt

 

Under Article 3(2) of the Regulations, the Regulations do not apply to any commercial company (as defined in Article 1 of the UAE Commercial Companies Law2) in which the UAE Federal Government, the Government of any Emirate, or any governmental authority or body of any of them has any direct or indirect ownership in its share capital. By contrast, Article 3.2 of the Guidance states that the Regulations do not apply to any commercial company with at least 51% direct or indirect governmental ownership. An EU document indicates that the change to the 51% threshold was made to accommodate concerns of the EU Code of Conduct Group that exempting companies with any government ownership created a risk of circumvention of the substance requirements.

 

4. Filing requirements commence with effect from 1 January 2020

 

Under Article 8(1) of the Regulations, a Licensee shall notify the Regulatory Authority annually of the following:

 

“(a) Whether or not it is carrying on a Relevant Activity.

 

 (b) If the Licensee is carrying on a Relevant Activity, whether or not all or any part of the Licensee’s gross income in relation to the Relevant Activity is subject to tax in a jurisdiction outside of the State; in all cases such Licensee shall provide the Regulatory Authority with all information and documentation   required to be submitted by it pursuant to this Resolution or any further guidance or decision issued pursuant to this Resolution.

 

 (c) The date of the end of its Financial Year.”

 

Under Article 8(2) of the Regulations, the foregoing annual filing shall be made at the time specified by the Regulatory Authority and in the manner approved by the Regulatory Authority. As noted above, the Regulatory Authority has not yet been identified. However, Article 4.2 of the Guidance clarifies that such filing must be made with effect from 1 January 2020. This suggests the Competent Authority believes (or assumes) that the Regulatory Authority will be appointed before 1 January 2020.

 

5. List of core activities in the Regulations is not exhaustive

 

The Regulations require a Licensee to demonstrate that it conducts its State Core Income-Generating Activities in the UAE. Article 5 of the Regulations identifies, for each Relevant Activity, certain activities that must be carried out in the UAE.

 

Article 4.3(a) of the Guidance explains that the list set out in Article 5 of the Regulations “is not exhaustive” and that the list “includes the activities listed but is not limited to them.” The Guidance further explains that the general principle is that the activities listed in Article 5 of the Regulations “are regarded to be the most important activities that a Licensee carrying out a Relevant Activity is expected to be carrying on in the UAE.”

 

6. Directed and managed in the UAE

 

One of the requirements of meeting the Economic Substance Test, under Article 6(2)(b) of the Regulations,  is that a Licensee must be directed and managed in the UAE in relation to its Relevant Activity. Article 4.3(b) of the Guidance explains that the aim is to ensure that there are an adequate number of board meetings held and attended in the UAE. Article 4.3(b) of the Guidance further explains that:

 

“A determination as to whether an adequate number of meetings are held and attended in the UAE will be dependent on the level of Relevant Activity being carried out by a Licensee. It is expected that it must be at least one (1) meeting held in a Financial Year in the UAE. Consideration must also be given to meeting requirements prescribed under the applicable law regulating the Licensee or as may be stipulated in the constitutional documents of the Licensee.”

 

Additional requirements highlighted in Article 4.3(b) of the Guidance include:

 

  • meetings shall be recorded in written minutes and signed by attendees and such minutes are kept in the UAE;
  • quorum for such meetings shall be met and those attendees are physically present in the UAE;
  • directors shall have the necessary knowledge and expertise to discharge their duties; and
  • the minutes of board meetings must refer to all the relevant decisions taken and must be signed by directors physically present.

7. Meaning of “adequate” and “appropriate”

 

The Regulations use the undefined term “adequate” in several places. For example, “adequate number of qualified full-time employees”, “adequate level of expenditure”. In addition, the Guidance uses the terms “adequate” and “appropriate” several times. Article 4.3(g) of the Guidance explains that businesses vary in size and therefor the employees, expenditures and premises which are adequate or appropriate for a large or medium sized business may not be adequate or appropriate for a small business and that the Regulations are not intended to impose requirements to engage employees or incur expenditures beyond what is actually required by a business.

 

What is adequate or appropriate for each Licensee will be dependent on the nature and level of Relevant Activity being carried out by such Licensee. But a Licensee should maintain sufficient records to demonstrate the adequacy and appropriateness of the resources utilized and the expenditures incurred.

 

Article 4.3(g) also explains that the requirement for adequate employees is aimed at ensuring that employees carrying out a Relevant Activity are suitably qualified to do so.

 

8. Outsourcing

 

The Regulations permit the use of the third party service providers to satisfy certain requirements of the Economic Substance Test. Article 4.3(h) of the Guidance explains certain criteria that the third party service providers must meet including, by way of example, having adequate activities, employees, expenditures and premises in the UAE. Article 4.3(h) of the Guidance contains further elaboration and explanation of requirements for outsourcing that is not discussed herein but may be of interest to businesses subject to the Regulations who use third party service providers.

 

Article 4.3(h)5 of the Guidance explains that a Licensee who uses a third party service provider must demonstrate to the Regulatory Authority that outsourcing is not being done with the objective of circumventing compliance with the Economic Substance Test. This is perhaps one topic on which the Guidance may have created more potential confusion than clarification. It is not clear under what circumstances outsourcing would be deemed to be circumventing compliance.

 

9. Holding company business

 

Under Article 6(4) of the Regulations, a Holding Company Business that derives its income solely from dividends and capital gains is subject to reduced substance requirements. Such Licensee must satisfy only two criteria:

 

  • compliance with requirements to submit any documents, records or information to the relevant Regulatory Authority; and
  • maintaining adequate employees and holding and managing for the Holding Company Business.

Article 5.1 of the Guidance explains that Holding Company Businesses that undertake a Relevant Activity and derive income from such activity other than solely receiving income from equity interests do not benefit from this exemption and must meet the full substance requirements of the Economic Substance Test. The Guidance further explains that:

 

“A Licensee which owns other forms of assets (e.g. bonds, government securities, interest in real property) will clearly not be a ‘pure equity holding’ entity (even if it also owns equity participations) and will not be treated as carrying on holding business.”3

 

Moreover:

 

“Because it is possible for a Licensee to carry on more than one Relevant Activity, the fact that the Licensee is a ‘pure equity holding entity’ does not preclude the possibility that it may carry on one or more other relevant activities, in which case the CIGA [Core Income Generating Activities] shall be those associated with the income generated.”

 

10. Headquarters business

 

Article 5.2 of the Guidance explains that whether an entity carries on a headquarters business for the purposes of the Regulations is entirely dependent on the services it provides to other group companies and is not dependent on its position in the group structure.

 

11. High risk intellectual property activity

 

The Regulations identify certain activities relating to Intellectual Property Business as high risk and set out additional conditions that a Licensee carrying out such activities must satisfy. Article 5(3) of the Guidance explains that because income derived from intellectual property assets activity poses a greater risk of artificial profit shifting as compared to income from non-IP related activity, there is a presumption under the Regulations that a Licensee who carries out such activities is not complying with the Economic Substance Test. The burden is placed on the Licensee to rebut this presumption by providing sufficient evidence “demonstrating that the Licensee does and historically has exercised a high degree of control over the development, exploitation, maintenance, enhancement and protection of the Intellectual Property Asset by an adequate number of full-time employees, with the necessary qualifications, who permanently reside and perform their activities in the UAE.”

 

12. Businesses should retain records for at least six years

 

Under Article 7(1) of the Regulations, the Regulatory Authority may make a determination that a Licensee has not met the Economic Substance Test no later than six (6) years from the end of the Financial Year to which the determination relates. Article 4.4 of the Guidance explains that while the Regulations do not prescribe a set period for the retention of information by a Licensee, it is advisable to retain information relevant to evidencing compliance for a period of at least six (6) years.

 

13. Disclosure to overseas regulators

 

Article 9 of the Regulations addresses the exchange of information with foreign regulators. Article 9(3) states:

 

“Upon receipt by the Competent Authority of notification containing information that a Licensee has not met the Economic Substance Test for a Financial Year from a Regulatory Authority pursuant to the above Clause 2, the Competent Authority shall, pursuant to an international agreement, treaty or similar international arrangement to which the State is a party, provide the information relating to such Licensee to – 

 

(a) the Foreign Competent Authority of the country or territory in which resides the parent company, the ultimate parent company, and the Ultimate Beneficial Owner of the Licensee. 

 

(b) If the Licensee is incorporated outside the State, the Foreign Competent Authority of the country or territory in which the Licensee is incorporated.”

 

Article 6.4 of the Guidance explains that the Competent Authority shall provide information to the Foreign Competent Authority:

 

  • if a Licensee fails to meet the requirements under the Regulations for a specific Financial Year; or

 

  • the Licensee carries out a High Risk IP business.

 

UAE removed from European Union Tax Blacklist

 

The UAE Economic Substance Regulations were enacted after the UAE had been put on EU’s blacklist of non-cooperative jurisdictions for tax purposes. On 10 October 2019, the EU issued a press release announcing that the UAE has been removed the blacklist. This topic is covered in more detail in Afridi & Angell’s Legal Alert dated 10 October 2019.

 

Next steps

 

All businesses in the UAE should make an assessment as to whether they are subject to UAE Economic Substance Regulations and those that are subject to the Regulations should begin initiating steps to ensure compliance with the Regulations. While the Regulatory Authority has not yet been appointed, the Guidance states that reporting requirements will commence on 1 January 2020 so it is anticipated that the Regulatory Authority will be appointed before year end. It would be prudent to start taking steps to comply with the Regulations as soon as possible. ■

 

_____________________________

1 Ministerial Decision No. 215 of 2019 on the Issuance of Directives for the Implementation of the Provisions of Cabinet Decision No. 31 of 2019 Concerning Economic Substance Requirements.

 

2 UAE Federal Law No. 2 of 2015, as amended.

 

3 The phrase “will not be treated as carrying on holding business” is potentially confusing. Read in the context of the entirety of Article 5.1 of the Guidance, we interpret this to mean that a Licensee owning other forms of assets such as bonds, securities, etc., would not be able to qualify for the reduced substance requirement under Article 6(4) of the Regulations. We do not interpret this phrase to mean ownership of other assets would automatically result in a company not being a holding company.

SCA issues guidelines for financial institutions on anti-money laundering

The past year has been a busy one for AML compliance in the UAE.

 

In October 2018, Federal Decree-Law 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organizations (AML Law) came into force. It contained features recommended by the Financial Action Task Force (FATF), and brought UAE laws in line with international AML standards.

 

The AML Law was followed by the implementing regulations in January 2019, which have helped bring further clarity to the intended operation of the AML Law. The Implementing Regulations were issued on 28 January 2019 pursuant to Cabinet Resolution 10 of 2019 (AML Regulations).

 

In May 2019, the UAE Securities and Commodities Authority (the SCA) promulgated guidelines for financial institutions on Anti- Money Laundering and Combating the Financing of Terrorism and Illegal Organisations (the AML Guidelines).

 

The AML Guidelines, resulting from a joint effort among the supervisory authorities of the UAE, set out the minimum expectations of the supervisory authorities regarding the factors that should be taken into consideration by financial institutions when identifying, assessing, and mitigating the risks of money-laundering, financing of terrorism, and financing of illegal organisations.

 

Do the AML Guidelines form part of the law?

 

The AML Guidelines do not constitute regulations or legislation. They are intended to be read together with the AML Law and Regulations as well as all other relevant Cabinet Resolutions and regulatory rulings currently in force in the UAE and the free zones. The AML Guidelines are not a replacement or substitution for any existing legal requirements or statutory obligations. The SCA has made it clear that, in the event of an inconsistency between the AML Guidelines and any legal or regulatory framework in place in the UAE, it is the latter that will prevail.

 

Who do the guidelines apply to?

 

As a starting point (with exceptions noted throughout the guidelines), the AML Guidelines apply to all financial institutions, and their directors, managers and employees, established or operating in the UAE or the UAE’s free zones, that establish or maintain business relationships with customers or engage in any of the financial activities or transactions or trade or business activities outlined in the AML Regulations.

 

Specifically, they are applicable to all such natural and legal persons in the following categories:

 

• banks, finance institutions, exchange houses, money service businesses (including monetary value transfer services);

• insurance companies, agencies, and brokers;

• securities and commodities brokers, dealers, advisors, investment managers; and

• other financial institutions not mentioned above.

 

The AML Guidelines define a financial institution as any person who conducts one or more financial activities or operations for or on behalf of a customer. The term business relationship is defined as any ongoing commercial or financial relationship established between financial institutions or designated non-financial businesses and professions (DNFBPs) and their customers in relation to activities or services provided by them.

 

What is contained in the AML Guidelines?

 

The AML Guidelines are organised into five parts, which consist of the following:

 

1. Part 1 – Overview: This includes background information of the UAE’s AML legislative and strategy framework including key provisions of the law and regulations affecting financial institutions;

 

2. Part 2 – Identification and assessment of money laundering and financing of terrorism risks;

 

3. Part 3 – Mitigation of money laundering and financing of terrorism risks;

 

4. Part 4 – AML and anti-terrorism financing (ATF) compliance administration and reporting requirements, including guidance on governance, suspicious transaction reporting and record keeping; and

 

5. Part 5 – Appendices including a glossary of terms and links to relevant portals.

 

The AML Guidelines have been prepared such that, where sufficiently clear guidance is provided in the AML Law and AML Regulations, no additional guidance is provided in the AML Guidelines. However, where the AML Law or AML Regulations do not specifically cover a topic but such topic is addressed implicitly or by reference to international practices, the AML Guidelines seek to provide guidance to bring some clarity to their intended application in the UAE.

 

How do the AML Guidelines interact with guidance from other supervisory authorities?

 

The AML Guidelines address some inconsistencies that may arise from the legal and regulatory framework currently in place, from previous laws or regulations, or from differences in regulatory requirements between the various supervisory authorities in the UAE. The AML Guidelines recommend, however, that for any unaddressed inconsistences between supervisory authorities, financial institutions should contact their relevant supervisory authority.

 

It appears that with the introduction of the AML Guidelines, other supervisory authorities may begin publishing guidelines of their own relating to AML and ATF compliance.

 

For example, on 30 June 2019, the Dubai Multi Commodities Centre (the DMCC) published its AML and ATF guidelines for financial institutions and DNFBPs. The DMCC’s guidelines are presented as the DMCC’s own interpretation of the AML Law and thus are not mandatory rules or regulations for entities operating in the DMCC. Rather, the DMCC makes it clear that it is the responsibility of all entities to review the AML Law and AML Regulations and determine the impact on their own business.

 

On 7 July 2019, the UAE Minister of Justice promulgated a number of resolutions introducing AML and ATF initiatives. The initiatives include:

 

• establishing a section for AML and ATF;

• issuing AML and ATF procedures for lawyers, notaries and independent legal professionals;

• establishing a Committee for managing frozen, seized and confiscated funds;

• issuing procedures dealing with situations where persons listed on the local terrorism lists use frozen funds;

• issuing guidance on the grievance mechanism for persons disputing listing on the local terrorism lists; and

• issuing procedures and conditions for requesting international judicial cooperation on the sharing of the proceeds of crime.

 

Conclusion

 

While not legally binding, the advent of AML and ATF guidance from the various supervisory authorities of the UAE is a welcome step for businesses in the UAE. It will allow entities subject to the AML Law and AML Regulations to understand how supervisory authorities may construe their obligations and to take the recommended practical steps to ensure they are in compliance with their obligations pursuant to the AML Law. ■

 

FDI – a “positive” development

On 23 September 2018, enactment of the new federal law on foreign direct investment — Federal Decree-Law 19 of 2018 (the FDI Law) — introduced the possibility of majority foreign ownership in UAE companies. While the FDI Law set out a “negative list” of 13 sectors (including insurance, water and electricity, land and airport services, and retail medicine) where existing foreign ownership restrictions would continue to apply, it also referred to a “positive list” that the UAE Cabinet would promulgate to identify economic sectors and activities where up to 100% foreign ownership would be allowed.

 

Ending speculation, the Cabinet has now acted. The Prime Minister issued a statement on 2 July 2019 announcing the Cabinet’s approval of a positive list of 122 economic activities in sectors such as agriculture, manufacturing, renewable energy, electronic commerce, transportation, arts, construction, and entertainment. The positive list (copy attached) was shortly afterwards published in the local press.

 

The list of 122 economic activities is divided into 51 industrial activities, 52 service activities and 19 agricultural activities. While allowing up to 100% foreign ownership, the positive list does not do this unconditionally. On the contrary, the positive list imposes additional requirements such as minimum capital requirements on some activities, obligations to employ advanced technology on other activities, and requirements to contribute to the Emiratisation of the workforce on others. For many business and service activities, existing restrictions and qualifications are expressly retained.

 

Removal of ownership restrictions is not an end in itself, but is a means to attract FDI that will support the nation’s overall development objectives. It is expected that the licensing authorities in each Emirate will ultimately determine the permitted foreign ownership percentages for specific projects. ■

 

Dubai Development Authority – UBO requirements

The Dubai Development Authority (DDA) (previously known as the Dubai Technology and Media Free Zone Authority (TECOM) and the Dubai Creative Clusters Authority (DCCA)) is the regulator of entities licensed to conduct business in Dubai Internet City, Dubai Media City, Dubai Knowledge Park, Dubai Outsource City, and other clusters regulated by the DDA.

 

The Federal Cabinet Decision 10 of 2019 on the Implementing Regulation of Federal Decree-Law 20 of 2018 on the Criminalisation of Money Laundering and Combating the Financing of Terrorism and the Financing of Unlawful Organisations (the Cabinet Decision) requires licensing authorities such as the DDA to identify the ultimate beneficial owners (UBOs) of businesses (Free Zone Entities) licensed by them. In response to this requirement, the DDA recently issued its Circular 323 regarding UBOs.

 

The DDA now requires all free zone companies (i.e. FZ-LLCs) and parent companies of branches licensed by the DDA to disclose details of their UBOs. A template of a form in which the details are required to be disclosed has been issued by the DDA (the UBO Declaration Form).

 

Definition of a UBO

 

As per the DDA’s Circular 323, any individual who ultimately owns or controls 25 per cent or more of a Free Zone Entity, whether directly as a shareholder, or indirectly via control of companies, other entities or structures that control the Free Zone Entity, is an UBO. This definition of the UBO is broad enough to cover trust arrangements.

 

UBO information

 

The following information of a UBO is required to be disclosed to the DDA:

 

(i) Full name

(ii) Name of the company

(iii) Date of birth

(iv) Nationality

(v) Passport number

(vi) Detailed residential address

(vii) Percentage (%) shares in the free zone company/parent company of a branch licensed by the DDA

 

Note that the DDA may require submission of a passport copy, proof of residential address and other documents of a UBO.

 

Exception from providing UBO information

 

In case a Free Zone Entity is a subsidiary or a branch of: (i) a company listed on a stock exchange; (ii) a government or government owned entity; or (iii) an entity registered and licensed in the UAE (outside the DDA’s jurisdiction), the UBO information is not required to be submitted to the DDA. In such a case, the UBO Declaration Form is required to be submitted to the DDA stating that the Free Zone Entity satisfies one of the above conditions.

 

Deadlines

 

As per the DDA’s Circular 323, existing Free Zone Entities will be required to submit the UBO Declaration Form as part of their license renewal process at the next renewal date. New entities will be required to submit the UBO Declaration Form as part of the incorporation/licensing process.

 

If there are any changes in the UBOs of a Free Zone Entity, such a Free Zone Entity is required to notify the DDA of the changes.

 

Other licensing authorities in the UAE

 

Apart from the DDA, many other free zones/licensing authorities in the UAE such as Dubai International Financial Centre, Abu Dhabi Global Market and Dubai Multi Commodities Centre already require submission of details of ultimate beneficial owners. It is likely that more and more free zones/licensing authorities will issue similar requirements in due course. ■

New economic substance regulations in the UAE

A previous inBrief dated 30 April 2019 discussed a law recently enacted in the BVI, the Economic Substance (Companies and Limited Partnerships) Act, 2018, which introduced economic substance requirements in the BVI. This article will discuss a similar measure recently promulgated in the UAE.

 

UAE Cabinet Resolution 31 of 2019 Concerning Economic Substance Regulations (the UAE Economic Substance Regulations or the Regulations) was published in the Official Gazette on 30 April 2019 and came into effect the same day.

 

Background

 

The European Union’s Code of Conduct Group (a group responsible for EU’s taxation policy) maintains a blacklist of non-cooperative jurisdictions for tax purposes. In order to avoid being placed on such blacklist (or to attempt to get removed from the blacklist), jurisdictions such as the BVI, the Isle of Man, and the Cayman Islands, among others, have introduced legislation requiring entities established in such jurisdictions to demonstrate economic substance in their respective jurisdictions. The UAE was added to the blacklist in March of 2019, and the UAE Economic Substance Regulations were apparently promulgated in response to this development.

 

Relevant Activities

 

The UAE Economic Substance Regulations apply to any Licensee, which is defined to mean any natural or juridical person licensed by the competent licensing authorities in the UAE to carry out a Relevant Activity in the UAE, including in free zones and financial free zones. The Regulations identify nine Relevant Activities:

 

• Banking Businesses

• Insurance Businesses

• Investment Fund Management

• Lease-Finance Businesses

• Headquarters Businesses

• Shipping Businesses

• Holding Company Businesses

• Intellectual Property Businesses

• Distribution and Service Center Businesses

Economic Substance Test

 

Under the Regulations, a Licensee engaged in a Regulated Activity must meet an Economic Substance Test in relation to each Relevant Activity carried on by such Licensee. This includes but is not limited to demonstrating that its State Core Income-Generating Activities are carried out in the UAE. The activities that constitute State Core Income-Generating Activities vary for each of the nine Relevant Activities.1

 

Under Article 6(2) of the Regulations, a Licensee meets the Economic Substance Test if it satisfies the following criteria:

 

(a) If the Licensee conducts State Core Income-Generating Activity in the State.

(b) If the Licensee is directed and managed in the State in relation to that activity.

(c) Having regard to the level of Relevant Activity, if there is an adequate2 number of qualified full-time employees in relation to that activity who are physically present in the State (whether or not employed by the Licensee or by another entity and whether on temporary or long-term contracts), or adequate level of expenditure on outsourcing to third party service providers, whose activities, employees, expenditure, and premises are in the State, and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.

(d) If there is adequate operating expenditure incurred by it in the State, or adequate level of expenditure on outsourcing to third party service providers whose activities, employees, expenditure and premises are in the State, and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.

(e) If there are adequate physical assets in the State or adequate level of expenditure on outsourcing to third party service providers in the State, for the activities of the Licensee.

(f) In the case of State Core Income-Generating Activity carried out for the relevant Licensee by another entity, if it is able to monitor and control the carrying out of that activity by the other entity.

Under Article 6(4), a Holding Company that derives its income from dividends and capital gains only is subject to a less stringent Economic Substance Test whereby such test is satisfied if the Licensee complies with all requirements to submit documents, records and information to the Regulatory Authority and has adequate employees and premises for holding and managing a Holding Company Business.

 

Regulatory Authority & Competent Authority

 

The Regulations stipulate that a Regulatory Authority will be delegated to regulate Relevant Activities in accordance with the Regulations. Such Regulatory Authority has not yet been identified. The Regulations stipulate that the Regulatory Authority will be appointed by the Cabinet pursuant to a further resolution.

 

The Regulations designate the UAE Ministry of Finance as the Competent Authority. The role of the Competent Authority is different from that of the Regulatory Authority. The Regulations stipulate that the Competent Authority shall issue guidance on how the Economic Substance Test may be met. The Competent Authority is also responsible for determining the form of certain reports to be filed by a Licensee pursuant to the Regulations. Each Licensee will report to the Regulatory Authority who in turn will share certain information with the Competent Authority.

 

Reporting Requirements

 

A Licensee engaged in a Regulated Activity has two periodic reporting requirements under the Regulations. Under Article 8(1) of the Regulations, a Licensee shall notify the Regulatory Authority annually of the following:

 

(a) Whether or not it is carrying on a Relevant Activity.

(b) If the Licensee is carrying on a Relevant Activity, whether or not all or any part of the Licensee’s gross income in relation to the Relevant Activity is subject to tax in a jurisdiction outside of the State; in all cases such Licensee shall provide the Regulatory Authority with all information and documentation required to be submitted by it pursuant to this Resolution or any further guidance or decision issued pursuant to this Resolution.

(c)  The date of the end of its Financial Year.

Under Article 8(2) of the Regulations, the foregoing annual filing shall be made at the time specified by the Regulatory Authority and in the manner approved by the Regulatory Authority. As noted above, the Regulatory Authority has not yet been identified, so the filing deadline is currently unknown.

Article 8(3) of the Regulations states that: “A Licensee that is carrying on a Relevant Activity and is required to satisfy the Economic Substance Test shall, no later than twelve (12) months after the last day of the end of each Financial Year of the Licensee, prepare and submit to the Regulatory Authority a report which report shall be submitted by the Regulatory Authority to the Competent Authority.” Article 8(4) stipulates that such report shall be in the form approved by the Competent Authority and shall include the following information with respect to the Licensee:

(a) The type of Relevant Activity conducted by it.

(b) The amount and type of relevant income in respect of the Relevant Activity.

(c) The amount and type of operating expenses and assets in respect of the Relevant Activity.

(d) The location of the place of business and, if applicable, plant, property or equipment used for the Relevant Activity of the Licensee in the State.

(e) The number of full-time employees with qualifications and the number of personnel who are responsible for carrying on the Licensee’s Relevant Activity.

(f) Information showing the State Core Income-Generating Activity in respect of the Relevant Activity that has been conducted.

(g) A declaration as to whether or not the Licensee satisfies the Economic Substance Test.

(h) In the case of a Relevant Activity being an Intellectual Property Business, a declaration as to whether or not it is a high risk intellectual property business. If the Licensee declares that it is a high risk intellectual property business, the Licensee shall provide the information under paragraph (i) to refute a determination made by the Regulatory Authority under Clause 3 of Article 7 of this Resolution.  

(i) In the case of a Licensee that is carrying on a high risk intellectual property business, the following additional information must be provided:

i. Information demonstrating that the Licensee does and historically has exercised a high degree of control over the development, exploitation, maintenance, enhancement and protection of the intellectual property assets by an adequate number of full-time employees, with the necessary qualifications, who permanently reside and perform their activities in the State.

ii. Business plan showing the reasons for holding the ownership in the Intellectual Property Asset in the State.

iii. Employee information, including level of experience, type of contracts, qualifications and duration of employment with the Licensee.

iv. Evidence that decision making is taking place within the State.

(j) Where a Relevant Activity is outsourced by a Licensee, the Licensee must demonstrate the following:

i. The Relevant Activity that is outsourced is a Core Income-Generating Activity being carried out in the State.

ii. The Licensee has adequate supervision of the Relevant Activity outsourced.

iii. The Licensee shall submit to the Regulatory Authority a report containing information in relation to the level of resources employed by the third party service provider to which the Relevant Activity is being outsourced, demonstrating that the service provider’s activities, employees, operating expenditures and premises in the State are adequate in relation to the level of the outsourced Relevant Activity.

 

The Regulatory Authority may require a Licensee to provide such additional information, documents or other records as shall be reasonably required in order to make a determination as to whether the Economic Substance Test has been met.

 

Penalties

 

Failing to meet the Economic Substance Test carries an administrative penalty of a fine between AED 10,000 and AED 50,000 in any Financial Year. Failing to meet the Economic Substance Test again the following Financial Year carries a fine of not less than AED 50,000 and not more than AED 300,000.

 

Failure to provide information required under Article 8 of the Regulations (i.e., the reporting requirements discussed above), or providing inaccurate information, carries a fine between AED 10,000 and AED 50,000.

 

Implications

 

Historically, jurisdictions such as BVI and the Cayman Islands have been major destinations for shelf companies (companies with little or no physical or economic presence in the jurisdiction of incorporation). The UAE has not been not been a major hub for shelf companies because, with limited exceptions (such as Jebel Ali offshore companies), businesses in the UAE are required to have physical offices and licenses to do business locally. Moreover, the UAE authorities have historically cooperated willingly with foreign official investigations into tax evasion, money laundering, and other offenses, and furthermore have implemented significant domestic measures. To us, it therefore appears that the European Union’s pressure on the UAE to implement economic substance legislation was misdirected. In any event, it will not have the same impact in the UAE as it will in countries that have been major hubs for offshore shelf companies.

 

Nonetheless, for Licensees that were originally established in the UAE to hold assets in other jurisdictions without a significant economic presence in the UAE, the Economic Substance Regulations will have significant ramifications. Compliance with the Regulations may require substantial restructuring of business operations.

 

Next Steps

 

All businesses licensed in the UAE should carry out an assessment to determine if they are subject to the Economic Substance Regulations and businesses that are subject to such Regulations should begin taking steps to ensure compliance. The timetable for compliance is currently unknown given that the Regulatory Authority has not yet been appointed but it would be prudent to start taking steps to comply as soon as possible. ■

*****
1 The definition of State Core Income-Generating Activities for each of the nine Relevant Activities is set out in Article 5 of the Regulations.
2 The Regulations stipulate that the Guidance to be issued by the Competent Authority may include guidance regarding the meaning of “adequate”.

New regulations offer welcome guidance to anti-money laundering law

UAE Federal Decree-Law 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organizations (AML Law) came into force at the end of October 2018. Containing features recommended by the Financial Action Task Force (FATF), the new AML Law has been shaped by international AML standards and provides several mechanisms to combat money-laundering and to ensure that businesses in the UAE are actively involved in managing compliance risks associated with money laundering activities.

 

While the new AML Law has introduced subtle but important changes, it is the implementing regulations to the new AML Law which have helped bring further clarity to the anticipated operation of the AML Law. The Implementing Regulations were issued on 28 January 2019 pursuant to Cabinet Resolution 10 of 2019 (AML Regulations).

 

The AML Regulations provide welcome guidance on the implementation of the AML Law and clarify the intended impact in certain key areas. In particular, guidance has been provided on the following matters:

 

• types of businesses subject to the AML Law;

• the scope of the exemption, accorded to lawyers and auditors, from the obligation to report suspicious transactions; and

• the functions and role of the Financial Intelligence Unit (FIU).

 

What businesses are subject to the AML Law?

 

Prior to the release of the AML Regulations, it was thought to be the case that all businesses engaged in economic, commercial or professional activities in the UAE were subject to the full set of AML obligations imposed by the AML Law. The AML Regulations make it clear, however, that only those entities which qualify as Financial Institutions or as Designated Non-Financial Businesses and Professions (DNFBPs) will be subject to the obligations of the AML Law.

 

A Financial Institution is a person or entity that conducts one or more financial activities or transactions for or on behalf of a Customer. Pursuant to the AML Regulations, the following are considered financial activities and transactions:

 

1. receiving deposits and other funds from the public, including deposits in accordance with Islamic Sharia;

2. providing private banking services;

3. providing credit facilities of all types;

4. providing credit facilities in accordance with Islamic Sharia;

5. providing cash brokerage services;

6. financial transactions in securities, finance and financial leasing;

7. providing currency exchange and money transfer services;

8. issuing and managing means of payment, guarantees or obligations;

9. providing stored value services, electronic payments for retail and digital cash;

10. providing virtual banking services;

11. trading, investing, operating or managing funds, option contracts, future contracts, exchange rate and interest rate transactions, other derivatives or negotiable financial instruments;

12. participating in issuing securities and providing financial services related to these issues;

13. managing funds and portfolios of all kinds;

14. saving funds;

15. preparing or marketing financial activities;

16. insurance transactions, in accordance with Federal Law 6 of 2007 Concerning the Establishment of the Insurance Authority and the Organisation of its Operations; and

17. any other activity or financial transaction determined by the Supervisory Authority.

 

A DNFBP is a person or entity engaged in the following trade or business activities:

 

1. brokers and real estate agents when they conclude operations for the benefit of their Customers with respect to the purchase and sale of real estate;

2. dealers in precious metals and precious stones when they carry out any single monetary transaction or several apparently related transactions with a value equal or exceeding AED 55,000;

3. lawyers, notaries, and other independent legal professionals and independent accountants, when preparing, conducting or executing financial transactions for their Customers in respect of the following activities:

 

a) purchase and sale of real estate;

b) management of funds owned by the Customer;

c) management of bank accounts, saving accounts or securities accounts;

d) organising contributions for the establishment, operation or management of companies;

e) creating, operating or managing legal persons or Legal Arrangements; and

f) selling and buying commercial entities.

 

4. providers of corporate services and trusts upon performing or executing a transaction on behalf of their Customers in respect of the following activities:

 

a) acting as an agent in the creation or establishment of legal persons;

b) working as or equipping another person to serve as director or secretary of a company, as a   partner or in a similar position in a legal person;

c) providing a registered office, work address, residence, correspondence address or administrative address of a legal person or Legal Arrangement;

d) performing work or equipping another person to act as a trustee for a direct Trust or to perform a similar function in favor of another form of Legal Arrangement; and

e) working or equipping another person to act as a nominal shareholder in favor of another person.

 

The AML Law also specifies that other professions and activities may be added to this list over time as determined by a resolution of the Minister.

 

Once an entity qualifies as either a Financial Institution or as a DNFBP, it will be required to undertake customer due diligence; identify, assess and understand AML risks that may arise for its business; mitigate such risks; and take measures for the enhanced management of any high risks that it identifies.

 

Exemption for lawyers and auditors from reporting suspicious transactions

 

As noted above, lawyers, notaries, and other independent legal professionals and independent accountants may qualify as DNFBP’s depending on the activities they are undertaking for their clients.

 

This has caused issues for such professionals who may be bound by client confidentiality requirements as well as non-disclosure agreements.

 

The AML Law introduced the concept of an exemption for lawyers, notaries, other legal professionals and independent legal auditors with regard to information that they receive subject to professional confidentiality. However, little detail regarding this exemption was provided in the AML law. As a result, professionals were left wondering as to the scope of the exemption and their ability to rely on it.

 

The AML Regulations have provided further clarity on the operation of this exemption.

 

As a general rule, the AML Regulations require that any Financial Institution or DNFBP who has reasonable grounds to suspect that a transaction, attempted transaction, or funds in whole or in part constitute the proceeds of a crime, are related to a crime, or are intended to be used in criminal activity, must provide a suspicious transaction report to the FIU and thereafter provide all additional information requested by the FIU.

 

The AML Regulations exempt lawyers, notaries public, other legal professionals and independent legal auditors from this requirement if the information regarding such transactions was obtained in the course of their assessment of their clients’ legal position, defending or representing the clients before judicial authorities or in arbitration or mediation proceedings, providing a legal opinion with regard to legal proceedings, or other circumstances where such clients benefit from professional privilege.

 

Furthermore, while a Financial Institution or a DNFBP is normally prohibited from disclosing to its client the fact that it has made a suspicious transaction report, the AML Regulations clarify that in cases where a lawyer, notary, other independent legal professional, or independent legal auditor attempts to discourage their client from committing a violation, this shall not be considered as such disclosure.

 

While lawyers, notary publics, other legal professionals and independent legal auditors are exempted from reporting suspicious transactions as aforesaid, they are still required to abide by all other obligations in the AML Regulations imposed on them as DNFBPs, including conducting customer due diligence and enhanced management of high risks.

 

The role of the FIU

 

The AML Law and AML Regulations have maintained the role of the FIU to receive and process information related to crime. They accord the FIU powers to investigate and to process suspicious transaction reports and to seek further information from Financial Institutions and DNFBPs. The AML Regulations grant the FIU the international role of exchanging information with and reporting to its counterparts in other countries.

 

Conclusion

 

The AML Regulations provide welcome clarity on the operation of the AML Law and in particular the changes introduced in the AML Law.

 

Such changes complement a series of other measures aimed at strengthening the integrity of the UAE’s financial system and bringing it into consistency with global standards.

 

The AML Law and AML Regulations should further be viewed as a sign that there is no tolerance for financial crime in the UAE. Businesses operating in the UAE who fall within the definition of a Financial Institution or DFNBP need to consider the application of the AML Law and AML Regulations to their business and ensure that they have internal processes in place to identify, manage and mitigate high risk customers and activities.■