Tag: Corporate and Commercial

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.■

BVI companies – economic substance law

British Virgin Islands (BVI) companies are commonly used in the UAE by investors to hold real estate properties and/or shares in UAE companies. Investors need to be aware of a recently enacted BVI law, the Economic Substance (Companies and Limited Partnerships) Act, 2018 (the Law), which introduces economic substance requirements in the BVI.

 

In order to avoid being identified/blacklisted as a non-cooperative jurisdiction for tax purposes by the European Union’s Code of Conduct Group (a group responsible for EU’s taxation policy), many offshore jurisdictions such as the BVI, the Isle of Man, the Cayman Islands, etc., have introduced legislation requiring entities established in such jurisdictions to demonstrate economic substance in their respective jurisdictions.

 

The Law came into force on 1 January 2019. Existing legal entities (companies or limited partnerships) in the BVI are required to demonstrate compliance with the requirements of the Law by 30 June 2019.

 

Applicability: Companies and Limited Partnerships

 

The Law applies to all companies (registered in the BVI under the BVI Business Companies Act, 2004) and limited partnerships (registered in the BVI under the Limited Partnership Act, 2017), except “non-resident companies”, “non-resident limited partnerships” and limited partnerships which do not have a legal personality.

 

A “non-resident company” or a “non-resident limited partnership” is a company/limited partnership which is resident for tax purposes in a jurisdiction outside the BVI (such a jurisdiction should not be on Annex 1 to the EU list of non-cooperative jurisdictions for tax purposes).

 

The Law is applicable to all companies and limited partnerships unless such companies and limited partnerships are considered as tax residents of other jurisdictions.

 

Relevant Activities

 

A legal entity is required to demonstrate economic substance in the BVI if it is carrying on any of the following activities (called “relevant activities”): (a) banking business; (b) insurance business; (c) fund management business; (d) finance and leasing business; (e) headquarters business; (f) shipping business; (g) holding business; (h) intellectual property business; (i) distribution and service centre business. These activities are defined in detail under the Law.

 

Requirements under the Law

 

The Law requires a legal entity carrying a relevant activity during any financial period to comply with the economic substance requirements in relation to that activity. A legal entity is considered to have complied with the economic substance requirements if:

 

a) the relevant activity is directed and managed in the BVI;

b) there are adequate number of qualified employees in the BVI;

c) there is adequate expenditure incurred in the BVI;

d) there are physical offices or premises in the BVI;

e) in case the relevant activity is intellectual property business and requires the use of specific equipment, that equipment is located in the BVI; and

f) it conducts core income-generating activity.

 

Holding Business

 

A BVI company which is carrying on the business of an equity/share holding company and earns dividends and capital gains, and carries on no other relevant activity is required to comply with a slightly relaxed level of economic substance requirements. Such a BVI company is considered to have adequate substance if it (a) complies with statutory obligations under the BVI companies law; and (b) has adequate employees and premises for holding and/or managing equitable interests or shares.

 

Requirement to Provide Information

 

A legal entity shall provide (in addition to the reporting requirements under other BVI laws) any information reasonable required by the competent authority to assess if such a legal entity has complied with the requirements under the Law.

 

Penalties

 

If the competent authority has determined that a legal entity has not complied with the economic substance requirements as per the Law, the competent authority shall issue a notice to the legal entity and impose a penalty (ranging between USD 5,000 to USD 50,000). A notice issued by the competent authority shall include its findings and steps required to be taken by the said legal entity to ensure compliance under the Law.

 

If the legal entity fails to comply with the first notice, the competent authority shall issue a second notice and impose additional penalty on the legal entity (ranging between USD 10,000 to USD 400,000).

 

If the legal entity fails to comply with the second notice, the competent authority may submit a report to the Financial Service Commission in BVI recommending striking the said legal entity off the Register of Companies or the Register of Limited Partnerships (as applicable).

 

A legal entity who has received a notice from the competent authority has a right to appeal to the BVI courts against the competent authority’s determination/findings (relating to compliance with the economic substance requirements) and amount of penalty imposed.

 

Next Steps

 

All legal entities are required to assess and determine if they are in compliance with the Law and if not, what steps are required to be taken to ensure compliance. ■

Directors’ duties in DIFC

Introduction 

 

On 12 November 2018, the Dubai International Financial Centre (DIFC) introduced a suite of new legislation concerning companies operating in or from the DIFC. This consists of DIFC Law 5 of 2018 (the Companies Law), DIFC Law 7 of 2018, the Companies Regulations and the Operating Regulations.

 

The Companies Law has amplified the duties of directors of DIFC companies by enacting a set of directors’ duties, largely following the standard contained in the UK Companies Act 2006.

 

This inBrief briefly outlines the particular duties that directors of bodies corporate in the DIFC should be aware of.

 

Directors’ Duties

 

Directors’ duties are owed to the company. This means that it will in the first instance be the company, rather than the shareholders, that are entitled to enforce them.

 

Companies are permitted to go further than the statutory duties provided by placing more onerous requirements on their directors in their articles of association, or by virtue of a director’s terms of appointment.

 

The Companies Law sets out the following directors’ duties (though there may also be additional duties that are relevant to a director, for example, a duty to prepare and deliver accounts) although directors of public limited companies or financial services providers licensed by the Dubai Financial Services Authority may be subject to additional duties:

 

• duty to act within powers: directors are confined to exercising their powers in accordance with the company’s articles of association and for the purposes for which those powers have been conferred;

 

• duty to promote the success of the company: directors must act in the manner they consider, in good faith, would be most likely to promote the success of the company for the benefit of its shareholders as a whole. In doing so, directors must consider, amongst others, the interests of the company’s employees, likely consequences of any decision in the long run and the impact of the company’s operations on the community and the environment;

 

• duty to exercise independent judgement: directors must generally exercise their powers independently. As an example, directors may not agree to vote at a board meeting in a certain way if instructed by a third party (i.e. shareholder);

 

• duty to exercise reasonable care, skill and diligence: a director must act as a reasonably diligent person would at all times. A director must display the general knowledge, skill and experience to carry out the functions that are required by the director. An individual should not take on a directorship unless they are appropriately qualified or experienced to be able to perform the functions that they may reasonably be expected to carry out;

 

• duty to avoid conflicts of interest: directors must avoid scenarios in which they have or can have a direct or indirect interest that conflicts with, or may conflict with the company’s interest;

 

• duty not to accept benefits from third parties: directors must not accept any benefit from a third party which is conferred because of him being in the position as a director of the company, or for him doing (or not doing) anything in his position as director, unless the acceptance of such benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. “Benefit” has not been defined in the Companies Law, but it is likely that a court considering the matter would interpret this term to have its ordinary meaning;

 

• duty to declare interest in a proposed transaction or arrangement: directors must declare, before entering into the relevant transaction or arrangement, to the other directors the nature and extent of any interest (direct or indirect) in a proposed transaction or arrangement with the company. As the legislation provides for indirect interest, the director need not be a party to the transaction for the duty to apply and directors should apply their mind to potential parties who may be regarded as connected persons;

 

• duty to declare interest in existing transaction or arrangement: directors must declare, as soon as practicable after the director became aware of the circumstances, the nature and extent of any interest (direct or indirect) in a transaction or arrangement with the company or by a subsidiary which, to a material extent, conflicts or may conflict with the interests of the company.

 

Consequences of breach

 

The consequences for directors breaching their statutory duties can be severe and may include personal civil liability, fines or payment of damages to the company. A breach of duty may also be grounds for disqualification from the position as a director.

 

Conclusion

 

Directors should familiarize themselves with the statutory duties outlined in the Companies Law (and other relevant legislation) before accepting a position as a director of a DIFC company. Individuals should assess whether they have the necessary qualifications, experience, knowledge and capabilities to perform the tasks which may be expected of the director. Directors or potential directors who are uncertain of what may be expected of them in their role as directors should seek legal advice. ■

Ultimate Beneficial Ownership Regulations (DIFC)

The DIFC Authority has issued the Ultimate Beneficial Ownership (UBO) Regulations, which took effect on 12 November 2018 (the Regulations).

 

The Regulations require entities currently registered with, or to be registered with, the DIFC Authority to keep and maintain a UBO Register and (if applicable) a Register of Nominee Directors, setting out the details of the UBO and Nominee Directors respectively.

 

In this inBrief, we highlight the key items that DIFC entities need to be aware of in creating and maintaining their UBO Register and Register of Nominee Directors and in issuing the associated notifications to the DIFC Registrar of Companies.

 

Who are the Nominee Director and the UBO?

 

For the purposes of the Regulations, a Nominee Director is a director who is obligated to act in accordance with the directions and instructions of another person.

 

An ultimate beneficial owner is a natural person who:

 

– in relation to a DIFC company, owns or controls directly or indirectly:

o 25% of shares, ownership interests or voting rights in the DIFC entity; or

o has the right to appoint or remove the majority of the directors of the DIFC entity.

 

– in relation to a DIFC partnership, exercises significant control over the activities of the partnership;

 

– in relation to a DIFC foundation, exercises significant control over the council of the foundation; and

 

– in relation to a DIFC non-profit incorporated organisation, exercises significant control over the board.

 

If, after applying the foregoing rules, no natural person can be identified as an ultimate beneficial owner of the DIFC entity, anyone who exercises significant control over the DIFC entity (or its governing body) shall be required to be notified as an ultimate beneficial owner of the DIFC entity. If there is no such person, then members of the governing body of the DIFC entity shall be required to be notified as ultimate beneficial owners of the DIFC entity.

 

Obligation of DIFC entities

 

The obligations of the DIFC entities vary slightly depending on when they were registered with the DIFC Authority.

 

– DIFC entities registered prior to 12 November 2018 were required to establish a UBO Register and Register of Nominee Directors, and notify the details of the Nominee Directors and the ultimate beneficial owner to the DIFC Authority through the DIFC portal by 12 February 2019 (the DIFC Authority granted an additional penalty free grace period of 30 days, meaning that the final deadline for compliance was 14 March 2019).

 

– DIFC entities registered after 12 November 2018 were also required to comply with the deadline of 14 March 2019 to establish a UBO Register. For the Register of Nominee Directors, the deadline is 30 days of the later of the registration date of the DIFC entity or the Nominee Director becoming a director of the DIFC entity.

 

– Entities in the process of being registered with the DIFC Authority are required to establish a UBO Register 30 days following the date of registration with the DIFC Authority.

 

The latter two categories of entities need not notify the DIFC Authority of the UBO details, as they are deemed to have provided such details as part of the registration process.

 

Changes to the UBO Register

 

DIFC entities must record any changes to the UBO Register and Register of Nominee Directors, and notify the DIFC Authority of the same through the DIFC Portal, within 30 days of becoming aware of such change.

 

Penalties

 

Failing to keep and maintain the UBO Register and the Register of Nominee Directors will result in a fine of USD 25,000. If the DIFC entity fails to comply with any requirement, or notice issued, under the Regulations, the DIFC Registrar may strike the DIFC entity off the Public Register.

 

Exempt Entities

 

The Regulations set out DIFC entities that are exempt from keeping and maintaining a UBO Register and Register of Nominee Directors. These are DIFC entities that:

 

– have their securities listed or traded on an exchange recognised by the DIFC Authority;

 

– or regulated by the DFSA or any other financial services regulator recognised by the DIFC Authority;

 

– constitute a company, foundation or partnership which the DIFC Authority recognises as being subject to equivalent international standards with adequate transparency of ownership information in its home jurisdiction;

 

– are a non-profit incorporated organisation which does not, as its primary function, engage in raising or disbursing funds for charitable, religious, cultural, educational, social, fraternal or similar purposes;

 

– are wholly owned by a government or governmental agency of the UAE and any other jurisdiction which the DIFC Authority may determine from time to time; or

 

– are established under UAE law to perform governmental functions.

 

DIFC entities that fall under one of the abovementioned categories will be required to request a formal exemption.

 

Partially Exempt DIFC Entities

 

Additionally, the Regulations set out the requirements for a partially exempt DIFC entity, which is a DIFC entity that is at least 25% owned by a corporate person that falls under one of the abovementioned categories (Exempt Owner). Such DIFC entity is subject to the obligations set out in Section 4, however with respect to the Exempt Owner, instead of tracing the ownership details of the Exempt Owner, the details of the Exempt Owner are inserted in the UBO Register instead. ■

Federal Penal Code amendments

In the latest development in an eventful year, Federal Decree-Law 24 of 2018 introduces amendments to the Federal Penal Code, originally enacted as Federal Law 3 of 1987.

 

The amendments are designed to make the Penal Code consistent with other recent federal legislation and current federal enforcement policies. Only ten provisions of the statute have been affected, out of the more than 400 total articles contained in the statute.

 

Confiscation of instruments of crime

 

Article 82 of the Penal Code authorises the confiscation of instruments used in commission of a crime. The 2018 amendments expand the category of items that may be confiscated, and they also allow the imposition of a fine equal to the value of the items in cases where confiscation does not occur.

 

The previous text of Article 82 read as follows:

 

The court shall, upon conviction, order confiscation of the seized things and property that were used in the crime, that by their type are for use in the crime, that were the subject of the crime or that were obtained from the crime, all without prejudice to the rights of good faith third parties.

 

The 2018 amendments restore the following clause to Article 82, which had been deleted by earlier amendments enacted in 2016:

 

If the manufacture, use, possession, sale or offer for sale of said things is considered a crime in itself, then in all cases the confiscation shall be ordered even if such things are not owned by the accused.

 

The 2018 amendments also add the following clause at the end of Article 82:

 

If any of the things or property stated in the first paragraph of this Article are not seized, or if an order of confiscation cannot be issued due to the rights of good faith third parties, then the court shall pass judgment for payment of a fine equal to their value at the time of commission of the crime.

 

National Defence Secrets

 

A new provision has been introduced as Article 170, defining the term National Defence Secrets. This article had been deleted by the 2016 amendments. The provision in its entirety now reads as follows:

 

Each of the following shall be considered a national defence secret:

 

1. Military, political, economic, industrial, scientific and security information related to the security of society, or other information that by its nature is known only by persons authorised therefor and which are required by the interests of the state to be kept secret from others.

 

2. Correspondence, writings, documents, drawings, maps, designs, pictures, coordinates, and other things that if revealed could result in the disclosure of the information stated in the preceding paragraph and which are required by the interests of the state to be kept secret from others than those entrusted to maintain or use the same.

 

3. News and information relating to the armed forces, the Ministry of Interior, and the security bodies, their formations, movements, ordnance, provisioning, staff and other issues that may prejudice military affairs or war and security plans, unless the competent authority issues written permission for the publication or broadcast thereof.

 

4. News and information relating to the measures and procedures followed for investigating the crimes set out in this chapter and for the apprehension of criminals, as well as news and information relating to the conduct of the investigation and adjudication if the investigating authority or the competent court prohibits the broadcast thereof.

 

External and internal security of the state

 

In 2016, a new chapter was added to the Penal Code addressing crimes against the external and internal security of the state. The specific article in this chapter that was amended in 2018 is Article 201 (repeated) (9), which allows a court to grant a convicted criminal an exemption from or reduction in penalty if the criminal has reported to the judicial or executive authorities any information relating to offenses against the external and internal security of the state.

 

When this provision was enacted in 2016, it provided as follows:

 

The court shall, at the request of the public prosecutor or on its own initiative, order reduction of or exemption from punishment in respect of criminals who have provided information to the judicial or executive authorities related to any felony harmful to the external or internal security of the state, when the same led to discovery of the felony or its perpetrators, proof of their commission of the felony, or arrest of any of them.

 

As now amended, the provision allows the court also to replace the punishment with a fine of not less than AED 100,000 and not more than AED 10,000,000, in addition to reduction of or exemption from the punishment. This may be done when the convicted defendant has provided information to the judicial or executive authorities related to any felony that is deemed to be harmful to the security of the state in other criminal statutes, in addition to any felony harmful to the external or internal security of the state.

 

Moreover, the amendments now limit the circumstances in which sentences may be reduced. Specifically, for a criminal that does not provide information under this article, only the public prosecutor may request the court considering the case to reduce the sentence, if the request relates to the supreme interests of the state or to any other national interest. The amended provision adds that, if sentence has already been pronounced by the court, then the public prosecutor may still request reduction prior to or during execution of the sentence.

 

Public officials

 

Several changes have been introduced to the provisions of the Penal Code that deal with the obligations of public officials, including the anti-bribery provisions.

 

Article 225 of the Penal Code makes it a criminal offense for a public official or a person charged with public service to abuse his office by obtaining without entitlement funds, papers or other materials belonging to the state or public body or by facilitating the same for another person. The 2018 amendments provide for a more severe punishment if such a crime is associated with or connected to forgery, the use of a forged document or the use of a forged copy of an official document.

 

Turning to the anti-bribery provisions, Article 225 (repeated) now provides that a public official who unlawfully obtains or attempts to obtain without entitlement, either for himself or another person, a profit or benefit from any activity pertaining to the obligations of his office shall be sentenced to imprisonment.

 

Article 234 expands the scope of the prohibited “quid pro quo” acts that constitute one of the elements of the crime of bribery on the part of a public official. The definition of bribery now appearing in Article 234 reads as follows:

 

A sentence of temporary imprisonment will be imposed on any public official, person charged with public service, foreign public official or official of an international organisation who requested, accepted or took, whether directly or indirectly, a gift, advantage or grant without entitlement, or a promise of the same, whether in favour of the official himself or for another person, entity or facility, in consideration of such official doing an act or refraining from an act pertaining to his office or breaching the obligations of his office, even if he intended not to do the act, to refrain therefrom or to breach the obligations of his office, or even if the request, acceptance or taking followed the performance of the act, the refraining therefrom, or the breach of the obligations of his office.

 

The sections underscored in the text above were added by the 2018 amendments. Taken together, the actus reus of the government official may be:

 

• committing an act pertaining to his office,

 

• refraining from an act pertaining to his office, or

 

• acting in breach of the obligations of his office.

 

Article 235 is added to the Penal Code. It provides that a sentence of temporary imprisonment may be imposed in the foregoing circumstances even if the actus reus of the government official is believed or alleged in error to pertain to his office.

 

Another new provision, Article 236, states that arbitrators, experts and investigators shall be deemed to be public officials within the confines of the tasks entrusted to them.

 

While the provisions discussed above address corruption by public officials, Article 237 addresses persons who attempt to bribe public officials. The amendments add, as an actus reus for this offense, an act by an official in breach of the obligations of his office.

 

Arbitrators

 

To the presumed relief of persons practicing as arbitrators in the UAE, Article 257 has been amended.

 

The amendments to the Penal Code that were introduced in 2016 provided that an arbitrator, expert, translator or investigator appointed by the administrative or judicial authorities or selected by parties who issues a decision, gives an opinion, submits a report, addresses a case or proves an incident for the benefit or against the benefit of a person, in a manner that fails to maintain the requirements of integrity and impartiality, shall be subject to imprisonment. The amended text now omits the arbitrator from this provision. Moreover, the amended text now imposes a criminal sanction only upon an expert, translator or investigator who knowingly makes a false statement.

 

Electronic Surveillance

 

Finally, under new Article 280 (repeated), it is a crime for a person under electronic surveillance to evade such surveillance or by any means to damage or hamper the remote monitoring device. Enhanced penalties can be imposed if the act in question involves the destruction in whole or in part of electronic reception and monitoring devices, in which case the defendant will also be required to pay the value of the damaged equipment. ■