Economic Substance Regulation of UAE

January 8, 2020

INTRODUCTION AND BACKGROUND H.H. Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai has promulgated the Resolution of the Cabinet of Ministers No. (31) for 2019 concerning Economic Substance Regulations (ESR/Regulations) on 30 April 2019. Pursuant to the Regulations,  a Ministerial Decision no. 215  of 2019 on the Issuance of Directives for the Implementation on the Provisions of Cabinet Decision no. 31 of 2019 Concerning Economic Substance Requirements was issued on 11 September 2019 as a guidance ( Guidance) on how the Economic Substance can be applied and how the Economic Substance Test may be met for the purpose of complying with the ESR . The Economic Substance Regulations shall apply to UAE onshore, Free Zone and offshore companies that operate and generate income from the “Relevant Activities”. WHAT IS ECONOMIC SUBSTANCE REGULATION (ESR)? Background of the ESR: On 1 December 1997, the European Union (EU) adopted a resolution on a code of conduct for business taxation with the objective to curb harmful tax competition.  Shortly thereafter, the Code of Conduct Group on Business Taxation (COCG) was set up to assess tax measures and regimes that may fall within the scope of the Code of Conduct on Business Taxation. On 5 December 2017, the COCG published the (first) EU list of non-cooperative jurisdictions for tax purposes, in cooperation with the Economic and Financial Affairs Council (ECOFIN). Recently, the world economy has been characterized by a shift from country-specific businesses to global enterprises operating both over the internet and at locations remote from where their physical customers are buying goods and services on online. This has presented opportunities for complex profit repatriation structures – reducing the tax burden in other words – and has fuelled concerns of unfair and unethical practice. As such, EU formalize and applies three listing criteria, which are aligned with international standards and reflect the good governance standards that the Member States comply with themselves: Transparency: Jurisdictions should comply with the international standards on exchange of information, automatic and on request. In addition, jurisdictions should sign the OECD’s (The Organization for Economic Cooperation and Development) multilateral convention or signed bilateral agreements with all EU Member States to facilitate such exchange. Fair Tax Competition: Jurisdictions should not have harmful tax regimes nor facilitate offshore structures which attract profits without real economic activity. BEPS Implementation: Jurisdictions should commit to implementing the OECD’s Base Erosion and Profit Shifting (BEPS) minimum standards, starting with Country-by-Country Reporting The common denominator for the Economic Substance systems is The Organization for Economic Cooperation and Development (OECD) Forum on Harmful Tax Practices (FHTP), which sets the global standard that requires companies to have substantial activities in a jurisdiction (known as “Economic Substance”). OECD is a unique forum where the governments of 36 member states with market economies work with each other, as well as with more than 70 non-member economies to promote economic growth, prosperity, and sustainable development.  Over 125 jurisdictions around the world are members of the OECD BEPS Inclusive Framework. The FHTP is a sub-body of the Inclusive Framework and is responsible for assessing […]

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Insolvency law: The objectives and the mechanisms

December 17, 2019

Insolvency Law No. 9 of 2019 enters into force from January 2020, which is the year of economic and social betting on development and aspiration for a happier and more stable country. What is the role of the insolvency law in this context? Contrary to the federal bankruptcy law, the insolvency law includes civilians who are not merchants whose financial difficulties have prevented them from paying their debts and discharging their financial receivables – the insolvency law has set out clear and easy-to-apply rules for collecting bad debts and rehabilitating the financial position of the debtor, which increases the credibility of creditor banks in loaning individuals, and encourages. According to the third article of the insolvency law, which requires commencement of procedures, the debtor shall submit to the court an application without contesting anyone in it, to settle his/her financial obligations, provided that the required documents are attached to the application. Protective and penal measures Opening insolvency proceedings, does stop the claims? The law stipulated that during the insolvency and liquidation procedures, it is not permissible to initiate or pursue any lawsuits or take legal or judicial measures against the debtor, as the issuance of the decision to open the insolvency and liquidation procedures entails stopping the entitlement of legal or contractual benefits to the debtor, including the interest due, or compensation due for late payment, and the cessation of any judicial action against any person who granted a personal guarantee to the debtor, or transferred his/her money as a guarantee of the debtor’s obligations, pending the issuance of a judgment to liquidate the debtor’s money, within the limits of that guarantee. Penal procedures If the court decides to initiate procedures for settling financial obligations, or commences insolvency and liquidation procedures, it orders, on its own initiative or at the request of the debtor, to suspend any penal procedures if they arise from cases of issuing a check without balance for checks issued by the debtor before requesting the commencement of procedures settlement of financial obligations, or prior to the request to open insolvency procedures and liquidation of funds. Measures against the debtor and penalties against the creditor The law has been misled by the debtor, with the intent to harm the insolvency and liquidation procedures, in a way that prevents the secretary appointed by the court from performing his duties in accordance with the provisions of this law. In the event that it becomes apparent to the court after the debtor’s insolvency decision and the liquidation of his/her funds, that any debtor’s money has not been disclosed, then it may include that money in the debtor’s liquidated funds, then the court may take the necessary measures against the debtor if he/she commits any of the acts or the following actions: fleeing outside the country to avoid or postpone the payment of any of its debts, avoid, postpone, disable the insolvency procedures or liquidate his/her funds,  dispose of any of his/her funds with the aim of preventing the Secretary from possessing it or delaying possession thereof, as well as hiding or destroying any of his/her funds, documents or other relevant information […]

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Spotlight on Recent Developments in UAE

November 26, 2019

Long-term Residence Visas   The UAE has launched long-term residence visa programs that aim to attract international talent into the UAE, such as entrepreneurs, investors, scientists and special talents. Availing these long-term residence visas can be described below: 10-year UAE residence visa According to the General Directorate of Residency and Foreigners Affairs, foreign investors may obtain a 10-year UAE residency visa provided the following: Establishing an entity with a minimum total share capital of AED 10 million with at least 60% shareholding of the total company share capital of such investor, make a deposit of at least AED 10 million in an investment fund in the UAE; The invested amount shall not be a loan from any financial/non-financial institutions; and The investment ought to be for 3 years. Further, specific categories are also entitled to apply for 10 years UAE residency visa (i.e. doctors, scientists, creative individual in field of culture and art, etc.), however, applicants must have an employment contract in a field which is identified as a priority for the UAE, in addition of specific conditions vary according to each field. 5-year UAE residency visa In addition to the above-mentioned 10-year UAE residence visa, investors who invest in a property in UAE can apply for a 5 years UAE residency visa. Granting the visa to such investors shall be allowed provided that (i) the property gross value the subject of the investment shall not be less than AED 5 million; (ii) the invested amount shall not be a loan from any financial/non-financial institutions; and (iii) the property must be taken for minimum 3 years. In addition of property invests as mentioned in the previous paragraph, entrepreneurs shall also apply for a 5 years UAE visa, provided to own a project within UAE of a value not less than AED 500,000 with obtaining an approval from an accredited business incubator in UAE. Outstanding students shall be entitled to apply for 5 years UAE visa as long as their score in their secondary school is at least 95% with a distinction of 3.75 GPA upon graduation from any university. Such students may obtain the visa for themselves as well as for their family. Digital Initiative: Spotlight on the Dubai Land Department As the UAE positions itself at the forefront of innovation and adoption of leading-edge technologies globally, it is worth highlighting specific initiatives and regulatory developments made by the UAE government to promote the transition of the UAE economy into one that is more digitally enabled and ready to adapt to the future. The Dubai Land Department (DLD) is one UAE government agency that is leading in the push for innovation and rollout of seamless and efficient customer experiences through digital solutions. The DLD has rolled out blockchain technology to automate and optimize real estate business processes end-to-end. The DLD is employing blockchain across three initiatives: Ownership Verification, Property Sale by the Developer and Smart Leasing. Through the blockchain platform, DLD aims to improve the provision of services, effectiveness of collaboration among all parties involved in the real estate market and enhanced security for real estate properties conducted digitally. The […]

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Key Highlights on the UAE Insolvency Law

November 26, 2019

The UAE Cabinet recently approved Decree-Law No. (19) of 2019 on the Insolvency of Natural Persons concerning natural person’s inability to pay debts due to insolvency and debt default. This new law is aimed at enhancing the competitiveness of the UAE, ease of doing business and at facilitating more favorable conditions for individuals facing financial difficulties and protecting those unable to meet debt obligations from going bankrupt. As a measure responsive to the needs of the UAE’s citizens and residents, said law shall support individuals who are facing existing or potential financial distress and allow them to settle their debts. Key highlights and changes from prior insolvency regulations involve the new law allowing for the following: Decriminalize the financial obligations of the insolvent person and allow an opportunity to work, be productive and provide for their families Protect the debtors from legal prosecution out of the bad debts incurred Enable debtors to reschedule their debts and give an opportunity to take new concessional loans Coming into force in January 2020, this new law also features the availability of the assistance of one or more experts to be appointed by the court to assist debtors in settling their financial obligations. Also acting as a coordinator between debtors and creditors, the expert/s shall come up with a settlement plan to address all financial liabilities of the debtor to be completed in no more than three years. The new law is different from that of the UAE Bankruptcy Law (Decree-Law No. 9 of 2016) which also addresses the insolvency of a debtor. The debtor in this new law pertains to the natural person who is not engaged in economic activity and does not match to the description of a trader. Nonetheless, both laws are aimed towards aiding and supporting the swift completion of related legal procedures to reduce the fees for rescheduling or restructuring debts with a view of finding a fair compromise for both creditors and debtors. The UAE Ministry of Finance has clarified that bounced cheques would not be decriminalized but that debtors can now turn to the insolvency law to resolve their debts without any jail time or legal action taken against them. We at Al Suwaidi & Company see the approval and implementation of this new law as a key milestone with significant implications throughout the commercial, financial services and consumer finance landscape of the UAE that shall overall improve the UAE’s competitive positioning and sustainability as the Middle East’s premier place to do business and to avail an attractive quality of life for its residents and citizens. Specialized rules and procedures regarding the insolvency of a natural person are expected to enhance transparency on civil debt repayment transactions and increase the general security of financial transactions. Easier access for individuals to obtain loans to help settle debt obligations shall also help in improving collections on bad debts and accelerate the rehabilitation process of debtors. This will improve creditor banks’ confidence in retail lending and ensures the protection of the debtors’ dignity and helps create an opportunity for them to better manage their finances and reduce their financial burdens.

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“Ignorantia Legis Neminem Excusat”

November 26, 2019

“But I did not know!”; “That can’t be!”; “It’s totally unacceptable!” These may just be a few of exclamations that people utter when they are apprehended while transiting, visiting or moving to a new country. As in most jurisdictions, “Ignorance of the law excuses no one.” Therefore, it is highly advisable to get acquainted with the laws and culture of any country that you visit. This famous legal maxim is embodied in Article 42 of Federal Law No. (3) of 1987, otherwise known as the UAE Penal Code, which provides that “Ignorance of the provisions of this law shall not be considered as excuse.” For expatriates, tourists and people in transit to the UAE, here are a few laws and reminders on how to or not to conduct yourselves when in the UAE: 1 – Flashing the middle finger is considered scandalous and disgraceful, and is also punishable as a crime committed against honor under the UAE Penal Code. 2 – Do not use the “F” word! This is considered as a crime perpetrated against reputation under the UAE Penal Code. Detention and or fine shall be imposed upon anyone who, by any means of publicity, disgraces the honor or the modesty of another person without attributing any particular act to the defamed party. Penalty will be graver when the defamed is a public official or one in charge of a public service is abused while performing his duty or public service. 3 – Do not engage in consensual intimate relations outside of marriage. This is punishable as a crime committed against honor under the UAE Penal Code. Casual or serious, it does not matter. Cohabitation may be accepted in some countries and frowned upon in others, but in UAE, it is illegal and will land you in trouble specially when one conceives a child out of wedlock. 4 – Do donate to accredited charities only and obtain a permit for fundraising activities. Raising funds must have the approval of the General Authority of Islamic Affairs and Endowments or the Islamic Affairs and Charitable Activities Department in Dubai. The solicitation, promotion and collection of donations online without the proper license is punishable under Federal Law No. 5 of 2012 on Combating Cybercrimes. 5 – Do ask permission when taking photos of people and posting them. Otherwise, you can be held liable under Federal Law No. 5 of 2012 on Combating Cybercrimes. It is considered an invasion of the privacy of another person to photograph others and publish their photos without their permission. Every country’s culture must be considered, and its laws followed. Ideally, everyone behaves properly and abides by the laws. However, for those who lands in trouble, do seek the help and assistance of accredited legal consultants and advocates for advice and representation.  

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Introduction to the UAE’S Court System

November 26, 2019

The United Arab Emirates is a fascinatingly inspirational young nation that has accomplished remarkable success in a short span of 48 years. UAE is also one of the safest countries with the lowest rate of crimes in the world. In line with UAE’s vision to become one of the safest places in the world, the Deputy Prime Minister and Minister of the Interior, His Highness Sheik Saif Bin Zayed Al Nahyan, has revealed the Ministry of Interior’s aim to be at the forefront of countries with the lowest rates of violent crime by the year 2021. On the auspicious occasion of UAE’s 48th National Day, whilst wishing the country prosperity, success, and peace, Al Suwaidi & Company. would like to take its readers through UAE’s journey towards today’s effective judicial system. The Constitution of UAE which came into effect on 2 December 1971 and which was permanently accepted in May 1996 is the guiding light for the legal system of the United Arab Emirates. Article 94 of UAE’s Constitution stipulates that “Justice is the basis of authority. Judges shall be independent and shall be subordinate to no authority but the law and their consciences in the performance of their duties.” The UAE Judiciary administers the civil law system, inspired by the Roman and French legal systems and the Egyptian civil codes of law. Although the core principles of law in the UAE are based on Shari’a law, most of UAE’s legislations consist of a mix of Islamic and European concepts of civil law. The judicial system is usually inquisitorial wherein, unlike common law countries, precedent is generally not recognized (although judgments delivered by higher courts may be applied by lower courts). Under the Constitution, each Emirate can either establish its own judiciary system or merge with the federal court system. As a result, there is a combination of federal and local (or Emirate) courts in the UAE with corresponding jurisdictions, depending on the system opted by the individual Emirate. The Emirates of Sharjah, Ajman, Fujairah, and Umm Al Quwain have merged themselves with the UAE Federal Judicial System, whereas the Emirates Dubai, Ras Al-Khaimah and Abu Dhabi, have retained their own distinct and separate local judicial systems. Both Emirate and Federal Courts are allowed by the Constitution to apply UAE federal laws, as well as laws and regulations promulgated by the rulers of the respective Emirates. In case of conflict, UAE Federal Law has the supremacy. In the context of judicial hierarchy, the UAE federal system is divided into Courts of First Instance, Courts of Appeal and Supreme Court of Cassation. The Federal Supreme Court is situated in the capital of the United Arab Emirates, Abu Dhabi and is the highest court in the federal judicial system. The Courts of Appeals seated in each Emirate hear appeals on rulings from the Court of First Instance of their home Emirate. In the three Emirates (Dubai, Abu Dhabi, and Ras Al-Khaimah) which have opted for their own state/ individual emirate court system, the judicial system in these three Emirates is divided into Courts of First Instance, Courts of Appeal and Courts of […]

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The New Federal Law on Financial Lease

November 26, 2019

  Due to the inability of some individuals to own properties or movables of high value that exceed their financial limits, the federal legislators were led to issue a law on Financial Leasing. This law aims to make individuals of limited income invest in immovables and movables in long-term installments. These individuals are entitled to own these properties after the completion of the agreed lease period. It has been indicated in Article (2) of this Law that all entities providing “Finance Lease” activity in the UAE must be licensed to do so by the UAE Central Bank (thus any Finance Lease Contract entered into with an unlicensed Lessor is deemed null and void). It is also prohibited for any unlicensed person to engage in this activity or to use the term Finance Lease or any equivalent thereof. The elements that should be included in a Finance Lease contract are names and details of the lessor and the lessee, detailed description of the leased asset, the term of the Finance Lease contract, rent amount and number of payments, due dates and terms and conditions of the delivery of the leased asset. This law regulates the ability of the Lessee or the Lessor to assign or transfer its rights and/or obligations in a Finance Lease Contract to a third party, this assignment includes rights, obligations, and ownership upon prior written consent of the other party. Such waiver shall be in accordance with the provisions of the law. This law sets out penalties for those who carry out financial leasing without a license so that only licensed companies are under the supervision of the Central Bank. The main purpose of this law is to provide opportunities for many investors and individuals to own movables, real estates, and other immovables through long-term payment methods.    

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Key Changes of the New DIFC Employment Law

November 26, 2019

The new employment law, namely, the DIFC Law No. 2 of 2019, came into force on 28 August 2019, replacing the DIFC Law No. 4 of 2005, as amended by DIFC Law No.3 of 2012 to be the current applicable law. In an effort to accommodate the varied employment arrangements in the DIFC, the newly enacted law addresses the extent to which the new employment regime is applicable to seconded, part-time and short-term employees. The provisions for a secondment arrangement are added to form part of the employment law for the first time. Under a secondment arrangement, an employee is permitted to work under another employer in the DIFC provided the employee is approved by the DIFC Authority (a secondment card will be given if an employee is approved to work on the basis of a secondment). In addition, for employees who are seconded from outside of DIFC, certain provisions will not apply to such employees and they are able to choose a foreign law to govern their employment contracts save from the mandatory provisions. Another crucial development under the new law would be the expansion of the anti-discrimination provisions. The scope of these provisions expanded to prevent discrimination based on age, pregnancy and maternity. Companies governed by the new employment law should be careful to review their employee handbook/manual, company policies, protocols and procedures to ensure that there are no provisions, criterion or practices which would constitute discrimination against one of the prohibited grounds ie. nationality, age, gender, race and so on. The new law also seeks to protect an employee who makes an allegation or brings a claim for discrimination against them as it prohibits the victimizing of such an employee in the situation. It should be noted that an employee has a limitation period of 6 months from the date of alleged discriminatory act or omission of an employer within which a claim for discrimination must be brought against the employer. Nonetheless, an employer should be aware that the courts may extend the aforesaid time limit as it sees fit. In adjudicating the claims filed before the courts, the courts have the power to order payment of compensation as much as the complainant’s annual salary. Under the new regime, a male employee, having served a requisite amount of time to the company may be entitled to 5 working days of paid paternity leave. The right to take paid time off to attend antenatal appointments is extended to expectant fathers. It is seen that this is a positive development towards giving more respect to the familial role of a father in the antenatal or postnatal process. Moreover, mothers returning to work from maternity leave are also entitled to take nursing breaks. Other changes govern the position of both an employer and an employee after the termination of the latter. Notice periods are prescribed by the new employment law and the parties are prohibited to agree on a term less than the statutory minimum notice periods. Minimum notice periods will not apply during the probationary period of an employee or where there is an agreement in place that an […]

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Foreclosure and Legislative Challenges for Islamic Banks

November 7, 2019

The way in which Islamic banks (the “Banks”) foreclose on properties they finance due to a default of the customer depends on whether the Banks either: a) register the properties in the names of their customers and mortgage them in favour of the Banks, or b) register the properties under the names of the Banks. In the first scenario, the Banks often sell the properties through an auction pursuant to Law No.14 of 2008 (Clauses 25 and 26) concerning mortgage of properties in Dubai. The process set out by the law is that if a Customer defaults on payment of their debt secured by the mortgage, the Bank will give the customer notarized notice to pay the debt within a maximum period of 30 days. Should the Customer fail to meet this obligation, the Bank may consequently file an application with an execution judge in order to sell the property directly via. an auction. Moreover, the benefit of this process is that the Bank does not need to institute proceedings before the three levels of courts, that is, the Court of First Instance, the Court of Appeal and the Court of Cassation (or Supreme Federal Court as the case may be) in order to sell the property which, at the same time, saves time and money for the Banks in terms of court costs and legal fees. When this concept first started, the Banks were successful in selling the properties by auction because the auction was conducted in the presence of buyers who always bid for best prices available. However, that being said, these auctions were also being conducted online which meant that buyers would also offer low prices for these properties which were insufficient to settle the debt owed by the Customers to the Banks. This sometimes meant that Banks were stuck with unsold properties. It should be noted that the principle for the sale of properties by auction is also recognized by Law No. 3 of 2015 (Clause 53), concerning Regulations of the Real Estate sector, in Abu Dhabi as well. From this, we can conclude that the Banks may only sell properties through an auction in Dubai and Abu Dhabi specifically. Concerning the second scenario, where the Banks register properties in their own names, the title deeds show the owners of the property are the Banks themselves, but it is subject to the terms and conditions of the lease agreement between the Banks (as lessors) and the Customers (as lessees). In this scenario, the Banks cannot apply the aforementioned laws listed above, and they are required to bring proceedings against the Customers in default and ask the court(s) to de-register the lease from the title deeds, permit the Bank to retake possession of the properties and to then claim their compensation – this value would be the difference between the outstanding amount due by the Customer and the market price of the properties. However, this process clearly takes time and causes the Banks to incur court costs and legal fees. That being said, the advantageous aspect of this scenario means that the Banks may sell the properties […]

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Basics of Bounced Cheques in Dubai

October 17, 2019

In the UAE, a country which continues to be a strategic hub with a rapidly growing economy, writing cheques is one of the common forms of payment; whether you’re buying a car, paying rent or any form of purchases and individual transactions, cheques are commonly used as a form of security. The below outlines important factors that one should familiarize themselves with prior to using a cheque as a form of payment. If a cheque is Dishonored/Bounced: When a cheque is dishonored, the drawee bank immediately issues a ‘Cheque Return Memo’ to the payee mentioning the reason for non-payment such as insufficient funds, the incorrect date mentioned on the cheque, signature mismatch, mismatch of the amount and figures, etc. Bearer of the cheque can resubmit the cheque within six months of the date on it if he believes it will be honored the second time. However, if the drawer fails to make a payment, then the beneficiary has the right to prosecute the former. Criminal Legal Action The payee may sue the defaulter/drawer for the dishonor of cheque. To file a criminal case for a dishonored cheque, the beneficiary must initiate the process by formally registering a complaint with the police of the respective emirate against the drawer. In Dubai, the beneficiary can avail the service of the Dubai Police mobile application in lodging such complaints without stepping foot in a station. Accordingly, the police shall communicate with the Drawee Bank to verify the signature of the drawer of the cheque. If the drawer settles the matter by paying the amount of the bounced cheque, no further legal proceedings will be taken. Otherwise, the Police will register a criminal complaint against the drawer. Since issuance of a bad cheque is a criminal offense in the UAE, upon registering the criminal complaint, a travel ban on the drawer will be issued automatically. This will ban the drawer/accused from leaving UAE or he will be detained on arrival if he enters the UAE. The said travel restriction can be removed only upon settlement of the amount of bounced cheque, or a sentence has been served. If the matter remains unresolved, the police will refer the complaint to the public prosecution. Upon receiving both parties’ contentions, if the public prosecutor finds the existence of a criminal basis, he shall transfer the case to the criminal court. The criminal court, based on the evidence submitted by the parties, will issue its judgment. The judgment will either entail a fine which is assessed by the court at its sole discretion (based on the conclusion reached and the value of the cheque dishonored) usually ranging between AED 1,000 to AED 30,000 or more or imprisonment between one year to three years. However, in the Emirate of Dubai, Law no. 1 of 2017 called ‘Criminal Order Law’, enables the Dubai Public Prosecution, without the need for the case to be transferred to the Criminal Courts, to issue a criminal judgment which will be in the form of fines but conclusive in the subject matter of the case. This covers dishonored cheques for a value not exceeding AED […]

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