- Newsletter
- September 10, 2016
Introduction
On 9th November, 2015 the council of ministers of Kingdom of Saudi Arabia approved much awaited new Company Law with dual objective of modernizing the company law framework and resolve ambiguities in existing framework in the kingdom. New law also strives to promote foreign investment and encourage small and medium scale enterprises by establishing simpler and flexible entry regulations. This law came into force with effect from 2nd May, 2016 and shall annul all the provisions of previous company law. Provisions of this new law are much in line with the Kingdom’s National Transformation Plan 2020 and the Saudi Vision 2030 to facilitate the kingdom to diversify its economy and reduce its dependence on energy and oil sector. Following are the major amendments made by New Company Law.
Widened Scope for Capital Market Authority
New law authorizes the Capital Market Authority for monitoring and regulating the operations of Joint Stock companies and to participate with the Ministry of Commerce and Industry (MoCI) in preparing the rules for implementation of new law. While MoCI still remains the primary authority, scope of capital market authority is also broadened.
Relaxed and Simpler Regulations
- New law allows single person to form a Limited Liability Company (LLC). Earlier at least two persons are required to form an LLC. However, law prohibits single shareholder of one LLC from being sole shareholder in more than LLC.
- Minimum shareholder for forming a Joint Stock Company (JSC) is now 2 while earlier the requirement was 5.
- Minimum capital requirements for companies have also been reduced but these are subject to additional capital requirements under Foreign Investment Law, wherever applicable.
- Minimum total statutory reserve is reduced to 30% from 50%. This is a welcome move as it will provide more liquidity to companies.
- If the losses of company reach 50% of its capital and the shareholders failed to take any action within the stipulated time, the company will be deemed dissolved and shareholders cannot be held personally liable on failure to convene a meeting.
- New confidentiality clause will be imposed on shareholders in respect of information about the company available to shareholders.
- Change of articles of association will not be required for registering transfer of shares under new law and now the transfers can be registered only by recording them in a register specially made for this purpose.
Protection of Investor’s Interest
To protect the interest of investor and shareholders, new law imposes stringent provisions to be followed by management of the company. Some of the major provisions are:
- Right to nominate board member will be directly associated with the percentage of shares held.
- Board will be required to establish an audit committee which is mandatorily required to be independent to board of directors.
- Modernization of provisions to convene general meetings.
- Chairman and members of board are not allowed to hold executive positions in the company.
The Transformation
Companies formed under new law will consequently comply with this law and the existing companies in Saudi will now have to tighten their shoes to comply with the provisions of new law. Article 224 provides existing companies a period of twelve months to comply with the provisions of new law. However, it is advisable to transform into new law at the earliest, because the penalties will be levied from the effective date of new law.
Bottom Line
The government of KSA is taking effective steps to strengthen the economy and changes in foreign investment regulations and simpler and flexible entry provision will definitely attract investors. Stringent corporate governance norms will again boost confidence of investors. Now the management have to understand the requirements under new law take effective steps to comply with the provisions of new law at the earliest to save companies from paying unnecessary penalties.
- Newsletter
- September 10, 2016
Introduction
Bahrain is currently implementing changes in relation to its company’s law framework. Last year have been a year of series of new laws and amendments to existing laws with an objective to promote business activities and to attract investors coming to the region for doing or expanding their business. Various new bodies have been formed to monitor and facilitate registration and licensing requirements. This articles aims to highlight some of the major steps adopted for the same.
Establishment of Business Licensing Integrated System (‘BLIS’)
BLIS was established by Ministry of Industry and Commerce (‘MoIC’) few years ago with the objective to simplify the registration process of business, streamline licensing requirements, and ensure full transparency of procedures and to facilitate coordination amongst relevant organizations. Now this project is successfully implemented and contributing to online procedures for registration of business in Bahrain and obtaining licenses. This is saving crucial time and finance of investors and attracting people to explore business opportunities in Bahrain. The government of Bahrain has also lifted many major restrictions on foreign investments to promote international investors to come to the country for expanding their business.
The Commercial Register Law 2015 (‘CR Law’)
The CR Law implemented last year applies to almost all organizations propose to carry or already carrying out commercial activities in Bahrain including the branches of foreign companies and the companies governed by Commercial company Law of Bahrain. This law provides that carrying out any commercial activity in Bahrain without obtaining a license and getting registered with appropriate is now a criminal offence. Without prejudice to any severer penalty set out in any other law, an offender have to face imprisonment of up to five years and or a fine of between BHD 1,000 to 5,000. In addition to this, the CR Law also provides investigative powers to the MoIC to conduct administrative investigations of any violation of the law upon any serious complaint or notification.
The CR Law sets out the procedure for dealing with violators and authorizes competent authorities to impose penalties or close down the company upon receiving an order from the court to safeguard the interest of stakeholders and ensure transparency.
Commercial Companies Law
Commercial Company law of Bahrain has also been amended last year to support corporate reforms in the nation and to bring it in line with current requirements and address existing ambiguities. Major amendment bought by the new law are as follows:
Liability of Shareholders and Directors
Article 18 states that directors, shareholders, promoters and management of companies can be held liable for the entire capital of company for any damages affecting the company or any of its partners, shareholders, directors and third parties in situations prescribed under the law.
The new Law also phenomenally extends the application of Code for Corporate Governance to all types of companies as opposite to previous law where it was applicable to listed companies only. This stringent corporate norms indicates that the government is in no mood to give leverage to persons who use corporate veil to fraudulently monetize the transaction for personal gains and bring Bahrain commercial laws in line with international practices.
Revised Capital Requirements
Minimum capital requirements for companies have also been reduced depending about the nature and size of company to promote medium and small scale business in the country.
Relaxed provisions for Public Companies
The requirement to have all Bahraini national in Public companies is now been waived off and Public companies can now use foreign capital and expertise subject to the laws applicable.
Article 234 which provides for three year restriction on closed joint stock companies from being able to convert and trade its shares publically is revised and now shares of such companies can be traded after payment of full value of shares. It is a welcome move and offers liquidity to investors and shareholders.
Introduction of Shelf Companies
New concept of Shelf companies is introduced. It is a company that can be registered without listing any activity under its functions. Such company may be sold afterwards, however the activity must be approved by the competent authority before sale. Life of a shelf company will be one year and all the licenses and approvals should be taken in this period only.
Foreign Ownership Restrictions
Bahrain has generally been liberal for foreign ownership requirements and allows for corporate vehicles undertaking certain activities to be wholly owned by foreign entities and/ or individuals.
Article 345 goes a little further and states activities which can be previously allowed only to Bahraini nationals or companies majorly owned by Bahraini national can now be undertaken without the requirement of majority Bahraini shareholding. It authorize the Council of Ministers to determine the activities which can be carried out by companies with foreign ownership by way of a resolution.
In a recent announcement, government have clarified that it is allowing 100 percent ownership in administrative services, manufacturing, residency and real estate, health and social work, information and communications etc. These changes are expected to be effective in near future.
Conclusion
The new measures adopted in Bahrain to reform the business and investment environment are welcomed by business owners and investors as they phenomenally simplify registration and incorporation procedures, promote foreign investment and streamline the procedures. The government is taking effective steps to strengthen the economy and changes in foreign investment regulations and simpler and flexible entry provision will definitely attract investors from around the globe and will give a boost the economy. Successful implementation of these measures shall start giving sweeter fruits to Bahrain in coming decades.
- Article
- September 10, 2016
UAE is currently witnessing transformations in fields related to sport and entertainment activities. In the recent past UAE have successfully hosted major sports event e.g. Abu Dhabi Formula 1, Dubai Air Show, Dubai desert challenge to name a few and will soon be hosting other major sport event likes Gulf Bike Week, Dubai Motor Festival, Dubai Rugby Sevens, Mubadala World Tennis Championship etc. These events provide opportunities to witness the biggest talents and earn great revenues but at the same time the risks associated with organizing such events give sleepless nights to investors. This article will highlight the types of major risks associated with organizing sports event and the ways to manage them.
Authorities in UAE have predefined criteria for allowing events to ensure safety and security for players, participants, audience and staff at such event. Organizers are required to obtain NoC from competent authority for organizing such events.
In addition to that the organizers should include a comprehensive risk identification system and to take adequate insurance cover to manage risks associated with such events.
Types of Risk
Following are the major types of risks associated with major sports event:
Security of participants and audience: These are risk associated with any unforeseen event that may result in physical hazard to any of audience and participants.
Damage of Property: Risk associated with damage of assets and property due to any unforeseen event during the event.
Low Turnout Risk: Generally huge investments are involved in organizing these events. There is always risk of loss in case of low turnout of audience.
Cancellation Risk: This is the risk associated with cancellation or postponement of event due to some uncontrollable incident.
Risk Management
Generally in big events the risk is shared by many parties like event right holders, venues, organizers, broadcasters and third party contractors and risk component is mitigated and allocated at the initial stages of organizing the event. It is advisable to adequate insurance cover along with fulfilling the basic safety and security requirement of competent authorities.
In addition to that, the organizers may also make it a part of contractual agreement for audience that organizers cannot be held liable for any loss or injury to them during event. However, it is important to note that this waiver of liability clause will save the organizers only if they have took reasonable precautions against such risk of loss or injury and such loss is caused out of the event.
Here we can say that the organizers are not free from their responsibility for ensuring safety and taking reasonable precautions against risk and at the same time audience should be bind by waiver of liability clause if they do not follow the safety conditions or choose to take an activity after getting a disclaimer of risk associated with it.
Third Party Risk
This risk is associated with loss and injuries to third parties. Organizers are generally advised to take third party liability insurance to save themselves against any liability for loss or injury to third parties that arises out of premises of event. With the growth and diversification of sport events in UAE it is becoming a general practice to take TPL.
The Bottom Line
To conclude we can say that risk is always associated and it is an indispensable part of any event. Managing risk reduce the loss or damages that may have to be suffered by organizers but it cannot guarantee full protection. The organizers should take effective steps in initial stages to identify and mitigate all types of risks associated with an event and shall take necessary steps to reduce it. It will not only facilitate to finalize the cost and revenue model but also be helpful in protecting organizers from huge financial losses that may impact their business for a longer period of time.
For further information reach us at [email protected]
- Article
- August 27, 2016
Introduction
The amendments to the Saudi Labour (Royal Decree No. M/46 of 05/06/1436) were published in Official Gazette No. 4563 dated 24 April 2015. It has been announced by the Ministry of Labour that these will come in force after six months after the date of its publication and therefore implemented on the 24 October 2015. The Ministry of Labor of Saudi Arabia announced an overhaul of the Labor Law that would include 38 amendments to its statutory provisions.
In this article, we have highlighted the notable amendments to the labour law.
I. Liability related to Sale or Transfer of Business
Originally, Article 11 stated that, where all or part of a business is sold or otherwise transferred in the Kingdom of Saudi Arabia, both the previous employer as well as the successor was jointly liable for the mandatory and contractual benefits of the employees of the business affected from such transfer.
The new amendment exempts the previous employer from providing statutory and contractual entitlements of the affected employees of a sold or otherwise transferred business and it will now be the responsibly to be borne by successor only.
II. Internal Regulations/work organization rules
All the employers are now mandatorily required to develop internal regulations, previously this was only required only if employers had more than ten employees. The requirement for the regulations to comply with the Model regulations issued by the Ministry still exists but now an employer may include additional terms and conditions subject to the condition that such additional regulations do not contradict the provisions of the law.
However, it is not yet clear whether the Internal Regulations will require the approval from the Ministry of Labour or not and it is expected that this will be confirmed in the coming months.
III. Training
Employers with 50 or more employees are required to train basis Saudi employees annually, which must amount to at least 12 percent of the total workforce (previously this was six per cent). It is important to note here that this 12 per cent includes Saudi employees whose study fees (i.e. course fees) is paid by employer.
IV. Probationary period
Originally, an employee is subject to a probationary period of no more than 90 calendar days and during probationary period the contract can be terminated without giving any notice. New law provides that, subject to the employee’s consent, probationary period can be elongated up to 180 calendar days in total. This allows employers more resilience in identifying whether the employee is fit for the role. As per the provision of new amendments, employee can now also be placed under a second probation period under the same employer in case more than six months have elapsed since the employee was previously terminated by the employer.
V. Conversion of fixed term contracts for Saudi nationals
New amendments provides that if a Saudi national have completed three consecutive fixed term contracts or if a Saudi national completes four years of consecutive service (whichever is less), and both parties to continue to bound by contract, then such contract will automatically be converted into an unlimited contract. Before these amendments, the maximum term was three years or two consecutive renewals of fixed term contracts, whichever is less.
VI. Transfer of work location
An employer cannot transfer an employee to another location, if such transfer requires him to move house, without obtaining the employee’s prior consent in writing. Previously, this was not allowed where there was a “grave disadvantage” to the employee and the employer did not have acceptable reasons for such transfer. However, in case of an emergency an employer can temporarily assign employees to another work location for a maximum period of thirty days per year without obtaining their consent.
VII. Service certificate/employee reference
On termination of contract, the employers are currently required, to provide a service certificate (free of charge) which sets out details of the employee’s salary, date of joining and leaving, details and profession etc. on request. The new amendments expressly prohibit employers from including anything in the said certificate that may be disadvantageous to the employee’s reputation or may trim employment opportunities for him in future. Previously, employer may include it in the certificate if the employer can provide reasons for the same.
VIII. Termination of employment
New amendments expressly recognize that a contract of employment can be validly terminated where the employer is (i) closing down the business completely; or (ii) terminating the business activity in which the employee is employed.
But, this recognition of a redundancy does not go as far as to extend to situations where there is a reduction in work requirements that requires curtailment of workforce or a reduction in a particular role. It may therefore be difficult to justify individual termination(s).
IX. Notice period
The notice period for employees paid on monthly basis on unlimited contracts is doubled from 30 days to 60 days and not less than thirty days for all other employees. If either party failed to give the required notice to terminate the contract, the parties can agree on compensation payable.
X. Wages
Wages will be required to be paid into the bank account of employee. This gives recognition to the Wages Protection System which is being implemented in phases in Saudi Arabia and currently companies having 170 or more employees must be in compliance with Wage Protection System since 1 June 2015.
XI. Working hours
Total number of hours per day an employee may be required to stay at his place of work are now increased from 11 to 12 hours. The requirement to give rest breaks and the normal weekly limit of 48 working hours remains the same.
XII. Leave for Female Employees (Article 151, 152, and 160)
Maternity Leave
Previously, Article 151.1 and 151.2 of law stipulates an employer to grant maternity leave to a female employee at least four weeks before the tentative date of delivery, as determined by persons prescribed by the law, and extending six weeks after delivery.
Originally, Article 152 required payment of atleast half pay for a female employee who served the organization for one to three years and payment of full salary for a female employee serving for three years or more during their maternity leave.
Article 151.1 and 151.2 as amended provides that the employer is mandatorily requird to grant at least 10 weeks of fully paid maternity leave to the female employee, to be divided she desires. However, she must take maternity leave for six weeks immediately following her delivery. Further, the employer must not restrict the female employee from taking maternity leave at least four weeks prior to the expected date of birth, as determined by persons mentioned above.
Amended Article 151.3 states that a female employee who gave birth to a sick child or a child who needs permanent care shall be entitled by law to an additional month of paid maternity leave, and she may extend the leave for an unpaid month, for a maternity leave of maximum eighteen weeks.
Article 152 was repealed completely, which means that now female employees in all cases are entitled to get paid for maternity leave without sacrificing for paid annual leaves.
Conclusion
As a whole, the Amendments aims to boost Saudisation since these are designed to encourage the employment of Saudi nationals in the private sector and promote employees’ rights in general, while a some of the provisions fall in favor of employers. The new amendments include an increase in leave entitlements of employees, doubling of notice periods for employees serving unlimited term contracts and severe penalties for labour law violations. However, law makers appears to have provided recognition of market practices and the needs of businesses and deciding about advance compensation in the contract of employment for unlawful terminations and removal of right to claim reinstatement.
- Newsletter
- August 26, 2016
The new Saudi Companies Law came into effect on 2nd May 2016 (“the Effective Date”).
Implementing Regulations clarifying the operation and effect of a number of the provisions of the new law have recently been through a consultation phase and are due to be issued in the coming months.
The renamed Ministry of Commerce and Investment (“MoCI”) and the Saudi Arabian General Investment Authority (“SAGIA”) are having to get to grips with the significant changes under the new law affecting how entities in Saudi Arabia are formed and regulated, against a background where Saudi Arabia is seeking to encourage more foreign investment in line with the National Transformation Plan 2020 and the Saudi Vision 2030, which are Saudi Arabia’s roadmap to diversify its economy and address the challenges brought by low global energy prices.
As with many new pieces of legislation it may take a while for the regulators and others to understand fully the new law and for it to be fully implemented in practice.
This article highlights some key issues relating to the implementation of the new law, signposts some new and impending regulations that Saudi, GCC and foreign investors need to be aware of and some of the steps that existing companies and managers now need to be considering.
The New Law
The important changes in the new law from the position under the old Saudi Companies Law are listed in the tables below.
Interim Period
Article 224 of the new law gives existing companies 12 months from the Effective Date to bring their affairs into compliance with the new law. However, this does not mean that existing entities do not have to comply with the new law until the end of the 12 months because penalties can be applied from the Effective Date. MoCI and the Capital Markets Authority (“CMA”) can also determine certain provisions of the new law which are effective during this interim period.
Template Constitutional Documents
MoCI has recently published template articles of association (“AoA”) and bylaws for the different forms of entity including LLCs and joint stock companies (“JSCs”).
Whilst it is not mandatory for a company to have constitutional documents in this format, it is likely to be easier, certainly for any companies formed after the publication of these templates, to obtain MoCI approval using constitutional documents based on this format and they should also be considered when existing companies are considering changes to their constitutional documents.
The new template AoA for LLCs reflect , for example, the following changes under the new law:
- Financial statements to be prepared within 3 months of year end and filed within a further 1 month (previously 4 months and 2 months);
- Suspension of set aside of statutory reserve when it reaches 30% of capital (previously 50%);
- Changes to statutory pre-emption process including added flexibility on valuation;
- New procedures and effects where losses reach 50% of capital.
JSCs-MoCI and Capital Markets Authority Statements
In April and May 2016 MoCI and the CMA issued two joint statements dealing with the implementation of the new law in relation to JSCs (and holding companies) and specifying certain provisions of the new law that must be implemented immediately and others which fall within the 12 month grace period.
Examples of provisions to be complied with are:
- Article 90 – regulating shareholders meetings;
- Article 95 – cumulative voting for board elections and certain situations where directors are prohibited from voting.
Examples of provisions where an extension can be granted are:
- Article 68.1 – the number of directors;
- Article 76 – directors’ remuneration;
- Article 81.1 – the functions of the Chairman, Deputy Chairman and Managing Director;
- Articles 101 – 104-certain provisions relating to Audit Committees;
- Article 150 – dealing with losses of JSCs (although listed companies have to make a monthly announcement of their plans and actions to comply if losses incurred equal or exceed 50% of capital in the interim period);
- Articles 182 – 186-dealing with holding companies.
However the MoCI/CMA statements make clear that any new action intended by a JSC must comply with the new law eg on appointing a new director Article 68.1 must be complied with.
Accordingly as well as bringing their procedures and affairs into line with the new law, all existing Saudi companies will need to review their existing constitutional documents and consider the changes required to be consistent with the New Law.
Foreign Investment
The Saudi Arabian General Investment Authority (“SAGIA”) announced in 2015 that international companies were being encouraged to establish 100% foreign owned trading companies. Shortly after the announcement of the Saudi Vision 2030, the Saudi Council of Ministers approved rules to implement this change in June 2016. Initial indications suggest that only very large international companies (who amongst other things will employ significant numbers of Saudi nationals) will qualify for 100% foreign ownership
On implementation of the new law, SAGIA has yet to clarify if, when and on what basis it will license foreign owned holding companies and foreign owned single shareholder LLCs.
These clarifications are likely to have a significant impact on foreign investors structuring their investments in Saudi Arabia.
New Implementing Regulations
The draft implementing regulations (“Implementing Regulations”) for the new law have also been through a consultation phase which was completed in May 2016. The final version is expected in the next few months.
The draft Implementing Regulations cover areas such as:
- Use of technology at JSC meetings;
- Buy-back of JSC shares;
- Pledge of JSC shares;
- Preference shares
Corporate Governance
In April 2016 MoCI and the CMA issued a draft of proposed new Corporate Governance Regulations (“the CG Regulations”) which again have just been through a consultation phase. The CG Regulations will apply to both Saudi listed companies and on a best practice voluntary basis to closed JSCs (favoured by many Saudi Family owned groups). Once approved the CG Regulations will replace the existing CMA Corporate Governance regulations which apply to Saudi listed companies. Saudi family-owned groups will want to consider the CG Regulations and to adopt some or all of their provisions to reflect best practice, which as well as for family governance purposes may also be important in dealings with third parties.
- Newsletter
- August 26, 2016
In the referendum held on 23 June 2016, the United Kingdom voted in favour of exiting the European Union. Although the two-year exit process is yet to commence, consideration should be given to the tax implications that may arise, especially with regard to customs, excise and value added taxes.
Transactions between the United Kingdom (UK) and the countries of the European Union (EU) are currently considered to be intra-community transactions, with an obligation to pay VAT (through a reverse charge mechanism) on assets sent and received. This allows for the free movement of goods, and the situation is similar for the provision of services.
After Brexit (a two-year process that is, at the time of publishing, yet to commence), the sale and purchase of assets between Italy (or other EU member countries) and the UK may no longer be considered intra-community transactions. Instead, assets shipped from Italy to the UK would be classed as export supplies, while incoming goods from the UK would be classed as imports.
With regard to the provision of generic services pursuant to Article 7-ter of Presidential Decree 633/72, formal requirements would change. Services provided should therefore be identified as “not subject to” transactions. With regard to services received, the Italian taxable entity would be required to apply the reverse charge mechanism, issuing a self-billing invoice. Completion of the invoice received from the British service provider would no longer be necessary. In addition, it would no longer be obligatory to declare the transactions on the Intrastat summary lists pursuant to Article 50, paragraph 6 of Law Decree 331/1993.
Another consequence of a completed Brexit would be the loss of the simplifications that are currently applied among the EU member states. Entities established in the UK would therefore be able to identify themselves as non-resident entities for VAT purposes in Italy only through the appointment of a tax representative in accordance with Article 17, paragraph 2 of Presidential Decree 633/72 and no longer through the identifying procedure set out in Article 35-ter of Presidential Decree 633/72.
It is likely that a similar situation would arise when a taxable Italian entity intends to operate in the UK. It should be noted that, in the future, a British entity that purchases assets in Italy and subsequently resells them to another Italian taxable entity, not creating any domestic tax position, would need to go through a process to recover the VAT paid on the purchase. This process will be much more cumbersome than that which is currently in place for member states.
Some repercussions are also foreseen in e-commerce where, in the case of direct e-commerce, the British operator must necessarily appoint a tax representative in one of the member states. Another consequence would be the loss of the right of Italian economic entities to request a refund for taxes paid in the UK (the non-resident tax refund in accordance with Article 38-bis of Presidential Decree 633/72).
- Newsletter
- August 26, 2016
On June 29, 2016, the Belgian Parliament adopted the ‘programme law’ (introduced on June 2, 2016) that contains the introduction into Belgian tax law specific transfer pricing documentation requirements (published in the Belgian Official Gazette of July 4, 2016). These requirements are based on Action 13 of the Organisation for Economic Co-operation and Development (OECD)/ G20 Base Erosion and Profit Shifting (BEPS) project. Only minor adjustments with no effect on the technical content of the draft programme law were made.
The relevant articles of the programme law introduce a three-tier documentation approach as provided under BEPS Action 13: Master file, local file, and country-by-country reporting (CbCR). According to the newly adopted documentation requirements, Belgian entities of a multinational group that exceed one of the following criteria need to submit to the tax authorities a master file and a local file (the detailed form that is part of the local file only when at least one of the business units of the entity has realised intra-group cross-border transactions of more than one million euros [EUR]):
- operational and financial revenue of at least EUR 50 million, excluding non-recurring revenue
- balance sheet total of EUR 1 billion, or
- annual average number of employees of 100 full-time equivalents.
Belgian ultimate parent entities of a multinational group with a gross consolidated group revenue of at least EUR 750 million should file a CbCR. Under certain conditions, the Belgian entity that is not the ultimate parent entity of the multinational group may be required to file the CbCR directly with the Belgian tax authorities.
The master file and CbCR should be filed no later than 12 months after the last day of the reporting period concerned of the multinational group. The local file, however, should be filed with the tax return concerned.
The programme law also introduces specific transfer pricing documentation penalties, ranging from EUR 1,250 to 25,000.
Currently, the Royal Decrees covering the implementation measures of the newly adopted documentation requirements are being drafted. It is expected that these implementation measures will be finalised by the end of September or early October 2016.
- Newsletter
- August 26, 2016
DUBAI // Community leaders, businessmen and diplomats from five countries in the Association of South-East Asian Nations region met in Dubai on 21.08.2016.
The meeting was part of plans for further cooperation before the group’s 50-year celebrations next year.
The gathering of expatriates from the Philippines, Malaysia, Singapore, Indonesia and Thailand was the first in Dubai for consuls, industry leaders and citizens of Asean countries.
“This is our first public diplomacy programme and we need interaction as a prerequisite to build our community,” said Yubazlan Yusof, the consul general of Malaysia.
“If Asean wants to succeed, we must make sure to link people together, such as the civil society and the NGOs.”
Last year, Asean countries established the Asean Economic Community.
The group seeks to create a globally competitive single market, with a free flow of goods, services, labour, investments and capital across the 10 member states.
The region has a collective population of 622 million.
Filipinos make up the biggest group of Asean expatriates in the UAE, with more than 700,000.
Presently, there are about 1 million people from the Asean region who work and live in this country.
- Article
- August 3, 2016
There are two jurisdictions for doing business in UAE: inside the Free Zone and outside the Free Zone or mainland. Both the jurisdictions has its own advantages and disadvantages depending on the activities and business type.
A business entity established outside free zones is treated as a fully Emirati entity and can operate within the jurisdiction of the emirate. They must comply with the regulations of the Federal and local licensing authorities.
In contrast, Free Zone are the special economic zones established under the Decree of respective Ruler, as a Government establishment, having office a designated places, with the objective of offering tax free, and free customs duty benefits to expatriate investors. Free zones are managed and operated by free zone authority. A Business entity established in a free zone must comply with the regulations and follow the procedures of the free zone.
And most of the Free zone offers the following benefits:
- 100% ownership
- 100% tax free
- 0% corporate tax
- 0% income tax
- 0% custom duty
- Confidentiality of Business
- Low Operating Costs
- Free Capital Transfer
- 100% repatriation of capital and profits
- Can wind up at discretion
There are more than 20 Free Zones operating in Dubai. In Dubai the business entities outside the free zone are regulated by Dubai Department of Economic Development (“DED”).
Whilst Mainland Company registered with DED are permitted to carry on business anywhere in United Arab Emirates (UAE), the Free Zone business entity operation has been restricted in respective free Zone. Thus, the restriction of carrying on business in mainland is the main drawback of Free Zone Company, as most of the free zone do not allow a Company registered under them to carry on business outside the Free Zone.
Further, in case a Free Zone Company intends to sell products outside free zones in mainland, the business entity must appoint a UAE official agent. Otherwise, a 5 percent customs duty is applied on most goods.
EXPANSION OF BUSINESS OUTSIDE FREEZONE:
As the business grows, management of the Free Zone Company would like to expand its business operation in mainland. A Free Zone Company could consider the option of either wholly restructuring to mainland or have a branch in mainland.
Further, as per Law No. 13 of 2011 requires the Free Zone Company to obtain necessary approval from Department of Economic Development (DED) to expand its business operation to mainland by applying for setting up suitable business structure.
Law No. 13 of 2011 states that the DED is the body responsible for the regulation of economic activity for all businesses outside the free zones. DED’s responsible for issuing licenses to business in Mainland, classification of economic activity permitted within Dubai, issuing trade permits for marketing activities and setting business work hours.
In case any free zone company carries on business in violation of law in mainland without having appropriate approval is subject to penalty of AED 100 000 (Hundred Thousand Dirhams).
Structures of Expansion for Free Zone Company in Mainland:
1. Limited Liability Company:
A LLC is the most common form of business entity currently used by Foreign Investor to set up business in mainland Dubai. It is blends elements of partnership and corporate structures. An LLC must have between 2-50 shareholders, each of whom is liable only to the extent of his or her share in the capital of the company. ???At least 51% of LLCs must be owned by UAE Nationals, and can be owed by GCC nationals by up to 100%.
Thus, in the given scenario, the Free Zone Company would be one of the partners of the mainland LLC Company along with a UAE National holding 51% of shares.
2. Branch of the Company:
The Free Zone Company can also obtain a branch license from DED to expand its operations to mainland Dubai. And a Branch of foreign Company operating in free zone cannot establish branch in mainland.
A branch of a free zone company can carry out commercial, industrial and professional business as long as the activity of the main company is authorized in mainland Dubai. However, Ministry of Economy restricts Branch from carrying on the following business activity:
- Trading and all branches of activities represented in sales and purchase of products and commodities.
- Restaurants, cafes and food stuff supplies and catering.
- Haj and Omra services.
- Labor supply
- Commercial Agencies.
In case the activity of the Company is Professional then approval of Ministry of Economy is not required for establishing branch.
Further, if there is no local shareholder in the main Free Zone Company, or the local shareholder in the main Free Zone Company owns less than 51% of the shares, then an approval from Ministry of Economy is also required in addition to appointment of a Local service agent. Companies owned 100% by GCC nationals do not need a local service agent (LSA).
Thus, for setting up Branch Company prior approval from both DED and Ministry of Economy is required.
3. Civil Work Company
A Civil Work Company, is a business partnership for professionals in recognized fields such as doctors, lawyers, engineers and accountants. A Civil Company can only practice professional business and is 100% owned by professional partners, whatever their nationalities.
Thus, civil companies can be formed for any object or activity that is not considered to be “commercial” by the concerned licensing authorities. Most civil companies require a Local Service Agent if there is no UAE-National partner in the business.
Bottom line:
Expansion of business outside the free zone requires considerable amount of attention as each of the structure has its own advantages and disadvantages. Necessary decision needs to be made considering the business activity in light of the company overall expansion plan.
Disclaimer: Whilst every effort has been made to ensure that the details contained herein are correct and up-to-date, it does not constitute legal or other professional advice. Intuit Management Consultancy does not accept any responsibility, legal or otherwise, for any errors or omission.
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- Article
- July 29, 2016
A Free zone (FZ) entity is the UAE offers many tax and business possibilities.
The establishment of free zones (FZs) in the UAE has been one of the most significant and promising initiate pursued to attract foreign investments. Dubai was the first emirate to establish a FZ in Jebel Ali.
The main advantages of being located in a FZ are set out below:
- 100 percent foreign ownership
- No corporate and personal income tax
- Eligibility for benefits of 80 UAE’s double tax treaties
- Issue of residence permits and tax residence to expatriate owners and managers
- No restrictions on profit repatriation
- No exchange controls
- Availability of offices, factory premises and warehouses
- Excellent port , airport and road transport infrastructure
- Efficient utilities and communication means
- No import or export duties, except for sales made from FZ into the UAE and the GCC
- No recruitment restrictions and assistance on obtaining work permits for expatriate staff
FZ enjoy DTT benefits
FZ companies are owned 100percent by foreigners. They also meet the growing necessity in international tax planning of having necessary substance. The UAE has concluded approximately 80 double tax treaties (DTTs), many of these with OECD countries. Some are not very attractive because of the limitation of benefits clauses, inclusion of tax liability clauses and uncertainty as to whether UAE residents are liable to tax in the context of the treaty. Some treaties restrict the benefits to UAE nationals, some other to government organizations. However, these are several double tax treaties of the UAE that are favorable including the treaties with New Zealand, Austria, Cyprus and Netherlands. None of these has a liable to tax requirement.
The Netherlands is a particularly attractive country for inward investments into the UAE, as most types of income that can be attributed to the UAE are exempt from Dutch corporation tax, even if they are no taxed in the UAE.
In particular, UAE real estate gains and income from a UAE permanent establishment are exempt from tax in the Netherlands. Employment income derived by a resident of the Netherlands from a UAE employer follows the exemption with progression method. Gains and dividends derived from a UAE subsidiary are exempt under domestic legislation in the Netherlands, provided they do not result from passive investments.
Another country that can be beneficially used for inward investment into the UAE is Cyprus. Cyprus also has a tax treaty with the UAE but has an even more favourable participation exemption system than the Netherlands and it exempts profits made by permanent establishment abroad under domestic legislation.
Tax residence
The UAE is particularly well positioned to cope with the increasing pressure from onshore Tax Authorities to provide real economic substance. By making use of the UAE, there are now opportunities available, even for small companies, to locate business functions in the UAE.
A possibility available to a FZ is to issue residence permits and obtain tax residence certificates from the UAE authorities for its foreign owners and executives. A FZ company, must have physical presence in the UAE and, in that respect, it must own or hire premises. If only a small office will be required as the company will be used by its foreign owners mainly for residency purposes the most cost effective options are available by free zones in the northern emirates, notably Hamriyah and Ajman FZs. Physical presence options include “flexi desks” or “flexi offices”.
Furthermore, and if a local bank account is maintained with some movements, the foreign owners and executives can apply to the Ministry of Finance to receive UAE tax residence certificates.
A UAE residence permit and a tax residence certificate can be useful to many foreign owners and executives of FZs who wish to register tax residency in the UAE. It is worth noting, that banking institutions in the UAE and many outside consider the UAE tax residence certificates as adequate proof of tax residency. As in all cases, the advice of a competent tax lawyer must be sought.
Location of FZ
An independent free zone authority governs each FZ. The rules and regulations of each FZ do not differ substantially, all being simple yet comprehensive. The UAE Companies Law is not applicable in the FZs.
Dubai
Dubai has witnessed significant growth in the number of free zones. Each zone has a focus on a particular type of industry. The names and industry focus of the major free zones within Dubai are listed below:
Jebel Ali free zone: manufacturing, heavy industry and distribution. It also encompasses:
- Dubai Cars and Automotive City (DUCAMZ) free zone: re- export of automobile
- Dubai Gold and Diamond Park free zone: dealing in precious metals and stones
- Dubai Airport free zone (DAFZ): light industry, distribution, service industries including insurance
Dubai Technology and Media free zone includes:
- Dubai Internet City: information and communication services
- Dubai Media City: media related business
- Knowledge Village: education and learning establishments
- Dubai Multi Commodities Centre (DMCC): aims to attract the world are leading precious metals, jewels and commodities traders. This zone also includes a manufacturing facility and a diamond trading bourse
- Dubai International Financial Centre (DIFC): focuses on financial institutions and financial services firms and has elevated the UAE to the position of a leading financial centre. The zone is subject to a comprehensive regulatory regime that follows international standards. The regulatory authority in the DIFC is the Dubai Financial Services Authority (DFSA)
- Dubai Healthcare City: aims to attract providers of healthcare, medical education and research
- Dubai Maritime City: aims to attract companies engaged in vessel design, manufacture, repair and maintenance and marine management and related services Other free trade zones in Dubai include Dubai Aid and Humanitarian City, Dubai Techno Park, Dubai Auto Parts City, Dubai Textile Village, Dubai Heavy Equipment and Trucks, Dubai Industrial City (DIC), Dubai Flower Centre, Dubai Logistics City, Dubai Silicon Oasis, Dubai Studio City, Dubai Carpet free zone and Dubai Outsource.
Abu Dhabi
- Abu Dhabi free trade zone (ADAFZ): the objective of this free trade zone is to establish Abu Dhabi as a major bulk commodity trading base to initiate the development of other existing industrial zones in the emirate
- Higher Corporation For Specialized Economic Zones (HCSEZ): the HCSEZ establishes specialized Economic Zones across a range of industries in Abu Dhabi. The benefits of the zones are similar to those in free zones
- Industrial City of Abu Dhabi: the objective is for industrial projects
- Abu Dhabi Global Market (ADGM): Recently set up, it is a broad based international financial centre of local, regional and international institutions. As in the case of the DIFC, an elaborate and comprehensive regulatory regime is in place that follows international standards
Sharjah
- Hamriyah free zone: established in Sharjah, this free trade zone caters to industrial, manufacturing, processing and assembling industries. Sharjah is the only emirate with ports on the Arabian Gulf’s east and west coasts with direct access to the Indian Ocean
- Sharjah Airport International free trade zone: aims to capitalize on Sharjah’s excellent access to both east and west by attracting light manufacturing, storage and distribution business together with services industries
Ras al Khaimah (RAK)
- Ras al Khaimah free trade zone: set up in 2000 on Al Hulayla Island, this free trade zone aims to attract all types of investment with an aggressive marketing plan, intending to turn this zone into the leading free zone of the northern emirates.
- Ras al Khaimah Media free zone: media related business
Fujairah
- Fujairah free trade zone: located near Fujairah Airport, it attracts manufacturing, distribution and general trading industries
Ajman
- Ajman free trade zone: attracts all types of business from heavy manufacturing to professional service companies
Umm al Quwain
- Umm al Quwain free trade zone: it is known as the Ahmed Bin Rashed Port and Free Zone and caters for light industrial development
Type of licenses
To operate in a FZ, all businesses need a license. The type of license depends primarily on the nature of the activity undertaken. Generally, in most FZs a combination of the following types of licenses are available to the foreign investor:
- Trading license
This enables companies to carry out general trading activities as specified in the license
- Industrial license
This license is required for the manufacture of products
- Services license
A services license is necessary where the activities undertaken are of a services nature
Accounting and audit requirements
As FZs have their own laws and regulations, accounting and audit requirements can differ between free zones. As an example, Jebel Ali free zone and Dubai Airport free zone require limited liability entities to file annual financial statements together with an audit report, within 3 months from the end of the entity’s financial year. However, limited liability entities in the Dubai Technology and Media free zone are not subject to the same requirements. Branches are not required to lodge audited financial statements with free zone authorities.
UAE DTT apply in the FZ
Below are some general strategies for setting up in the UAE and taking advantage of its double tax treaties with other countries.
Strategy One: Establishing a free trade zone entity
The free trade zones allow having a UAE entity which is 100 percent foreign owned and yet take advantage of:
- Low formation and annual costs
- Visa sponsorships
- A range of options for physical presence, from flexi Desks (virtual desks) to complete buildings and industrial Developments
- No taxes
- No exchange controls or thin capitalization restrictions
- An individual acts as the “Manager” and is nominated for Each company
Strategy Two: Combine a free trade zone entity with an IBC
Owning a free trade zone entity or creating a free trade zone branch of the IBC provides the following benefits:
- Confidentiality of ownership and operations; physical presence or management as required by some treaties for treaty protection
- Restricted custodian and nominee shareholdings
- Ability to have investments in the UAE and yet not carry on business
- Choice of law – common law, civil law etc
- Access the UAE double tax treaty network
- No local meetings, audits, or local presence requirements
- Migration in and out of the jurisdiction, and
- OECD white list jurisdiction
Strategy Three: Global head office company/IP holding company
In the majority of the UAE double tax treaties which look through limitation provisions, the use of the UAE as the place of the head office of a company to minimize global taxes is an under-estimated and under-utilized strategy.
The relocation of the head office of the known US Company, Halliburton to Dubai is one example of this strategy. However, for the majority of practitioners, the use of the UAE treaty network in this manner has been ignored possibly due to lack of information.
The choice of law for IBCs provides for the head office company to own patents, IP trademarks, confidential know-how and copyright under the laws of any jurisdiction and to license this technology to a free trade zone entity or to other countries worldwide.
The treaty network will reduce withholding taxes, impose no taxes in the UAE and ensure legal enforceability in licensing securities and charges outside the ambit of the local UAE or DIFC laws.
Strategy Four: Residence and domicile for directors and senior staff
Whilst domicile in the UAE may not be possible depending on the laws of the home country, certainly with a renewable residence visa that is issued to persons or associates of a free trade zone entity, individuals may reduce or eliminate home country taxation. In many cases, following the OECD model, the treaties provide for directors’ fees paid to a non- domiciled director of a UAE entity to be exempt from tax in the home country.
The UAE presents a unique window of opportunity. The system of IBCs combined with the benefits of the free zones and the extensive network of double tax treaties make the UAE an attractive proposition.
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