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  • Article

5 reasons why KYC (Know your customers) has become critical for companies

The worldwide regulatory environment commonly referred to as AML (Anti Money Laundering) and KYC (Know your customers) are complex and dynamic regulations. But, they both are becoming an important focus area for all the organizations globally these days owing to the significant cost and risk of non-compliance.

The risk of non-compliance is very real nowadays. Money laundering at international level, investing money in tax havens, Ponzi schemes and sanction violations are creating new grounds for risk exposure. Hence, the companies are increasingly investing more time and effort in KYC.

Reasons why KYC has become critical and inevitable for companies:

Financial penalty:

Any non-compliance with the KYC regulations can attract heavy monetary penalties on the company.

Imprisonment:

As it was mentioned earlier that non-compliance of the regulations go far beyond monetary penalties and in some cases, the CEOs and Directors of the businesses face serious implications. Also, it is noted that the offences that got prison term were smaller in magnitude in comparison to the organizations that faced larger fines but no prison term.

Damage to a company’s reputation:

If there is any proven non-compliance against the business by the regulatory authority it can cause serious damage to the company’s reputation. Even an investigation by the regulatory authority can cause irreparable harm to the brand image.

This may make the stock prices fall drastically and no investor, customer or supplier would like to continue the relationship with the company. This is even a bigger loss than just monetary penalties.

Share holder’s might lose confidence in the business:

The distorted brand image and penalties due to non-compliance of rules and regulations will make the shareholders lose faith in the management of the company. Also, reduce the shareholder’s confidence in the company and it will again many years to build the same level of trust with the shareholders for the management.

Business disruptions:

The business will surely be affected since lot of time and efforts will be spent on identifying the loopholes. Then, a due diligence plan to be formulated to put a system in place ensuring complete compliance. This leads to loss of precious business time as well as disruptions in the workflow.

The bottom line:

In today’s business world around the globe, the companies or organizations need to operate in a highly-regulated environment wherein stricter rules and governing bodies are in place. Also, it is just not the money that is at stake at the times of non-compliance but the losses are much bigger that can leave a lifelong scar on company’s reputation and trustworthiness. Hence, it essential to ensure that the companies comply will all the regulations in all the countries in which your business does the business.

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  • Article

Highlights of New DCCA Regulations, 2016

Regulations apply to companies registered in the Dubai Creative Clusters Authority (DCCA) and came into force on 1 February 2017. The Regulations repeal and replace the Dubai Technology and Media Free Zone Private Companies Regulations 2003.

The Amendments:

    1. Shareholder increase – A company incorporated in the DCC may now be incorporated by up to 75 persons. The earlier regulations prescribed for a limit of 50.
    2. Constitution – New standard articles of association are to be issued, combining the previous memorandum and articles into a single constitutional document. All the existing companies will now be required to adopt the new document within a period of twelve month.
    3. Registration – The Registrar of Companies is to maintain a register of companies, containing details of all DCC companies.  The Regulations envisage that, in due course, this register may be accessible to the public and certain information may be made available online.
    4. Consideration for share issues – The new Regulations provides for allotment of shares to be issued for consideration other than cash.
    5. Changes to share capital – More detailed provisions are included on changes to share capital, including new provisions to allow share buy-backs and treasury shares, and more detailed provisions in relation to dividends and distributions.  The Regulations allow shares to be issued at a premium and contain provisions addressing how a premium is to be applied.
    6. Pledges – New provisions are included on share pledges, including registration, perfection, priority and release. The Registrar will maintain a Security Register, which may be made available to “interested persons”.  The parties may agree in the pledge instrument to submit to the jurisdiction of the DIFC courts (rather than the onshore Dubai Courts).  These is an welcome provisions for multinational companies and groups with DCC private company subsidiaries, enabling their shares to be included in financial security arrangements.
    7. Corporate governance – Clearer, modernized provisions are included in relation to company management and administration, including allowing for participation in both board and shareholding meetings by conference call.
    8. Branch offices – The Regulations consolidate previous regulations on the operation in the DCC of companies incorporated outside the DCC.
    9. Continuation of incorporation – The Regulations contain provisions which permit companies to move their place of incorporation into and out of the DCC.
    10. Future flexibility in form – The DCC Authority is now able to prescribe different types of company in addition to the FZ-LLC.  This allows flexibility to respond to future market demand.
    11. Authorization: A requirement that only those persons acting under an express authority (usually pursuant to a duly authorised power of attorney, resolution of the board of directors or shareholders or pursuant to powers granted under the articles of association) may contract on behalf of the FZ-LLC company
    12. Director Duties: Additional duties for directors and officers including the duty to act honestly, in good faith and with a view to the best interests of the company, and a requirement to declare conflicts of interest.
    13. Manager Responsibilities: New provisions in respect of the role and responsibilities of the general manager. For instance, the manager is now liable for maintaining a register of shareholders and a register of officers and for the accuracy of their contents

Action to be taken by DCCA Registered Companies:

All companies and branches established within the DCC prior to the New DCCA Regulations will need to take steps to follow the New Regulations by no later than 1 February 2018.

      1. Replace their existing memorandum and articles of association with a consolidated article of association, which will be prepared by the DCCA.
      2. The management to follow the new corporate governance procedures and best practices to facilitate compliance.
      3. Confirm that the company’s registers are maintained and up-to-date.

Registers:

Register of Members : The law mandatorily requires the companies to maintain the following in electornic or any legible form:

  1. Register of Meetings & Minutes
  2. Register of directors and officers

    Please feel free to contact us at [email protected] for making your company 100% compliant with the regulation.

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  • Article, VAT

VAT Briefing Highlights

VAT Introduction

Value Added Tax (VAT) is an indirect tax levied on supplies. GCC have entered a treaty to introduce and implement VAT and Excise across the GCC to create a wider scope of revenues for the Government. All the countries in the region shall prepare and implement their legislation for VAT based on the basic principles set out under the treaty. The Kingdom of Saudi Arabia (KSA) and United Arab Emirates (UAE) will be introducing VAT with effect from 1st January 2018. It is advisable for the organizations entering long term agreements with their clients, shall have clear clauses about restructuring in cost and prices and terms payment of VAT, post implementation of VAT.

Chargeability

All the supplies of goods and services will be categorized into three categories:

  1. Supplies chargeable at a Standard Rate of 5%: The standard rate for VAT is kept at 5% across GCC. All the supplies shall be subject to VAT at the rate of 5% if they do not fall under the below two categories. Renting and Buying of commercial property is an example of supplies chargeable at 5%.
  2. Supplies chargeable at Zero percent: The lawmakers understand that certain necessary items should be charges at lowest possible rate to ensure that it will not burn a hole in the pockets of residents. Necessary goods and services e.g. healthcare and education are kept under this category. The countries can have their own list of items to be charged at zero percent rate.
  3. Exempt Supplies: The goods and services that will not be subject to VAT are exempt supplies. Local passenger transport, renting and buying of residential property are kept under this category. It is important to note here that the companies providing exempt supplies shall not be required to register for VAT and cannot claim any input credit for the VAT paid on purchases.


Operational Highlights

VAT system in UAE shall be a federal law. Important terms e.g. taxable person, economic activity, input and output tax, reverse charge, tax group, place of supply etc. shall have the same definition for all GCC nations as defined in GCC VAT treaty. UAE shall also use the same. The GCC treaty makes use of reverse charge mechanism extensively, which is justifiable also as they are making a law for multiple countries same in line with European Union.

The detailed rules for supply of goods and services are under the drafting stage and shall be majorly divided into following categories:

  • Basic Rules for Goods – Depends upon the location of goods when supply took place
  • Special Rules for Goods – Shall be applicable to cross border supplies and for the goods where location of goods cannot be ascertained e.g. Electricity, Water.
  • Basic Rules for Services – Shall be applicable on starting point of Service
  • Special Rules for Services –  Shall be applicable for cross border supplies and electronic supply of services.


Registration for VAT

All the entities have total annual turnover of AED 375,000 are mandatorily required to be registered for VAT. The entities whose total annual turnover of AED 187,500 have the option to voluntarily register themselves for VAT.

Calculation of threshold limits

  • Total values of supplies made in current month and eleven preceding months
  • Expected value of supplies in subsequent thirty days
  • Exempt supplies shall be excluded when calculating value of supplies
  • Non-Established taxable persons are also required to be registered for VAT.


Treatment of Imports and Exports

Import of goods for transshipment to GCC shall be chargeable to VAT. The taxpayer should get himself registered in the country where goods and services are supplied to avail the credit. However, if the purchaser is registered, the supplier will not be required to register himself and can take the benefit and the supplies can be charged on a reverse charge basis. Reverse charge is allowed for all intra GCC transactions. It is important to note here that if a GCC country have not introduced VAT, then it will be considered as a non GCC country for VAT purposes.

With an aim to promote exports, the UAE lawmaker have made export outside GCC a zero-rate supply.

Mandatory maintenance of Books and Records

The authority mandatorily requires all VAT registered entities to maintain their financial statements and cash flows. They shall have proper evidence of all the transaction, copy of invoices for purchase, records of payments received and payment made. Further, the entities should maintain a proper record of invoices issued and the invoices shall specifically have mentioned the following information:

  • Unique Invoice No.
  • Date of Issue
  • Time of Supply
  • Name, Address and TRN of Supplier
  • Quantity of goods and terms of services supplied
  • The amount should be in AED for if in foreign currency the rate of exchange and its source.

Reverse Charge

As mentioned above the GCC VAT treaty uses reverse charge extensively and it is allowed for all intra GCC transactions. Also, the payment of VAT to be done by suppliers for the supplies made to offshore person under reverse charge. Also place of supply of goods and services plays a key role in determining the tax liability and whether the liability lies with the supplier or with the purchaser.

VAT Grouping

The branches of a company operating in multiple locations shall come under same group and shall have a single VAT Registration number. This is going to be an intricate issue and more clarification is awaited from the authority.

Treatment of Certain Supplies in UAE

Supplies chargeable at Standard Rate are:

  • Oil and Gas
  • Buying and Renting of Commercial Property

Supplies chargeable at Zero Rate are:

  • Education and Healthcare
  • International transport of goods and passenger and supply of related goods and services
  • Charity Buildings
  • Export of goods and services
  • Investment precious metals

Exempt Supplies:

  • Local Passenger Transport
  • Residential Buildings
  • Bare Land
  • Some specific financial services

Filing of Returns and Refunds

The GCC treaty allow member nations to have their own time framework for filing of returns from a monthly to yearly basis. In the UAE, VAT returns will be required to filed in every three months. The returns shall be filed in 28 days after end of quarter. All the filing and payment of VAT will be through electronic mode. No cash or cheque payments will be accepted by the authorities. Refunds will also be credited through electronic modes only.

Refunds will not be allowed to tourists. However, international organizations and diplomatic bodies can get refund according to the agreements and arrangements between UAE Government and their home countries.

Conditions for availing VAT Credit

As discussed earlier, the returns shall be filed on a quarterly basis and all the payments of VAT should be made to authority on a quarterly basis. The entities can avail input credit of the tax paid on purchases of raw material and capital goods in determining their tax liability. However, it is important to fulfil the below mentioned conditions for availing input credit:

  • The recipient of supplies shall be a taxable person
  • The VAT should be correctly charged in the invoices
  • The supplies are supplied for eligible economic purpose only
  • Proper evidence of the transaction is available in the records.

Appeals

If a person is aggrieved regarding his VAT liabilities, he shall file an appeal within 20 working days. The authority shall response within 20 working days of receipt of appeal. If he is not satisfied with the decision of the authority, he can appeal to the appeal committee within 20 working days. The appeal committee shall consist of one judge and two tax experts.

If he is not satisfied with the decision of appeal committee, he can approach court within 20 working days and the decision of courts shall be binding on the parties.

Violations and Punitive Provisions

The authority has majorly classified violations under two categories viz. administrative and tax evasion violations. Administrative violations will include non-maintenance of proper books and records and tax evasion violations shall be where the assess willingly attempt to evade his tax liabilities. The punitive provisions are in drafting stage and expected to be very stringent and includes prosecution of violators. The Federal Tax Authorities (FTA)’s can visit business for inspection of their records and books.

De- Registration for VAT

The entities shall de-register themselves from VAT in the following conditions:

  • Cessation of Economic Activity
  • Cessation of taxable transactions

The value of taxable transaction falls below the voluntary registration threshold.

Detailed regulations for De- registration are still awaited.

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  • Article

New Regulations in Jebel Ali Free Zone Authority

Introduction

Jebel Ali Free Zone Authority (JAFZA) is one of the oldest free zone in the country and catering to the needs of thousands of the business and supporting UAE’s objectives of attracting foreign investments and ensuring sustainable developments. It continuously strives to offer the best services for its member without compromising on quality and compliance of law of the region.

In line with its objectives of ensuring sustainable growth and best services for its member, JAFZA has issued a new set of guideline on 23rd May, 2016 which came into force on 24th August, 2016 and shall apply to all the companies registered or registering in the future at the free zone. The new regulations repeal the previous regulations issued for companies registered as free zone establishment and free zone companies in JAFZA. This article aims to highlight some of the major amendments made by these guidelines.

Major Amendments

Some of the significant changes brought in by the new law are

  1. Commercial Companies Law will be applicable to JAFZA entities
  2. New structure of the companies introduced
  3. Limit of minimum share capital abolished
  4. JAFZA companies can now issue different class of share
  5. No effect of change of Domicile of Business

We shall discuss all these amendments in brief in the following paragraphs.

Applicability of Commercial Companies Law

The government of the UAE has issued a new commercial companies law which came in force in 2015. Commercial companies law defines the laws applicable to the companies in the mainland of the country and the entities formed in free zones are generally be governed by the regulations issued by respective free zone in this regard. JAFZA regulations now direct the companies to comply with the provisions of Commercial companies’ law and with this the compliance requirements for JAFZA companies will be similar as for mainland companies. However, if the commercial company law is silent matter the rules in JAFZA regulations shall apply to companies registered in the free zone.

Introduction of New Structure of Companies

Until now, the companies can register in JAFZA either as Free Zone Establishment (FZE), Free Zone Company (FZCO) or the branch of a Foreign Company. The new regulations add one additional structure, namely, Public Listed Companies (PLC) as a new type of entity that can be registered in JAFZA. PLC shall have at least two shareholders and can offer its shares to the public subject to regulations prescribed in this regard.

No Requirement to have Minimum Share Capital

The entities registered in JAFZA are required to maintain a minimum share capital depending on their form. The new regulations waive off this requirement and states that the companies should have minimum capital as required for their activities and no minimum amount or limit is prescribed in this regard. It will also be in line with the provisions of Commercial Companies Law.

Issue Different Class of Share

Many free zones do not allow companies registered with them to issue different class of share and JAFZA were no exception to this rule until recent changes. As per the new regulations, the businesses registered in JAFZA can issue a different class of shares, subject to approval by majority of shareholders. An PLC company can do so, if allowed by its Memorandum and Articles of Association.

Change of Domiciliation

The new regulations allow the foreign companies to register in JAFZA without having to apply as a new registration. In simpler terms, their operations will be transferred to free zone without registering as a new company and they can have their legacy of being an older company just changing their domicile.

Conclusion

The new regulations are a welcome step as they allow companies to enjoy more freedom and at the same time putting the responsibility of self-governance and complying with Commercial Companies Law to be in line with companies registered in the mainland of the country. Many international companies may find it a more lucrative option now as they can transfer their operations without losing their old identity.

If you are looking to set up a company in Jebel Ali Free Zone reach us at [email protected]

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  • Article

Amendments in UAE Penal Code: Prohibiting Bribery & Misappropriation of Public Funds

Introduction

The UAE has been a prodigy of the phenomenal changes for maintaining the balance of safe and protective environment at an individual as well as at an institutional level. Following the same gradation, UAE has announced amendments to the UAE Penal code (Law no. 3 of 1987) by Emiri Decree No. 7 of 2016. This article shall highlight the major amendments brought in and their impacts.

Major Amendments and their Impacts

Article No. Old Provision New Provision Impact
5

The definition of a public official is provided in this article. It shall include all the persons as mentioned in the list provided in this article any other person who perform works related to public services.
The fine for the crimes committed by public official shall not be more than AED 50,000.

The new provision broadens the definition of “Public Official” by including the persons working with the judiciary and security apparatus and employees of companies which are wholly or partly owned by the local or the federal Governments.

The fine for the crimes committed by public official shall not be more than AED 500,000.

Larger category of persons will now be included in the purview of the Penal code.

The higher limit for imposing fines on public officials found guilty is increased to 10 times, which shall now enforce companies in becoming proactive to restrict their representatives from committing any crime.
227

Any public official or a person entrusted for public services shall be liable to punishment of temporary imprisonment if he found guilty of willfully harming properties of public office or of any third party entrusted to such public authority.

Imprisonment and fine up to AED 10,000 or either of them shall be imposed if a Public official is found guilty of harming public properties or the properties of public office or of any third party entrusted to such public authority.

The new provision expands the scope of punishment to include the public funds and properties.

Accordingly, a public official shall be extra cautious in handling the public properties and funds.
234

Article 234 provides for a penalty of temporary imprisonment to a public official who accept any form of gifts or reward for performing or refrain from performing a part of his duty.

The amended provision closes the loopholes existed in previous provision. It now provides for prosecution of foreign nationals.

This amendment has bought UAE laws in line with international laws to prosecute persons guilty of bribery or misappropriation of public funds.
238

A convict of bribery shall be liable to pay a fine of at least AED 1,000.

As per the amended provision the convict is liable to payment of fine of at least AED 5,000.

Increasing the minimum fine by 5 times will discourage people into involving into bribery.

Conclusion

The amendments to the UAE Penal code clearly reveals lawmaker’s intolerance towards any act of bribery or misappropriation of public funds. UAE being the business hub and a signatory of the United Nation’s treaty is against corruption and maintains a zero-tolerance policy towards any harm to public funds or property. Any public official involved in harming public property or property of a third party shall prepare himself for hefty fines and imprisonment. The stringent punitive provisions shall help UAE to achieve its objective of safety of public money and assets and prohibit bribery and misappropriation of public funds in any form.

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Retail Payment Services and Card Schemes Regulations Marks an Innovative Era of Retail Digital Payment in the UAE
  • Article, VAT

VAT is UAE: Reason of MNC’s Joy

Introduction

The UAE is all set to launch VAT which will be applicable to most of the business in the country with effect from 1st January, 2018. Preparations are in full form and authorities are leaving no stone unturned for successful implementation of the law in the country. Though business in the country are apprehensive that they will now have to share a part of their earning with state, but VAT in UAE is not discouraging for multinational corporations operating here. We shall discuss how it is beneficial for MNC’s and giving them a reason for earning higher Profits after tax (PAT).

Why and How?

The UAE Government is diversifying its sources of revenue generation and introduction of VAT is a major reform, as this word “TAX” was an alien to many residents in the country till now. The government is taking an implementing suggestions for diversifying sources of revenues from international institutions. As per a statement made by a senior Government official, UAE is applying best international practices for increasing revenues and coordinating financial policies with sustainable growth. This approach shall inject confidence into the UAE’s economy and investment environment.

UAE is introducing VAT at a rate of five percent and the average rate of VAT around the world is around fifteen percent. Hungary has the highest VAT rate of 27 percent amongst OECD nations. Accordingly, UAE is offering a significantly lower rate of VAT and multinational corporations can still save heavy amount in comparison to VAT rate in their home country. As per the reports published in a leading daily newspaper of the UAE, many top-level executives are happy with the UAE government’s decision to introduce VAT. Therefore, it is now important for businesses to learn the requirements and adjustments that will be required to me made for preparation and filing of VAT returns.

It is important to note here that as VAT is a tax on consumption, so the ultimate burden of tax is generally borne by the end consumer. Businesses only collect VAT on behalf of the Government and submit the same at regular intervals. But, what is more important is that international players find middle east market as growth leader and see a larger scope of penetration to generate higher figures.

What should be your Strategy?

The UAE Government has signed more than 100 treaties for the avoidance of double taxation with different countries and more than 60 agreements for protecting and promoting investments. So, the lower tax rates may benefit if the double tax avoidance agreement is already signed between UAE and your home country as rate of five percent is the lowest around the world.

Conclusion

Introduction of VAT may burden with businesses with additional compliances but that will also bring more transparency, which shall be beneficial in the long run. Secondly, UAE still retains its position of low tax jurisdiction and lesser tax legislations. So, VAT is not unfavorable for multinationals as they can still save high amounts that they otherwise be paying to the government in their home country.

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  • Article

Business Types in Jordan

The different type of entity set up in Jordan is governed by the Companies Law of 1997 [Law No. 22 of 1997. And it amendments As of the Official Gazette No. 57 dated 1/11/2006]. Basically, it includes Jordanian entities holding a Jordanian nationality, foreign entities having the nationality of the parent company. Also, the Foreign entities are further classified as operating and non-operating to be considered as an extension of the parent company.

Jordanian Companies

There are two types of Jordanian Entity that can be set up in Jordan – namely Private Shareholding Companies (‘PSC’) and Limited Liability companies (‘LLC’). The PSC type of companies can operate on a permanent basis and can carry out the activities as mentioned in the company registration documents.

The only distinction between the two entities is the capital requirement. A PSC can be formed with a minimum share capital of Fifty Thousand (50,000) Jordanian Dinars whereas an LLC requires to have a share capital of at least One (1) Jordanian Dinars. Also, it is important to note that LLC companies have limitations of requirement to adhere to the Companies law prescribed standard-Form and requirement to follow a strict Memorandum of Association and Articles. However, PSCs are more flexible form which can also adapt a Memorandum of Association and Articles as per the requirement and approved by the shareholders of the said entity.

The Foreign Investment regulation (Regulation No. 77 of 2016) of Jordan regulating all the investment made by non-Jordanian in the country provides for restriction on ownership in the economic sector in which the said PSC or the LLC operates – which are mainly three types:

  • Complete Prohibition of foreign ownership
  • Foreign ownership restriction of maximum 50%
  • Foreign ownership restriction of maximum 50%

As per the amended Foreign Investment regulation non-Jordanian businessman is allowed to invest in any type of entity without any restriction, provided the proposed business activity is not subject to fulfillment of particular criteria.

Place of set up: Customs Area and Special Zone

The Foreign Investment regulation of Jordan (Law No. 30 of 2014) the main objective is to encourage the foreign investment, so that the country as a whole can derive the benefit of it. In order to achieve the said objective and attract the foreign investor the foreign investment law provides for designated Zones were upon establishment of business get special advantage and ease of doing business.

The Designated zones are further classified as Development Zone and Foreign Zone. In case the Company is registered by the foreign Investor in a zone they get various advantages like wavier on requirement to have local Jordanian as Partner, reduced tax rates, etc. Also, a company registered in a particular free zone can carry out those business activities as allowed in the said special economic zone. Some of the other advantages of setting up company in special designated zone are remittance of all or part of the investment in the foreign capital, profits and revenue earned via the business operations and liquidation of the investment as on when required subject to fulfillment of regulatory requirement.

Bottom-line

The Jordanian Investment Commission the regulatory body responsible for the registration and licensing of entities which want to set up business in Jordan are trying the make the foreign Investment Law relaxed and a create more welcoming environment for the foreign Investor.As the entities operating outside the zone are not granted the tax exemption and other advantages also are required to have a local Jordanian national as a partner. Thus, the businesses planning to expand their operation in Jordan are required to consider the type of entity and also the Zone to derive the available benefits of the foreign Investment Law.

If you are looking to set up a company in Jordan reach us at [email protected]

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  • Article

Recent Amendments in UAE Laws – Share Pledge and Executions against Partners

Introduction

Pledging of shares is a very important topic for financial institutions and banks all around the world. It also has significance importance for foreign investors in United Arab Emirates (UAE). Until recently, the pledge over shares of onshore Limited Liability companies of UAE have been a very debatable topic during the application of Commercial Companies Law prior to enactment of Commercial Companies Law, 2015. New Pledge law was also enacted in UAE on 12th December, 2016 and shall come into force from 15th March, 2017. This article aims to discuss the major amendments bought in Commercial Companies Law, 2015 regarding share pledge and executions against partners. It shall also touch some relevant changes brought in by Pledge Law.

Regulations for Share Pledge

Article 79 of Commercial Companies Law, 2015 deals with pledging of shares by a commercial company in UAE. It is a substitute of Article 230 of previous law. Article 230 of previous company law dealt with assignment of shares only whereas Article 79 deals with pledge of shares as well as assignment of shares. It explicitly provides that shares can be pledged to third parties.

Process for Pledging the shares

The process of pledge of shares can be divided into following steps:

  1. Drafting the agreement for pledge of shares, in accordance with the provisions of law and memorandum and articles of association of the company.
  2. Notarization of Share pledge agreement
  3. Registration of the agreement with Department of Economic Development (DED) of respective emirate.


Provisions for Execution against Pledged shares

As the new law allow companies to pledge their shares as security against the debt and if the pledger fails to repay the debt within the specified time, the pledgee shall be entitled to enforce the pledge. We shall discuss the provisions related to execution against partners’ share in LLC and the procedure for the same in the coming paragraphs.

Article 20 of the Commercial Companies Law, 2015 deals with provisions related to execution and majorly have the same content as Article 17 of previous law. It allows creditor to satisfy his debts from profit of debtors’ shares which was not provided for in the former law.

Further, Article 81 of the new law bring significant amendments and provides for execution against partner’s share in the company.

Procedure for Execution against Partner’s Share in company

The procedure for execution against partner’s share in company can be divided into following steps:

  1. The creditor should initiate the execution proceedings against the pledged shares, including the profits thereto.
  2. If the creditor is unable to satisfy his debt through the profits of the shares, he may target the sale of the share.
  3. Actual sale shall be carried only after negotiating and reaching on an agreement with the debtor and company about the method and terms of sale of shares.
  4. If the parties fail to reach on an agreement, the creditor must apply to the competent court seeking public auction for sale of shares.
  5. The proceeds of sale shall be used to satisfy the debts.


The Bottom Line

The Commercial Companies Law, 2015 has effectively resolved major issues related to pledging of shares of companies registered in UAE but there are still many loose ends that needs to be tightened. Like, right to pledge shares are still not available to Limited partnerships and Joint Liability companies. Also, the law does not allow pledging of shares to banks and financial institutions, which is bottleneck in getting access to more competitive option for financial leverage for modern day companies.

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  • Article

New Government rules in Commercial Company Law of UAE

Introduction-Commercial Company Law

There has been New Government Rules issued by the authority recently, The Provisions are related to “Related Parties”, “Insiders”, and “Conflict of Interest”. The purpose of this article is to provide an overview between the New Government Rules and Commercial Company Law.

To suffice the purpose of this article, let us first understand the definition of these terms to get the overview of the terms.

Deals

The simple definition of deal is “an agreement entered into by two or more parties for their mutual benefit, especially in a business or political context’. It would define as Transactions, contracts or agreements entered by a public joint stock company that is listed in the market and do not fall under the main activity of such company or by way of including preferential terms that are not usually granted by the company to its clients, in addition to any other deals to be specified by SCA from time to time by a resolution, instruction or circulation issued thereby.

The new rule Is that the deal entered between related parties the company is 5 percent or less than the company’s capital, the approval of the Board of Directors is required. When the value exceeds 5 per cent the approval of the general assembly is required. However, the old definition mentions if deal’s value is 10 per cent or more of the company’s total assets the approval of the Board of Directors and General assembly.

However, the main issue rises in this regard is that whether the value of Deal’s shall be calculated per se or it shall be calculated accumulative. The new definition was issued recently and have not been put into practice, which creates confusion on this matter.

Another point to be considered that whether valuation of the Deal’s is required or not, the old definition of deal’s mention that the valuation of the deal is required whose value are less than 5 per cent of the company’s capital, however the new definition has ruled out this requirement and mentioned that only those Deal’s are less than 5 per cent of the company’s capital is not required.

Related Parties

The new definition of Related Parties has been amended in the new government rules by limiting the Related Parties to the Chairman, Board Members, Members of the Senior Executive Management and the employees of the company and the companies to which any of such persons own at least 30 percent of their share capital as well as sister and allied companies and subsidiaries.

The motive of such change is lesson the burden of the disclosure to the people who are entered in such deals with the company where it is impracticable. Therefore, the burden of the disclosure about the deals Is only on those are related parties as explained above.

Another point to be considered is the New Government Law is that it is saying 30% of shareholding owned by Chairman, Board Members, Members of the Senior Executive Management and the employees of the company and the companies to which any of such persons, however the old definition is mentioned 30% of shares holding by such people, so the point is the new law is silent on whether such holding should be directly or indirectly since, indirect owners have the same benefits as direct owners.

For the disclosure requirements, the new rule said the disclosure of Deal’s entered by related parties with the company, a subsidiary, or a sister company on the other side has to be disclosed to the Board of Directors whatever is the value of the deal. The old rules on the other hand mentioned that disclosure required only if the Deal’s value is 10 per cent or more of the company’s total assets. The New Governance Rules in Commercial Company Law further introduced to maintain a register of related parties which will include the value of the Deal’s and name of parties and every detail.

Insiders

The new Governance Rule in Commercial Company Law introduced new provisions for insiders (Article 12) and Confidentiality (Article 13) that did not exist under the Revoked Governance Rules. However, the new Governance Rule does not define an Insider, therefore it Is very difficult to determine who is an insider and who is not an insider of the company Therefore, insider can be determined on a case to case basis, so we assume that insider can be considered who are company’s related parties or their relatives and the persons who have access to the inside information prior to publication such as consultant, advisors who are employed or retained on a certain deal.

The new rule in Commercial Company Law also mentioned to maintain the register of permanent & temporary insiders with their name and details and it should include their disclosures.

Conflict of Interest

Another new provision also has been introduced which does not exists in the revoked law that if any Board of Directors has a joint interest of conflict of the interest with the Deal presented to the Board of Directors to take a decision on the same should inform the board regarding his interest and will not be allowed to vote on such deal and the director must inform the same to the company beforehand about the conflict of the same. If any director fails to do the same, then the company can resort to the court to invalidate the deal and the director will be compelled to pay any profit or benefit he obtained from such deal.

The new Governance Rule in Commercial Company Law also mention to maintain the register of Conflict of interest with each detail regarding to, name, address, amount, declared interest and any court decides if he fails to do so.

To Conclude we can say that the new rule is a detailed solution to avoid any problems which the company may get in the future due to the negligence of the details and therefore, it is very beneficial in today’s era. However, it is not yet put in practice once it is done, we may get to know more advantages of this.

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Important Provisions of the New SPV Regime in Dubai International Finance Center (DIFC)

The Board of directors of DIFC have approved the regime for establishment of intermediate special purpose vehicles on 19 September, 2016 which shall come into force with immediate effect. It will again be innovative initiative by the DIFC that will allow the limited and listed companies in DIFC to enjoy the benefits of having an intermediate SPV, which is an advantage available only to companies having a physical presence in DIFC before the approval of this new regime. We shall be discussing the important provisions of this new regime below.

Background

These new vehicles are “Intermediate” which means that these SPV’s are neither the operating entities and nor can be the ultimate holding entities and shall have very limited application. Prior to approval of this new regime, the DIFC did not have any provision of establishment of non- regulated SPV and the entities, that already having a substantial presence in DIFC can establish SPV but must undergo a detailed application and compliance process for the same. The professional advisors however, always preferred use of SPVs for better efficiency and structuring perspective. The DIFC authorities considering the interest of entities and demand of professionals permitted the use of intermediate SPV’s.

The authorities are still in process of reviewing their companies law and related regulations and it is anticipated that this new regime will be explained and structured in the revised regulations. It is important to note here that intermediate SPV will be allowed for companies already registered with DIFC.

The Qualification Requirements

The guidelines set out by DIFC mentions the eligibility requirements for incorporating or establishing an intermediate SPV. As per the requirement criterion laid down by the authorities, applicants will only be able to qualify to incorporate an intermediate SPV, if they are one of the following:

  • Holding Entity or entities, Single Family offices or proprietary investment vehicles already have a presence in DIFC;
  • A collective investment scheme (CIS) established in DIFC;
  • A CIS established outside DIFC but managed by a fund manager regulated by Dubai Financial Services Authority (DFSA)

If any entity does not come under any of three categories mentioned above, it shall not be a qualifying applicant for incorporating an intermediate SPV in DIFC.

Advantages

The Intermediate SPV’s registered in DIFC shall enjoy the following advantages:

Cost Saving: The new regime allow formation of these intermediate SPV’s in  a more cost effective manner, rather than forming a holding entity.

Lesser Compliances: The applicants do not have to go through the long application procedure, or comply with detailed compliance requirement, which shall save lot of time and efforts.

Limited Liability: They shall enjoy all the benefits available to companies registered in DIFC e.g. UAE status and limited liability of shareholders.

No Restrictions on Foreign Ownership: These SPV’s will also have no restriction on foreign capital investments and can be owned wholly by foreign nationals or entities.

Conclusion

It is a very business friendly evolution of DIFC regulations and an significant step from the authorities. The competitive fee, easier compliances and no restriction of foreign capital shall make incorporating intermediate SPV a preferred choice for companies registered in DIFC to structure their businesses and increase efficiency.

To read more about DIFC and its features click here.

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