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Strategic Cooperation Between Riyadh and Ankara Hits New Highs

November 25, 2016

RIYADH: Saudi Arabia and Turkey have been enjoying a deep and longstanding bond based on their common geopolitical interests and similarities in approaches on a host of regional and international issues.

The recent visit of Crown Prince Mohammed bin Salman, minister of interior, to Turkey; preceded by the visit of Custodian of the Two Holy Mosques King Salman to Ankara early this year indicate the progressively growing relations between the two countries.

It is important to note here that Turkey has already been working with Riyadh by supporting Operation Decisive Storm in Yemen, and took part in the Saudi-led Islamic alliance against terrorism.

It has also stated categorically that Iran has become more aggressive after signing a nuclear deal with the US.

Khalil Ozcan, a Turkish parliamentarian and head of the Turkish-Saudi Association, who is also a graduate of King Saud University, said that Ankara sees the Kingdom as a trusted strategic partner, with which it has more in common than Iran.

Interestingly, Turks also have a special place in their hearts for the Kingdom because it hosts Islam’s holiest sites.

This attempt for more harmonious relations with Turkey is being made at the highest possible level. The royal visits from the Kingdom and the visits of high-ranking Turkish officials including President Recep Tayyip Erdogan send a message to everyone that the two countries are seeking stability and peace based on a policy of openness, partnerships and the prioritization of economic benefits over politics.

Referring to the important role played by Turkey, Adel Al-Jubeir, foreign minister, said that the Turkey’s engagement in the Middle East is essential for “regional stability.”

He, while showing solidarity with Turkey, also underlined that the Erdogan government successfully defeated the attempted military coup.

Also, Saudi Arabia and Turkey are on the same page on the regional conflicts and issues including Syria, Iran and Yemen.

The strategic cooperation council established by Saudi Arabia and Turkey is one step above a bilateral alliance.

The purpose of the council includes deeper coordination with Turkey in light of the challenges both countries face in Syria, Iraq, Yemen and Libya, from terrorism to extremism to Iran’s negative intervention in regional issues.

The political battle over the implementation of resolution 2259, which for the first time endorsed a political process in Syria since the conflict there began five years ago, is inevitable.

Moreover, Saudi Arabia and Turkey are both crucial for the quest to defeat Daesh in Iraq and Syria.

They also have great economic potentials.

Turkey and Saudi Arabia are among the leading countries in the Middle East, with a combined Gross Domestic Product of almost $1.4 trillion, an export volume of $540 billion and a population of 105 million.

For decades, the two states have attempted to develop economic relations based on mutual respect.

Turkey sees its friend Saudi Arabia as one of the most important countries in the region.

On commercial front, the two countries have reported consistent growth.

Turkish exports to Saudi Arabia are mainly made up of clothing, textiles, iron, steel, automotive, fruits, vegetables and other agricultural products, while around 80 percent of Turkish imports from Saudi Arabia are composed of oil.

Turkish trade centers, which have aimed to increase bilateral trade volume and develop joint investment projects in Saudi Arabia, are operational in Riyadh and Jeddah.

A large number of well-known Turkish construction companies have been successfully operating in Saudi Arabia for many years.

There have also been many agreements made between the two states in order to secure good bilateral mechanisms for economic cooperation, with one being the Turkish-Saudi Arabian Joint Economic Commission (JEC), which was set up in accordance with Article Five of the Economic Technical Cooperation Agreement of 1974, to secure better relations between Turkish and Saudi business communities.

Referring to the progressively growing commercial relations, Turkish Ambassador Yunus Demirer said that trade between Turkey and Saudi Arabia has been growing consistently. He said that trade between Ankara and Riyadh has shown a stable trend with a much better performance in 2010-2012 period compared to that of Turkey’s overall trade volume. It reached to $8.1 billion in 2012.

“Turkey’s export to Saudi Arabia, which was almost $555 million in 2002 reached to over $3.5 billion in 2015,” Demirer added.

Speaking about the upswing in trade and investment, Ambassador Demirer said that there is a genuine opportunity to establish a long-term partnership between Turkish and Saudi business communities.

Saudi visitors feel at ease in Turkey, says the envoy, while adding further that Turkey is among the world’s top 12 producers of building materials such as cement, glass, steel and ceramic tiles.

As neighbors and two of the world’s oldest civilizations, Turkey and Saudi Arabia have shared a long history of religious, cultural, scientific, and economic linkages, said a report.

The report said that “the depth and diversity of Saudi-Turkish relations, joint commitment to stability and well-being of the region as well as intertwined interests lead the two countries to foster the existing relationship to higher and new levels of cooperation.”

Referring to the investment climate in Turkey, the report said that the structural reforms carried out by the government in the last decade have improved the investment climate in Turkey, which in turn attracted substantial Foreign Direct Investment (FDI).

Legislation on investment was streamlined along global standards.

At present, Turkey has a foreign capital-friendly legislation and transparent regulatory system.

FDI legislation is based on the principle of equal treatment for domestic and foreign investors.

Turkey’s legal system protects and facilitates acquisition and disposal of property rights, including land, buildings and mortgages.

Also, generous tax privileges for free zones and technology development zones have provided a stimulus to the investment therein.

As a result, Turkey has become the commercial/investment hub of the region.

Foreign companies have been using free zones as well as Turkish partners to access the EU market as well as looking for business opportunities throughout the Balkans, Central Asia, the Caucasus and the Middle East.

To this end, the report noted that about 400 Saudi firms directly or indirectly operate in Turkey at present.

Saudi companies mainly invest in industrial sector in Turkey in collaboration with Turkish private and public sectors.

They can also increase their investments in agricultural, finance, tourism and communications sectors.

Turkey, on the other hand, has had a sizeable number of highly-qualified and technologically superior contractors, who are present in every nook and corner of the globe including the Gulf states today.

In the field of tourism also, Turkey has been doing very well.

A total of 39 million tourists visited Turkey in 2013 and, hence the tourism revenue reached $32 billion.

Turkish tourism sector’s target is to be among the top five countries in the world in terms of attracting the highest number of tourists and receiving the highest amount of tourism revenue by 2023.

It is important to note here that the tourism traffic between the Kingdom and Turkey has also been consistently growing. “Indeed, tourism is a dynamic and resilient sector in Turkey,” said the report.

Speaking about Turkey’s global standing in world’s trade and economy, the diplomat said that “due to its globally integrated and solid economy, large and young population, Turkey is a source of new business and development in its region.”

Turkey has shown remarkable performance with its strong growth over the last decade. A sound macroeconomic strategy in combination with prudent fiscal policies and major structural reforms integrated Turkish economy into the global economy.

Besides, Turkey’s dynamic and growing economy creates many opportunities in trade and in other areas of cooperation in the region.

In fact, the economic growth of Turkey has become sustainable through the macroeconomic improvements and fiscal discipline.

During 2002-2014 period, Turkey ranked among the top five countries with its 4.9 percent annual GDP growth rate.

On the other hand, Turkish contractors have become important players internationally, related to their domestic experience.

Starting from 1972 to 2015 (August), Turkish companies have taken 8,620 projects in 104 countries worth of $318.4 billion.

This increase is mainly related to the airport, metro, industrial production sites, refinery, energy infrastructure and highway projects which require more skills and necessitate more technology.

This also enables Turkey to be among the top 12 producers of building materials in the world, particularly in the supply of products such as cement, glass, steel and ceramic tiles.

These numbers highlight the power that the Turkish construction industry has on an international level. In 2015, 43 Turkish contracting companies were listed among the “Top 250 International Contractors” announced by a leading international industry magazine.

Turkish contracting companies in Saudi Arabia has undertaken over 100 projects up today. All these Turkish companies, especially contracting ones, area also doing exceptionally well in other GCC states. As the political, economic stability and the structural reforms contributed to the inflow of FDI to Turkey and on Turkish companies working overseas, these inflows increased the soundness of the Turkish economy in return.

Saudi Arabia is the largest economy in the Middle East.

The Saudi government has ambitious infrastructure plans for the next years.

Turkish firms, now increasingly internationally oriented, cannot ignore these facts.

On the other hand, Turkish private sector proved its expertise and proficiency worldwide and earned a sound reputation in Saudi Arabia and the Middle East.

Also, Turkey hosts more than 1.5 million Syrian refugees as part of a historical humanitarian effort, and helps many more in Iraq.

The humanitarian assistance of Turkey to those refugees has reached $4 billion.

Turkey has the longest land border with Syria among all its neighbors.

Together with Iraq, the length of the border is 1,295 km.

This is a danger felt far more acutely by Turkey than any other country.

Daesh, which constitutes a direct threat to Turkey’s national security, being priority, any threat coming out of this geography is first directed against Turkey.

Turkey is and will always be on the frontline in combating terror, said the diplomat, while advising resolute and comprehensive action, which is required to curb terrorism, and to finish terror outfits in Syria, Yemen and elsewhere in the region.

Newsletter

THE UNITED ARAB EMIRATES GOVERNMENT STRENGTHENS ITS COMMITMENT TO IMPLEMENT THE AUTOMATIC EXCHANGE OF INFORMATION BY 2018

November 25, 2016

The Ministry of Finance (MoF) announced the approval by the UAE Cabinet of the agreement on mutual administrative assistance in tax matters (MAC) and the Multilateral Competent Authority Agreement (MCAA). Broadly speaking, the MCAA is based on Article 6 of the MAC and is one of the available legal basis to establish the exchange relationships between jurisdictions. It specifies the details of what information should be exchanged and when such exchanges should occur.

This approval is a significant step towards the effective implementation of the automatic exchange of information in the UAE and reaffirms the country’s commitment to greater tax transparency. HE Obaid Humaid Al Tayer, Minister of State for Financial Affairs, commented: “The UAE achieved a significant shift in the second phase of evaluation. The Ministry takes into consideration all remarks given by evaluators, and works on a plan to meet the requirements and criteria to be able to provide a report that supports the Global Forum on Transparency and Exchange of Information by July 2017.

These efforts reflect the Ministry’s commitment to rate as ‘largely compliant’ or ‘compliant’, and reaffirm the UAE’s commitment to implement the automatic exchange of information by 2018.” The UAE’s firm commitment to follow the transparency path and effectively implement taxes is also supported by the recent announcement of the establishment of a Federal Tax Authority, the legal framework of which is set by the Federal Decree-Law No. 13/2016.

We are now waiting for a domestic legislation to be enacted and a specific channel for transmission to be put in place, which guarantees a sufficient level of confidentiality and data safeguards. Once all these are in place, the UAE should be ready to sign the agreements and activate the bilateral exchange relationships in line with the Common Reporting Standard (CRS).

As of writing, there are already over 1000 effectively established bilateral exchange relationships with respect to jurisdictions committed to CRS as from 2017.

Newsletter

Amendment in Double Taxation Avoidance Agreement (DTAA) between India and Japan

November 25, 2016

The amended bilateral tax treaty between India and Japan, which provides for strengthened exchange of information to help reduce tax evasion, has come into force from October 29. The agreement to amend the 27-year old Double Taxation Avoidance Agreement (DTAA) was signed when Japanese Prime Minister Shinzo Abe visited India in December 2015.

In a notification, the Department of Revenue said, “All the provisions of said Protocol amending the Convention between the Government of India and the Government of Japan for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income shall be given effect to in the Union of India with effect from October 29, 2016.”

Article 26 of the Convention provides that the information received under the DTAA would be kept secret and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of taxes. Besides, the two countries cannot decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.

In order to push investment in India, in December 2015, Japan had set-up a make in India fund of Rs 83,000 crore by Nippon Export and Investment Insurance and Japan Bank for International Cooperation. Nippon Export and Investment Insurance has been classified as ‘Central Bank’ eligible to claim the beneficial provisions of the treaty, in respect of interest income.

Similarly, General Insurance Corporation of India and New India Assurance Company Ltd have also been included in the definition of ‘Central Bank’ eligible to claim beneficial provisions of the treaty in respect of interest income.

Newsletter

Dubai International Financial Centre (DIFC) Intermediary Special Purpose Vehicle Regime

November 25, 2016

On 19^th September 2016 Intermediate Special Purpose Regime (“Intermediate SPV”) was approved by DIFC Board of Directors with immediate effect.

The Intermediate SPV regime applies to entities that are already present in the DIFC provided that they meet certain criteria (see below).

Discussions with a number of DIFC entities and professional advisory firms have led the DIFC to believe there is a need for a new regime to be introduced that would enable existing DIFC companies to set up their intermediate vehicles to bridge their DIFC and other operations.

Applicants qualifying to set up an “Intermediate SPV” are limited to:

Fund vehicles established in the DIFC pursuant to the provisions of the DIFC Collective Investment Law and rules;
Collective investment schemes established outside the DIFC managed by a fund manager or an asset manager regulated by the DFSA; and
Holding companies, proprietary investment vehicles (incorporated or unincorporated) and Single Family Offices, having presence in the DIFC

In order to qualify for the Intermediate SPV license, the applicant will in particular have to provide sufficient assurances to the DIFC Registrar of Companies that the Intermediate SPV applied for will be set up for the purposes that fit into the overall objectives of the DIFC.

The application process for establishment of an Intermediate SPV is simplified. No additional office space or lease arrangements are required if the applicant already has a registered office in the DIFC and incorporation fee is USD 1,000 and an annual license fee is USD 3,000 only.

Newsletter

UAE COURT JUDGMENT: IMPORTANCE OF SIDE AGREEMENTS IN PROFIT DISTRIBUTION BY LLC

November 14, 2016

Introduction

In a landmark judgment, the Abu Dhabi Court of Cassation recently pronounced (in Civil Appeal 30 of 2015) that in case an UAE national purposely sells his shares in violation of the UAE Companies Law and public policy prevalent in the country, shall have no right to subsequently claim the profits of the company he had voluntarily served as a service agent and not as an active shareholder (which is requirement of law) once the side agreement is nullified. It is important to note here that nullification of the sale and purchase agreement/side agreement shall come into effect from the date of the court judgment. This article aims to highlight the brief facts about the case and the judgment of honorable court.

Background

All companies in UAE are mandatorily required to have registered at least 51% of its shares in the name of UAE national. In the UAE, it is a general practice to form side agreements (sponsorship or nominee arrangements) to be entered between foreign nationals on the one side and UAE national shareholders on the other side which state that the beneficial interest and/or economic benefit in shares of the company which is legally held by the UAE shareholder belongs to the foreign national (other party to the agreement) and that the economic interest or stake of the UAE national in the company is limited to an agreed annual fee or other benefits as may be mentioned in the agreement.

In this case, the Company was going through a tough time and performing badly. The claimants (UAE National) do not wanted to be a part of a loss making company and sold their shares to Defendants. Both the parties voluntarily entered into an agreement in 2004 by which the Claimant sold their shares to the Defendants for AED 5 million, stopped being an active shareholder, but continued to remain shareholders on paper to satisfy the legal requirements for the Company, and agreed to receive an annual sponsorship fee of AED 150,000 for it.

This sale was not registered with any authority or the Notary Public, nor was it on the company’s records or registrar or the commercial register. The Claimants gave a Power of Attorney for management without referencing the side agreement for all future transactions. In succeeding two years, the Company’s business improved and it started making profits. Claimants with an intention to claim their shares in profits of the Company, brought an action against the Defendants to nullify the agreement for sale of the shares.

The Decision

The Court at first exemplification appointed an expert who prepared his report and educe that the sale of the shares was made upon the request of the Claimants. The Defendants have fulfilled their obligations under the voluntary agreement with claimants and therefore claim for share in profits was dismissed. The Claimants could not provide any proof to prove that they were deceived.

The Claimants were not satisfied with decision of Court of Appeals and filed an appeal with court of Cassation. It overturned the ruling of Court of Appeal’s and returned the case again for a decision by another panel.

A three persons committee was appointed by court of Appeal which concluded that sale is not valid as it was contrary to the public policy prevalent in the country. The court pronounced that parties were to be restored to the state they were before entering into the side agreement as it void ab initio, and if it is not possible to restore them into previous position, claimants are entitled for compensation which was more than AED 20 million.

Now, the defendants were aggrieved of the decision and appealed the decision. Their first argument was that the Court of Appeal was unconscionable to decide on the basis of Memorandum of Association (MoA) of Company to make the Claimants entitled to 51% of profits of the Company, since the MoA is only factitial contract and the side agreement is the real contract which accurately defines the relationship between the parties and documented the fact that the Claimants were only dummy partners to fulfill the requirement of law. The side agreement is not registered on the commercial register as it is against the law and cannot be lodged. The Claimants intentionally acted as nominal partners so that the Defendants’ could take benefit from the Claimants’ status of being a UAE National.

The Court of Cassation of Abu Dhabi ousted this argument. It construed that the existence of a dummy agreement is a matter of fact for the trial judge and not a matter that could be scrutinized by the Court of Cassation. The further arguments rose by the Defendants were also dismissed. However, the last argument raised in the Court of Cassation by the Defendants was that the Court of Appeal had been erroneous to pronounce that the Claimants are entitled to the profit on account of their status of 51% shareholding in the company because the decision of the Court of Appeal had been denotative and therefore can be applied to future profits and not to the profits earned between 2004 to the date of judgment. This is quoted as an exception to the general principle that the parties to these types of contracts should be restored to the positions they occupied prior to such agreement or contract. Furthermore, the Claimants were cognizant since 2004 that the side agreement was against the public policy, and maintained their role as service agents voluntarily and received compensation for the same.

The Court of Cassation agreed that the Court of Appeal had been amiss to award the Claimants and direct defendant to pay 51% of profits earned from 2004. In this case the Claimants had knowingly and voluntarily participated in the violation of the Companies Law which led to the agreement being invalidated, and no person(s) should be allowed to take benefit from their wrongful conduct. Therefore, defendants are only liable to pay profits from the date of the Court of Appeal (remand) judgment and not from 2004 (the date of entering into side agreement with claimants).

The matter referred back to the previously appointed committee for recalculating the amount payable. The Cassation Court pronounced that the Claimants should return the money received for entering into the side agreement and selling the shares (which was approximately AED 5 million), and fee received for serving as Service Agent from 2004 until 2015.

Conclusion

The honorable Court of Cassation judgment addresses key issues concerning service agents who attempt to claim profits of a company despite voluntarily acting only as a sleeping partner and not being an active shareholder. The head rending judgment in this case is that whilst the Claimants had tried denial of the agreement and sue the defendants for the sharing profit from past, even after knowingly participating in violation of public policy. The judgment not only denied them from any share in profit, but also was ordered to repay the purchase price they received for selling their shares to defendants and the annual sponsorship fee that they had received for over a decade.

Newsletter

VISION 2030: REFORMING KINGDOM OF SAUDI ARABIA

November 5, 2016

Introduction

The Saudi vision 2030 was launched in April 2016. It is the blueprint for deviating Kingdom’s economy’s dependency on oil and super scribes the tightening economic situations. World Bank has given a gloomy forecast for oil prices for 2017 as well. Though they are expected to recover from previous years’ blow but do not appear to be a promising source of good revenue in near future. To answer the questions raised by current market conditions for oil and energy sector, a “National Transformation Plan 2020” (NTP) was launched to accomplish the interim targets by end of this decade through implementation of various innovative measures across all governmental bodies.

NTP as well as KSA Vision 2030 accentuate private sector involvement and investment into large number of business which were solely handled by governmental bodies until recently. It also proposes large scale restructuring of ministries, government departments and institution to align them with the requirements of NTP and the vision 2030.

Key Highlights

Sovereign fund of USD 2.5 trillion: KSA aims to transform its Saudi Public Investment Fund to Sovereign fund asset with a value of USD 2.5 trillion which will be the largest of its king globally. As per the statement given by the Prince initial data suggest that the fund will controls more than 10% of investment capacity of the globe and more than 3% of total global assets. It will be key driver of investment into the region.

Listing of Aramco: The giant oil company of the company will be offering 5% of its shares through IPO and giving a large part of its proceeds to the Sovereign fund. It will not only increase transparency and bring it into under control of Saudi Banks, thinkers and regulators.

Restructuring: Restructuring of the state assets and agencies will be the key rather than spending cuts to making government finances viable in the long run; Prince Mohammed said the reforms would not require any substantial allocation of government funds but work on existing infrastructure projects would deliver the desired results. He cited the housing ministry as a target for restructuring.

Shifting from Dependence on Oil: Considering the recent turbulence bought by oil prices, the plan aims to minimize the dependency on oil and increase its non oil revenue up to six times. KSA also seek to improve its position to amongst top fifteen economies in the world. It is currently in twenties.

Promoting Tourism: The Kingdom is planning to open tourism to all nationalities. However, it will be in line with the values and beliefs of the country. It also aims to increase the number of pilgrims to thirty millions. The infrastructure development work is already in process for the same.

Investment Opportunities

Recent advancements since the launch of Vision 2030 and the NTP provide strong confirmation of the fast pace of change, opening doors of investment opportunities for both foreign and local investors in Saudi Arabia, since the Governmental authorities are working proactively in seeking and promoting new initiatives and private sector involvement.

The renewed policies allowing 100% foreign-owned trading companies are already in force and although aimed at large investments by multi-national entities, various foreign groups have already been licensed to establish such entities.

In August 2016 it was reported that the RCJY had signed as many as 24 contracts with up to 16 private sector investors for the development of various housing, commercial centers, hotels, medical clinics and other projects in line with Vision 2030 within a couple of month of its launch.

The policies allow that investments may take the form of joint ventures and/or public private partnerships and given the initiatives by the NTP many opportunities can be anticipated in the Eastern Province.

Bottom Line

KSA have already identified the need of hour and started taking effective and dynamic steps for diversifying their economies from oil and gas products on one side and formulating and amending the existing Corporate and Financial Laws to bring them in line with international laws on the other side. KSA already implemented new Company Law, Employment Law, trademark law and arbitration law and will soon be implementing International Financial Reporting Standards for recording of financial statements to increase confidence of international investors.

Launch of NTP and Vision 2030 surely aware the world that economy of Kingdom is still very strong and it shall come up as a better and brighter economy very soon.

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