The amendment of Corporate Law in the UAE

Changes to foreign ownership restrictions

The United Arab Emirates (UAE) has had a longstanding requirement that entities in the UAE shall be 51% sponsored or owned by an Emirati citizen. Foreign businesses who wish to operate onshore would do so through a Limited Liability Company (LLC) or branch office of a foreign company. For LLC’s, 51% of the shares had to be registered in the name of one or more Emirati citizen or a company wholly owned by an Emirati citizen. For a branch, companies had to appoint an Emirati individual or company wholly owned by an Emirati as a national service agent. However, since the introduction of the Federal Decree Law 26 of 2020, foreign companies opening a company in the UAE no longer need an Emirati shareholder or agent in order to be established. This has significantly shifted the law and significantly amended the Federal Law 2 of 2015 (Commercial Companies Law). Previously, 100% ownership was only possible in ‘free zone’ areas such as Dubai International Financial Centre (DIFC). The aim of the Federal Decree Law 26 of 2020 is to boost the country’s competitiveness and facilitate doing business to attract foreign investment. The removal of an Emirati sponsorship reduces registration and administration costs for businesses.

However, there is an exception contained in the law. Companies which have a ‘strategic impact’ are not included. The UAE Cabinet will establish a committee compromising of representatives from each of the Department of Economic Development (DEDs) who will be responsible for determining a list of commercial activities considered to have a ‘strategic impact’ on the UAE’s economy; and additional licensing controls to impose on companies undertaking commercial activities in the sectors listed on the Strategic Impact List. The Cabinet is yet to decide but it is likely that the oil, gas and national security related sectors will be listed. It is important to note, that this list is not exclusive and may vary between each Emirate as the UAE is a federal state. Companies will have one year to comply with the amended legislation from the time it comes effective, which is the 1st of June 2021.

The Ultimate Beneficiary Owner (UBO) disclosure

Following the Cabinet Decision No. 58 of 2020 on Regulating the Beneficial Owner Procedures (Regulations), companies will be required to create and maintain a Register of Real Beneficial Owners (UBO) and Register of Partners (shareholders). The purpose of this amended legislation is to introduce an additional element of transparency and make the UAE corporate practices more in line with global standards such as the EU and Hong Kong. This aids in combatting tax evasion, corruption and money laundering as individuals can be held accountable. However, the amendments will not apply to companies in the DIFC and ADGM or companies which are directly or indirectly wholly owned by the government in any of the Emirates.

An Ultimate Beneficiary Owner (UBO) is an individual who ultimately owns or controls the company, through at least 25% of the capital or voting rights. If no person is identified within these criteria, then the UBO is the individual who exercises control of the company through other means. If this is also not met, then the UBO is the individual who is responsible for the senior management of the entity. An UBO disclosure shall include the following information: full name, nationality, date and place of birth, place of residence and address; passport or ID number; date and basis on which the individual became a UBO; the date on the which the individual ceased to be a UBO (if applicable). Companies must regularly update and maintain this register – any changes or amendments must be notified to the Registrar within 15 days of the change or amendment. Furthermore, companies must designate a person whom the Registrar can be in regular contact with, in relation to any disclosure submitted. Companies under liquidation must also provide an UBO disclosure and this must be completed within 30 days of the liquidation appointment.

A Register of Partners must also be submitted under the Cabinet Decision, as mentioned above. The Register of Partners must include: the number and classes of shares; associated voting rights; date of appointment as a partner/date of acquisition of shares. For natural persons, it must include the full name as per passport, nationality, address, place of birth, name and place of work, photocopies of the relevant identification documents.  For legal persons, it must include the name of the legal person, legal form and memorandum of association, registered office address, articles of association and any similar documents, names and particulars of the directors of the entity. The Register must also include information on any partner or shareholder who is acting as a ‘trustor’ (natural or legal person who transfers management of their funds to a trustee by virtue of a deed) or ‘nominee board member’ (natural person who acts in accordance with the instructions of another person). Companies have up to 15 days to update any changes or amendments to the information provided.

Development in corporate governance and compliance

Corporate governance is best described as the system of rules and practices that dictate how the company is controlled and directed. This is usually composed of Board of Directors who oversee the operations of the company and the recognition of shareholders. This would aid in promoting transparency and accountability, which would increase the UAE’s position in the global economy as a reliable economy. This assists in increasing investor confidence and reducing the risks of corruption and mismanagement within companies. Most notably, the Chairman of Securities and Commodities Authority (SCA) Board Decision No. (03 R.M.) of 2020 advanced corporate governance and compliance, in particularly with regards to Public Joint Stock Companies (PJSC). The Decision requires that: shareholders must be treated equally; have a right to receive profits and review the PJSC’s financial reports; and enjoy the right to attend, participate and vote at general assembly meetings.

The Decision also places various obligations on members of the Board in the PJSC, which ultimately enhance corporate compliance. Board members are expected to safeguard the PJSC’s interests, exercise reasonable care and undertake acts for the benefit of the PJSC. Board members must also avoid conflicts of interest; they need to disclose any interests and avoid voting on these matters. To tackle conflicts of interest, Board members are required to fill out a form, which is kept by the Board of Secretary, declaring any interests or relationships that may affect their ability to perform their tasks as a Board member. This is reviewed and updated regularly. The Board has to appoint an independent Board of Secretary, which they directly report to.

Economic Substance Regulations

The UAE introduced Economic Substance Regulations in 2019. This was in order to respond to the EU’s decision of blacklisting the UAE for not meeting the EU’s criteria on tax transparency, fair taxation and measures to counteract base erosion of profit shifting. Companies must report actual profits of economic activities undertaken within the UAE. The Cabinet Resolution No.57 of 2020 Concerning Economic Substance Requirements and Ministerial Decision No. 100 of 2020 on the Issuance of Directives for the Implementation of the Provisions of the Economic Substance Requirements are referred to together as the Regulations. The Regulations apply to any legal person (incorporated inside or outside the UAE) or a Licensee (registered in the UAE – including free zones) that carries out one or more of the ‘relevant activity’, which include areas like banking, insurance, shipping and intellectual property. A Licensee that carries out one or more relevant activity must maintain and demonstrate an adequate economic presence in the UAE and fulfil the criteria enlisted in the Economic Substance Test.

As part of the Economic Substance Test, a Licensee must conduct necessary core income-generating activity in the UAE and this activity is to be directed and managed in the UAE. Core income-generating activity means activities that are of central importance to a Licensee for generating income from the ‘relevant activity’. ‘Relevant activity’ is demonstrated by companies by having an adequate number of qualified full-time employees who are physically present in the UAE, adequate operating expenditure incurred by the Licensee in the UAE and adequate physical assets in the UAE. To show this, the Licensee’s Board of Directors must meet in the UAE, record the meetings in written minutes, noting the decisions made and this must be signed by the directors attending the meeting. The records must also be kept in the UAE.

There are some entities that may be exempt from Economic Substance Regulations such as investment funds or Licensees who are not a UAE tax resident. Additionally, if there is a branch of a foreign company which is registered in the UAE however the relevant income is generated outside the UAE, then it is considered an Exempt Licensee. This is because the relevant income may be subject to tax in a jurisdiction outside the UAE. Exempted Licensees are required to submit sufficient information and evidence to the relevant authority to establish its status as an Exempted Licensee for each financial year.

Economic Substance Notifications from Licensees as well as Exempted Licensee’s should be submitted to the relevant regulatory authority. This is to be done for each financial year and submitted within six months from the end of the Licensee’s/Exempted Licensee’s financial year. They must submit the nature of the relevant activity, whether relevant income was generated, the date of the commencement and termination of their financial year and any other information which may be requested by the regulatory authority. For onshore entities, the relevant authority is the Department of Economic Development; for DIFC entities it is the DIFC Registrar of Companies; and for ADGM entities it is the ADGM Registration Authority. The relevant authority’s position is to collect and review notifications and reports from the Licensee or Exempted Licensee. They will then report this information to the UAE Federal Tax Authority, who are the National Assessing Authority. The relevant authority’s along with the National Assessing Authority have discretion to request any additional information they may need to complete the Economic Substance Test and failure to comply can result in penalties, suspension or non-renewal of a Licensee’s license or permit.

Bankruptcy or Insolvency

The UAE Cabinet has approved the new law of bankruptcy in September 04, 2016 and has been already signed and approved to continue in 2017. Lately, many companies and retail shops are closed and the owners have left the country with huge number of debtors and cases.

Therefore, the law of bankruptcy drafted which has been implemented in chapter No.5 of commercial transaction law.

The applicant who owns the company inside UAE can submit the request of bankruptcy after 30 days from their non-payment of entire dues in the court. The procedure of reviewing the matter of applicant is decided for each procedure how long the judge and experts will decide on matter anticipated approximately within 90 days. After the award is issued and confirmed the bankruptcy of the company the same judgment will be valid for a duration of 5 years.

The aforesaid law has adopted the law from Japan, Dutch and trusty from English law.

The law only applies for the companies, traders and businessmen who are registered in within UAE including sole establishment company, corporate company, and professional company however, free zone companies; DIFC and Abu Dhabi have their own procedure.

The applicant must submit a request of bankruptcy not later than 366 days of their pending dues.

The law has also considered individuals who cannot pay their debts and loan due to loss of their jobs and impact of the bankruptcy of the company which is call insolvency.

Many of the traders and businessmen raised questions regarding bounced cheques. Please note that the law of bankruptcy will not change the procedure and law of criminal cases with regard to the bounced cheque, however if the company has a case of bankruptcy in the court, we can hold the procedure of the criminal case for bounced cheque for sometime until the court decides the matter accordingly.

Moreover, please note that the foreign branches company who have registered within the UAE can also file a request for bankruptcy, although the mother company is not bankrupt.

After the court decides the bankruptcy of the company, the trusty will be appointed by the court for distributing the assets for the creditors. 

Set up a company

If you wish to set up a new business in Dubai please make sure you follow the below steps accordingly :

1- reserve the trade name with your passport copy

2- fill up the application for the partners and activity

3- prepare the Ejari contract which has to valid for more than a mount

4- submit all documents including ; application form- initial reservation of trade name, passport copies, emirates ID

5- get the pre-approval for your license

6- draft a memorandum of association

7-prepare the stamp for your company

8- within a week the license will be ready

9- open a bank account which it will take usually 2 week