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Economic Substance Regulation (ESR) in the UAE
Kreston Menon
Under the Organization for Economic Cooperation and Development – OECD/G20 Inclusive Framework on BEPS, over 135 countries are collaborating to put an end to tax avoidance strategies that exploit gaps and mismatches in tax rules to avoid paying tax. On 30 April 2019, the UAE Cabinet issued the Cabinet of Ministers Resolution No. 31 of 2019 concerning Economic Substance Regulations (ESR) requiring all in-scope UAE entities to comply with the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) to ensure that profits are accounted by the entities where the actual economic activities are conducted and value created. The Ministry of Finance (MoF) of UAE released a Ministerial Note on the application of the regulations on 11 of September 2019 and another guidance note, the Relevant Activity Guide (RAG) on 15 April 2020 in their continued efforts to clarify the scope and coverage of listed economic activities and their associated Core Income Generating Activity test (CIGA).
Is ESR applicable to your company?
ESR requires all businesses having a commercial license, certificate of incorporation or similar permits issued by any regulatory authority in UAE (licensees) carrying out one or more Relevant Activity to substantiate adequate economic substance in the UAE.
ESR excludes UAE licensees with direct or indirect holding of at least 51% by any UAE Government, Governmental authority and/or body.
Action Points
Since the principles of economic substance are largely governed by international best practices (albeit tweaked for local market conditions) and recommendations by the OECD, UAE businesses should:
Penalties for non-compliance with ESR
Non-monetary penal consequences could include suspension, revocation or non-renewal of license in appropriate circumstances.
How Kreston Menon can help you?
Kreston Menon has a specialized team to provide an end to end solution for impact assessment, gap analysis and reporting obligations for ESR for your business.
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UAE Federal Law on Foreign Direct Investment – The Game Changer
Kreston Menon
As the Covid-19 pandemic continues to rip nations, governments are forced to impose strict public health measures, such as social distancing, to physically disrupt the conta- gion. By doing so, the flow of goods and people are halted, economies are stalled and many economists are predicting a global recession. But there is hope as many govern- ments are taking unprecedented steps to contain the economic damages caused by this pandemic.
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An Opportunity for Existing Limited Liability Companies (LLCs) to Transform & Amend its Legal Status into a Private Joint Stock Company (PSC)
Pushpakaran Parambath, Senior Partner - Kreston Menon Corporate Services
In the first chapter of this communiqué, Raju Menon, Chairman and Managing Partner of Kreston Menon elaborated on the new update on the UAE Federal Law on Foreign Direct Investment, granting foreign investors an ownership up to 100% in the mainland.
The new Federal Direct Investment (FDI) Law could not have been come into force at a more appropriate time. This long-awaited reform will progressively transform the economic and business atmosphere locally and regionally, and attract large scale investments. With governance gaining focus, the landmark FDI Law could just provide the right impetus for promoters and investors who consider enhancing their stakes and benefiting from the virtues of a corporate structure.
To begin with, there lies an immediate opportunity for aspiring limited liability companies where governance procedures are already in place, to convert the legal status into a Private Joint Stock Company (PSC) and thus transform their corporate image and enjoy the associated benefits. Though the Commercial Companies Law states the “holder of capital of a limited liability company shall not be liable for the obligations of the company other than to the extent of the capital as set out in its Memorandum of Association”, the practical applicability of this clause is often arbitrary. In case of PSC, the liability of the shareholder is limited to the extent of the value of the shares subscribed by a shareholder. In true sense, PSC is a limited liability corporation.
Prior to the implementation of the FDI Law, Article 10 of Law No. 2 of 2015 on Commercial Companies required the shareholding structure of a PSC to have 51% minimum national equity participation, just like the LLCs. Article (7) clause (5) of the Federal Law by Decree No. (19) of 2018 Regarding Foreign Direct Investment states that foreign investors can invest up to 100% in mainland companies in UAE as long as the activity is in the Positive List.
The resolution of the Council of Ministers may exclude Foreign Investment Companies from certain provisions of the Companies Law and the federal laws of the State as shall be consistent with the nature of Foreign Direct Investment Projects.
Salient features of Private Joint Stock Companies
- A Private Joint Stock Company is a company where the number of shareholders is at least 2, but not exceeding 200.
- The capital of the company shall be divided into shares of the same nominal value, to be paid in full.
- The nominal value of the share shall not exceed AED 100 and shall not be less than AED 1.00
- It is not permitted to offer the shares for public subscription.
- A shareholder shall be liable only to the extent of his share in the capital of the company.
- The issued capital of the company shall not be less than AED 5,000,000 (AED five million) and shall be paid in full either in cash or in kind.
- The founders shall choose from amongst them a committee consisting of at least 2 members to complete the incorporation procedures and to register the Company with the relevant authorities.
- The Founders Committee shall be fully liable for the accuracy, validity and completion of all the documents, studies and reports provided to the relevant authorities in connection with the incorporation, licensing and registration process of the company.
Merits of a Private Joint Stock Company
The FDI Law requires a minimum capital investment between AED 7.5-10 Million for the Agricultural and between AED 2-100 Million for the Manufacturing Sectors, while the capital requirement for the Services Sector will be in accordance with the legislation in force. It should be noted, however, that the Resolution relies on the general minimal capital requirements for some commercial activities.
Kreston Menon Corporate Services has a FDI advisory team which can help you with corporate structuring and related services. If you have any queries related to converting the legal status of your LLC into a Private Joint Stock Company (PSC) or have general questions about the Positive List Resolution you may contact the Author.
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FDI Law Update on 100% Foreign Ownership – Manufacturing Sector to be the Biggest Beneficiary
Kreston Menon
In the previous two articles, my colleagues elaborated on the recent FDI Law update allowing 100% foreign ownership in mainland companies. We are overwhelmed by the great response and we are excited that it has led to meaningful deliberations on how our clients can benefit from the new change in the Law.
The UAE has strategized to raise the industrial sector’s contribution to GDP and boost economic growth by building a diversified and sustainable economy. The country has set its goals to equip the economy for the Fourth Industrial Revolution post oil era through the UAE Vision of 2021 and UAE Centennial 2071 – the Five-Decade Government Plan. The reformed FDI regulations and the associated cabinet resolutions shall act as precursor to the sector.
Despite recent fluctuations in oil prices and the global slowdown caused by the Covid-19 pandemic, UAE’s economy is moving towards greater diversification and a future-based on leadership in non-oil sectors.
UAE understands that the advanced technology outputs are radically transforming the business models and investment climate across the globe even as companies struggle to address supply chain and additional manufacturing location issues. Strategically located, UAE ranks high in all the five key dimensions of manufacturing environment namely policies and regulations; energy and transportation; workforce quality; infrastructure and innovation; and unrestricted adaption to automation and AI facilitates. Increased productivity that results from such economic environment helps develop transformative technologies which are envisaged in the UAE national strategies created to guide development during the next phase in the fields of Advanced Innovation, Artificial Intelligence (AI), Fourth Industrial Revolution and so on.
While there are uncertainties on the prospects of growth in the near future, UAE is now focusing on completing the strategic and infrastructure projects which were on hold due to various reasons making UAE the preferred destination for new investment. Enough weightage is given to the manufacturing segments which complement these projects in all economic sectors such as renewable and nuclear energy, aluminium, military, food, engineering, plastics, medicine, aviation, space, robotics, artificial intelligence, self-propelled vehicles, biotechnology etc.
Current Contribution of Various Sectors to the GDP of UAE
Sectors and General Conditions
The positive list available to the foreign investor at 100% ownership
The Foreign Investors have to meet the general conditions which are applicable for all the three sectors:
- Use of advanced technology;
- Adding value to the UAE economy;
- Contributing to Research and Development; and
- Meeting the requirements of the licensed activities.
Status of National Industrial License
It is worth to be noted that “the Article (8) of the FDI Law clearly states Foreign Investment Companies licensed pursuant to the provisions of this Law shall be treated as national companies to the extent permitted by legislation in force in the State and international agreements to which the State is a party”. ccordingly, the Foreign Investment Companies are also eligible to be treated as an industrial unit having National Industrial License and thus benefitted with:
- Duty exemption to import raw materials and machines
- Privilege to use “Made in UAE” mark on final product
- Duty exemption to export products to GCC countries
- Duty exemption to export products to member countries of Great Arab Free Trade Agreement
Current Contribution of Various Sectors to the GDP of UAE
The investors will still need clarity on certain requirements specified in the Law, such as:
- How do you demonstrate high added value?
- How will the contribution to research and development be measured?
- What is the magnitude of Emiratization requirements?
- What are the criteria to assess if the technology can be considered “modern”?
It is noteworthy that the Cabinet Resolution clearly mentions the mode of exit of UAE national partner enabling the foreign investor to acquire the entire shares and thus transforming the entity as a FDI Company. My advice to the existing manufacturing entities in UAE would be to explore this opportunity to strengthen and protect their investment.
Kreston Menon Corporate Services team will be happy to address your queries regarding the new FDI Law.
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FDI Law Update on 100% Foreign Ownership – Services Sector
Sudhir Kumar, Senior Partner & Head of Corporate Communications - Kreston Menon and Director - Kreston Global Board
In the previous article, my colleague explained on FDI Law Update on 100% ownership in the Manufacturing Sector. Here I will take on the Services Sector in UAE. Services Sector forms the highest percentage in the GDP of UAE and also contributes the highest percentage in employment in UAE.
Businesses focused on the services sector are expected to flourish compared to other sectors in the UAE’s trade growth post-Covid-19. The UAE has been one of the most successful countries in the region for its diversification efforts and due to this economic diversity, UAE’s service sector will drive the rate of UAE’s trade growth till 2050. Expo 2020 postponement to 2021 and Abu Dhabi’s Surface Transport Master Plan are anticipated to accelerate growth in services. Healthcare and Pharmaceutical sector, Construction and Architectural sectors, Food and Beverage sector and Packaging sector are expected to drive the services growth. R&D labs for health and food industries will create lots of connected businesses in the services sector. Travel, Tourism, Hospitality, Real Estate, Aviation and Hydrocarbon sector services are expected to take a while to lead due to the current global challenges.
Cloud services, Data Centres, IOT, AI, Cybersecurity, Cloud Computing, Data Science & Data Analytics services are expected to grow multifold now post-Covid-19. The pace of digital transformation will increase rapidly with UAE businesses and service providers transforming in a technology-driven new world. UAE is already ranked second globally in the ICT sector with the milestone announcements like-Dubai Future Foundation, Ghadan 21, Hub 71, DTec Ventures, Mubadala’s USD 250 million Tech Fund, Microsoft opening its Middle East data Centres in Dubai and Abu Dhabi and UAE launching the World’s first AI University. Many UAE companies will be deploying machine learning to make more informed decisions on evolving market conditions and strategies and optimize their scale and operations, with focus on procurement, marketing, customer communication and support. The focus will be on digitization and creating the foundations for AI, including infrastructure, Cloud Computing, applications platforms and quality data. More Data Centres are expected to open up in UAE supporting local storage and processing of data and more companies are likely to migrate to Cloud to save on IT infrastructure costs, boost operational efficiencies, increase revenue and for attracting foreign investments for local and regional multifold growth.
The crux for AI projects to be successful locally, is that they need to be ideated, curated and developed locally and so all the related services will be preferred locally post-Covid-19. Hence, major investments by international investors to build huge IT set ups with 100% ownership and PSC advantage will happen in future. Foreign investors can accommodate from 2 to 200 shareholders in the PSC format and that will enable them to large capital accumulation. This will bring in major collaborations in the industry and will trigger investments in the ICT sector with many related services becoming very active. All these will lead to many new ICT giants with large capital base being born in the UAE in future.
Also this focus and the initiatives on new Technologies will create lasting societal impact, boost R&D, accelerate foreign investments in start-ups, SME growth and collaborations and spur innovation in many sectors including healthcare and agricultural services. Distance learning, upskilling the workforce to gear up, equipping and training to use digital tools, innovating educational content, regular communication with parents and well-being programs will boost educational services sector. A new way of learning and learning systems will develop and investments on the ICT sector will be the core of smart investments on educational services. Huge investments are expected in this sector due to the 100% foreign ownership.
Post Covid-19, Digital Infrastructure is key to ensuring business continuity for companies in UAE and the Arab World. Dubai has put in place platforms such as UAE pass, the national digital identity and digital signature solution for the UAE, for all digital transactions. The complete digitalization of public and private sector systems is expected to take lead and the future of business will move into such services. Automation and new Technology services will become the prime requirement in Trade, Manufacturing, Healthcare, Education and in all other sectors. Foreign Investments will play a major role in collaborations and partnerships in these areas.
FDI in Services Sectors – Capital Requirement
The combination of all these services will have a positive effect on business and economic growth. Overall the services sector will move in a new trajectory and will be the key contributor to the UAE economy. The services sector will undergo lot of creativity, innovation, diversification, M&A and collaboration as never before due to the 100% foreign ownership and emerge as the strongest pillar to fortify the future of UAE economy.
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FDI LAW & CABINET RESOLUTIONS (CR) Commonly Asked Questions
Kreston Menon
This booklet is a compilation of a series of communique aimed to update you on the new FDI Law Update. We encapsulated the provisions of the Law and resolutions in the flyers to give insights on how these changes will cement UAE’s position as the most preferred investment destination in the region. We have compiled some of the major queries from our clients and contacts and attempt here to clarify them.
QUERY
Are the provisions of the new Law update applicable for trading entities?
The positive list released as per the CR does not include trading entities for enhanced foreign ownership. However, Retail Trade (non-specialized stores) with an investment of AED 100 million is permitted.
QUERY
What is the minimum amount of physical investment that has to be evidenced immediately for getting approval for a FDI Company?
As per the guidelines issued by Dubai FDI, 20% of the proposed investment must be evidenced in the form of physical capital.
QUERY
Currently most of the professional/consultancy firms are registered as per the provisions of UAE Civil Code and with unlimited liability on the investors. Does the Cabinet Resolution provide a procedure for converting the civil partnership firm to a Limited Liability Company or PSC to be eligible as a FDI Company?
As per the guidelines on FDI issued by the Ministry of Economy, if the legal form of the existing entity is different from the form specified for the FDI Companies, the change of the legal status to any legal form specified for FDI Companies shall be processed according to the procedures provided for in the UAE Commercial Companies Law -2015.
QUERY
Is the Positive List published as per the CR conclusive?
Foreign Investor may still submit to FDI Committee or the Competent Authority, a request for approval to license a project not listed in the Positive List.
QUERY
Are FDI Companies with agricultural or manufacturing activity allowed freehold ownership of property and land?
As per Article 9 of the FDI Law, the right to benefit from any real estate allocated to the Foreign Direct Investment project may not be cancelled, suspended, or restricted except in the event of a violation of the license conditions. Thus, it ensures non-cancellation, non-cessation or limitation of usufruct right of properties allocated for the FDI Project
QUERY
Does ‘pharmacy’ include the category ‘other human health activities’?
Other human health category includes laboratories, diagnostic and therapeutic centers and the minimum investment requirement is AED 70 million. However, pharmacy has not been included in the list. As per Article 16 of the FDI Law, the activity of Medical retail such as private pharmacies is on the Negative List.
QUERY
Are construction of buildings and civil contracting eligible?
Permitted only for large-scale infrastructure projects like airports, roads, sports facilities and projects worth more than AED 450 Million
QUERY
What is the percentage of Emiratization applicable for FDI Company?
Membership in ‘Tawteen Partners Club' of the Ministry of Human Resources & Emiratization is mandatory for an FDI Company. More clarity is awaited on the number of UAE Nationals to be employed by FDI Companies.
QUERY
Are the relevant provisions of the Federal Law No: 2 of 2015 on Commercial Companies amended to adjust with the provisions of the Federal Law No. 19 of 2018 on Foreign Direct Investments?
The legal form of the existing company shall be one of the forms specified for FDI Comp
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