Insights & Regulatory Developments

UAE Economic Substance Regulations (ESR): On April 30 2019, the UAE Cabinet issued Cabinet of Ministers Resolution No. 31 of 2019 concerning Economic Substance Regulations in the UAE (the Regulations), and the guidance on its application was issued on 11 September 2019. The main objective of the ESR was to ascertain that certain UAE entities that indulge in certain activities as part of their regular affairs, do not artificially attract profits that are disproportionate to the scope of their UAE activities. The risks of non-compliance with local regulations are considerable, with the potential for harsh consequences and monetary penalties on individuals as well as entities.

With the first financial year reportable being 2019, the company secretarial services have become essential for UAE businesses to ensure compliance, and provide required information to the regulatory authorities. Tesseract would provide assistance for the entire process by way of preparation, compilation of documentation requirement to prove board meetings and quorum and further assist on corporate secretarial services to provide advisory guidance on economic substance.

UAE Cabinet Decision No 58/2020 – Regulation of Procedures related to Real Beneficiaries / Ultimate Beneficial Owner

On 24 August 2020, the UAE Cabinet published Cabinet Decision no. 58/2020 on the Regulation of Procedures related to Real Beneficiaries (the “New Cabinet Decision”). The New Cabinet Decision requires companies licensed to carry on business in the UAE to maintain a Register of Partners (or Shareholders) and a Register of “Real Beneficial Owners”.

A “Real Beneficial Owner” is defined as the individual that ultimately owns and or controls the licensed UAE company, whether directly or indirectly, through at least 25% of its capital.

Accordingly,

• Most companies licensed to operate in the UAE will be required to create and maintain a Register of Real Beneficial Owners and a Register of Partners (or Shareholders) by 26 October 2020.
• There is also a requirement for information from these registers to be submitted to competent licensing authorities. According to the New Cabinet Decision, new and existing companies are required to submit these registers to the Department of Economic Development of the relevant Emirate (“DED”). Based on the available information, the MOE will be coordinating with the DED to ensure that they can start receiving the required information, though it is not clear whether that will be possible to do in practice at the moment.
• Under the New Cabinet Decision, the competent licensing authorities are under an obligation to maintain the confidentiality of information submitted to them i.e. the Real Beneficial Owners information will not be disclosed to the public or be set out in the company’s license.
• The New Cabinet Decision applies to all companies licensed in the UAE, except for the following:

1. Companies in financial free zones (Abu Dhabi Global Markets and Dubai International Financial Centre), which have their own rules in this regard.
2. Companies which are wholly owned, directly or indirectly, by federal or Emirate government; and
3. Companies licensed in the UAE which are ultimately listed on a market/exchange are exempt from certain of the requirements in the New Cabinet Decision, as they are subject to robust transparency rules on Real Beneficial Owners.
4. Although the New Cabinet Decision specifies that penalties may be applicable for failure to comply, such penalties have not been confirmed by the authorities yet.

• These Disclosures for new entity registrations or amendments to existing entities are mandatory and form part of the new registration applications with the DED. A new license of a relevant entity will not be issued without the Disclosures and its associated filings. As part of the Disclosures, entities are required to provide the following details:

Full name as per the identity card or passport (Attach a true copy of valid identity card or passport).
Nationality, Date and Place of Birth.
Country of issuance, date issuance and expiry date of the identity card or passport.
Residential address or the address which the notices shall be sent on it.
Name of the relevant entity and address thereof.

Identification of the beneficial owner capacity, in terms of either:

Ultimate ownership or control of the UBO, whether directly through a chain of ownership, control or by other means of control such as the right to appoint or dismiss majority of directors of the Legal Person (as defined in the Cabinet Decision);

Determination of a ratio of capital of the UBO, his shares and its nominee value; or

In the event if the UBO and more natural persons jointly own or control a ratio of capital in the Legal Person, all of them shall be deemed as jointly owners or controllers of such ratio.

Disclosure of the number of other legal persons which the UBO owns, manages or controls accordingly.
In the event if where no natural person is identified in accordance with the above-mentioned, the natural person who holds the position of a higher management official or who controls the Legal Person, by other means of control such as the right to appoint or dismiss majority of directors of the Legal Person shall be deemed as the UBO.

For the existing entities, based on the information available, a representative must visit one of the following service centers in person, to submit the above information to comply with the Disclosures:

• Allied Unik Business Centre;
• Dxb Businessmen Services Centre;
• Dubai National Government Services Centre;
• OnTime Centre – Mazaya;
• Premium Businessmen Services Centre;
• Good Hand Government Services Centre;
• One Click Government Transactions Centre;
• EQC Centre;
• Khidmaty Government Service Centre;
• First One Centre;
• Quick Stop Government Transactions Centre;  or
• Ahlan Businessmen Services – DragonMart.

Tesseract can assist in reviewing your corporate shareholding structure so that accurate information / UBO registration is submitted to the authorities.

Amendments to the UAE Commercial Companies Law No 2 of 2015

The UAE has issued a decree introducing amendments (the “Amendments”) to the Commercial Companies Law no. 2 of 2015 (the “Companies Law”) reforming foreign ownership policies applicable to business activities. These Amendments allow full foreign ownership of commercial companies as they eliminate:

(i) The foreign ownership restriction of a maximum of 49% in the capital of Emirati onshore companies; and

(ii) Minimum requirement of Emirati directors in certain companies.

The Amendments shall authorize the UAE Cabinet to establish a committee that includes representatives of the relevant authorities to propose activities of strategic impact and the procedures including inter alia minimum share capital required to obtain licenses to undertake the activities, granting them the power to determine which activities shall remain subject to the aforementioned restrictions.

UAE authorities have previously issued Foreign Direct Investment Law no. 19 of 2018 (the “FDI Law”) as a step towards eradicating foreign ownership restrictions among Emirati companies; however, such advantages only cover a small range of activities. Such Amendments supersede the FDI Law, as it extends the advantages of lower restrictions on foreign ownership to a wider range of industries beyond the activities stipulated therein, unless they are classified as having strategic impact.

These changes intend to reform the UAE investment climate and create foreign direct investment (the “FDI”) opportunities in activities previously restricted for Emirati nationals. This would mean more prevalent mergers and acquisitions in the country because of the increase in potential foreign buyers creating possible exit strategies.

Furthermore, the Amendments will also amend the Companies Law as follows:

• Include new regulations with respect to joint stock and limited liability companies;
• Grant local authorities the power to set a specific percentage of Emirati nationals in the capital allocations and board of directors of companies, approving company establishment requests and determining the fees in accordance with the decisions adopted by the UAE Cabinet;
• Increase shares of joint stock companies from 30% to 70% that are permitted to be sold through IPO;
• permit electronic voting at general assembly meetings;
• Empower the Securities and Commodities Authority to establish the procedures required to evaluate in-kind shares and names of stakeholders attending general assembly meetings;
• Appoint independent board members who are not stakeholders, without stipulating a specific percentage and dismiss the chairman or any board member if a judicial judgement is issued against them for committing fraud or abuse of power; and
• Enable public companies to approve its capital increase by issuing bonds and converting them into shares.

The Amendments will become effective as of January 2021 and will be implemented six (6) months after publishing the Amendments in the official gazette. According to the available information, as of today, the list of activities of strategic impact has yet to be issued, and that MOE is coordinating with the DED in liaison with other relevant authorities to ensure that the list of activities of strategic impact is finalized at the earliest, though that will still be subject to the current foreign ownership restrictions. Under the circumstances, since such activities are unknown, the true significance and impact of the intended FDI reform cannot be assessed.

Companies are extended a grace period with a maximum of one year to comply with the Amendments from the time they become effective and may be extended by virtue of a Cabinet decision.