100% Foreign Ownership for 13 Sectors in the UAE

Following the enactment of the UAE Federal Law No. 19 of 2018 on Foreign Direct Investment (“FDI Law”), the UAE Cabinet has announced the positive list of activities covered by and benefiting from Article 7-3 of the FDI Law.

The UAE cabinet has approved 122 economic activities across 13 sectors that will be eligible for up to 100% foreign ownership. These sectors include:

  • Transport and storage;
  • Agriculture;
  • Space;
  • Manufacturing;
  • Renewable energy;
  • Hospitality and food services;
  • Information and communication;
  • Professional, scientific and technical activities;
  • Administrative and support services;
  • Educational activities;
  • Healthcare;
  • Art and entertainment; and
  • Construction.

The eligible sectors will offer new economic opportunities for international investors looking to explore the UAE market particularly for projects involving e-commerce, research laboratories, advancement in biotechnology, logistics and supply chain, production of solar panels, hybrid power plants and green technology.

The UAE Cabinet has further confirmed that it will be left to the discretion of the local governments at an emirate level to decide on the percentage of foreign ownership for each sector/ activity. This announcement represents a much-awaited step towards the development of foreign investment regulations in the UAE. It is expected to considerably boost the level of FDI in the UAE as a whole and cement the role of the UAE as a global business hub for foreign investments.

The list of privileges awarded to Foreign Direct Investment projects (“FDI Companies”) are extensive and include the following:

  • FDI Companies licensed under the FDI Law shall be treated as national companies within the limits prescribed by the legislation in force in the UAE and the international agreements to which the UAE is a party.
  • FDI Companies may transfer their returns outside the UAE including net annual profits, proceeds from the liquidation of the investment or the sale of all or part of their assets; and funds collected from the settlement of disputes in relation to their activities in the UAE.
  • Employees of FDI Companies may transfer their salaries, indemnities and entitlements outside the UAE.
  • FDI Companies shall be guaranteed confidentiality of technical, economic and financial information as well as investment initiatives submitted to the competent authorities or the licensing authority in accordance with the provisions of the FDI Law in a manner that is compliant with UAE applicable laws and regulations including enforced international treaties in the UAE.
  • FDI Companies, subject to obtaining the required approvals, can admit one or more shareholders; sell the business; change their legal form or enter into a merger without losing the privileges awarded to them under the FDI Law.

We will be posting regular updates in respect of the implementation and development of the FDI Law.

How can economic substance rules impact business in the UAE?

There is a multitude of companies in the UAE that are owned by entities incorporated in “no or only nominal tax” jurisdictions (referred to herein as “noons”) such as the British Virgin Islands (BVI), Cayman Islands, Isle of Man, Jersey, Guernsey, Mauritius, Bahamas, Seychelles, Bermuda and the UAE (to name a few). Except for using these entities only to hold shares in UAE entities, these companies in the noons often also hold intellectual property rights and enter into licensing agreements, franchise agreements, management agreements and other similar agreements with UAE entities, aimed at reducing the perceived risks of retaining these funds in the UAE and/or to take advantage of the no or nominal tax regimes of these jurisdictions from which dividends are distributed internationally. The European Union has however, with effect from 1 January 2019 changed, the playing fields regarding the conduct of business in this way as is explained below.

What exactly are “Economic Substance Rules”

The European Union Code of Conduct Group, after assessing the tax policies of jurisdictions with no or only nominal tax, has prescribed certain criteria which need to be followed resulting in the implementation of laws by these noons for the purpose of eliminating the facilitation of corporate structures or arrangements aimed at attracting profits which do not reflect real economic activity in these jurisdictions. As a result, entities incorporated in noons which conduct certain identified business activities need to show “real economic activity” in these jurisdictions or face fines, penalties and possible de-registration by the relevant authorities in the jurisdiction in which they are incorporated. The European Union has further imposed certain measures in order to obtain cooperation from the noons which include “blacklisting” non-complying jurisdictions. In order to avoid “blacklisting”, all affected jurisdictions were required to promulgate “Economic Substance Rules” into law within their respective jurisdictions by 1 January 2019. In the UAE, economic substance regulations have been introduced by the Cabinet of Ministers Resolution No. 31 of 2019 which came into effect on 30 April 2019.

Essentially all the jurisdictions that have passed “economic substance rules” into law have followed the same criteria in that they have defined which entities are affected, which economic sectors and/or economic activities are affected and have devised certain tests to establish if an entity complies with the criteria for “economic substance” within that jurisdiction. Although all the laws passed by these noons are not exactly the same, the general criteria imposed by the European Union Code of Conduct Group have been applied by all jurisdictions.

Affected Entities

In general, all legal entities that are resident for tax purposes in accordance with the laws of the particular noon must comply with the economic substance requirements, the only exception being if the entity is resident for tax in another jurisdiction from which a tax residency certificate must be obtained to this effect. A number of the noons have also provided particular provisions relating to the determination of tax residency in their economic substance laws.

Affected Sectors & Relevant Activities

Generally, the relevant jurisdictions have made the economic substance laws applicable to the following sectors and/or activities, namely banking, insurance, shipping, fund management, financing and leasing, headquarters, equity holding entities, head offices entities, intellectual property holding and distribution and service centers.

Economic Substance Tests

To show that sufficient economic substance exists within the noon, an entity must pass the following “substance tests”, namely that the entity must from within the noon be (i) effectively directed and managed, (ii) conduct core income generating activities, and (iii) show adequacy in respect of qualified employees, expenditure and physical presence.

Directed & Managed

For an entity to be directed and managed from within the noon it will have to show that regular board meetings are held, the required quorum of directors are present at such board meetings, that the directors have adequate experience and knowledge of such responsibilities, that the minutes of the board meetings are kept, all within the noon itself.

Core Income Generating Activities

The entity must show that core income generating activities (“CIGA’s”) are conducted within the noon with due consideration to the level of income being generated by the entity’s activities. The extent of the CIGA’s may also be dependent upon the economic sector within which the entity falls and/or the economic activity of the entity as certain entities may be an equity holding company and license intellectual property in which case it must pass the test for both activities. The important feature in complying with the CIGA’s is that the income subject to tax in the noon is “appropriate” to the CIGA’s conducted in that jurisdiction.

CIGA’s for the different economic sectors and economic activities will vary. A few examples are as follows: (i) “Equity Holding Entities” would require compliance with relevant corporate filing requirements, manage the shareholdings in the various subsidiaries with adequate personnel and an appropriate premises (ii) “Intellectual Property Holding Entities” would require research and development activities to be conducted in the noon, and (iii) in respect of intangible assets such as brands and trademarks, the CIGA’s would have to include the conduct of activities such as branding, marketing and distribution.

It is possible to outsource certain CIGA’s, even to outside the noon however this would be subject to certain conditions. In the event of outsourcing, the resources of the service provider will be taken into account when determining compliance with the required CIGA’s.

Adequacy

Relating to the two criteria mentioned above, the noon entity must have sufficient qualified employees, incur sufficient expenditure and have adequate assets within the noon in order to justify the income generated by the noon entity. The employees must be physically present in the noon, although they do not need to be directly employed by the noon entity and may be employed by another entity and may be also be employed either on a temporary or permanent basis. The determination of “adequacy” will depend entirely on the particularities of the noon entity and its economic activity.

Reporting Obligations

Each noon has its own reporting mechanisms however, reporting will mostly be by the submission of a bi-annual or annual “economic substance return” specifying how the substance rules are being complied by the entity. Failure to comply with the economic substance rules of the particular noon will result in the imposition of penalties or other ramifications as determined by these laws. As the implementation date of the various economic substance laws in some of the noons was 1 January 2019, the reporting obligations relating to compliance with the economic substance rules for entities incorporated prior to 1 January 2019 is as early as 1 July 2019 in some of these noons.

As part of the filing obligations to the relevant company registration offices, the noon entity will be required to submit the following details: (i) business/income types, (ii) amount and type of gross income, (iii) amount of operating expenditure, (iv) details of premises, (v) number of qualified employees, including experience levels, employment terms, qualifications and period of employment, (vi) details of CIGA’s (for each economic activity conducted), (vii) financial statements (viii) details of outsourced CIGA’s (if applicable), (ix) business plans, especially relating to reasons for holding intellectual property in the noon, and (x) evidence of quorate board meetings and resolutions passed.

Penalties for Non-Compliance

Should the economic substance requirements not be met for each financial reporting period, the noons will impose financial penalties on the noon entities and in cases of repeated violation, the noon entity may even be de-registered or placed into liquidation by the competent authorities. The amount of the penalties are determined by the economic substance laws of the noons and are not uniform. By way of example, in the BVI the Economic Substance (Companies and Limited Partnerships) Act of 2018 provides for a penalty up to USD 20,000 for the first year of non-compliance and for repeated years up to USD 400,00 per year. The impact on a local UAE entity by a holding entity is incorporated in a noon could be that unless outstanding penalties are paid, the company registration offices of the noon entity may not issue documents such as certificates of good standing and the like, that may be required for share or property transfers in the UAE, amongst other problems that may be experienced.

De-Registration & Liquidation

In the event of repeated non-compliance with the economic substance laws of a particular noon, the noon entity may be de-registered or placed into liquidation at the instance of the relevant noon’s company registration office. Should the noon entity be de-registered, this will severely impact upon the local UAE company in that, required documentation will not be obtainable from the company registration authorities in the noon as may be required from time to time in the UAE, the transfer of shares in the UAE entity will be refused, the transfer of property owned by the local UAE entity will be blocked through the lack of documents, bank accounts of the noon entity may be blocked or even closed, the agreements between the local UAE entity and the noon entity may be unenforceable or terminated, and intellectual property rights may be seriously affected.

Action To Be Taken

Where UAE entities are owned by noon entities, the economic substance laws of the particular noon must be complied with to avoid possibly serious implications on the operations of the UAE entity. As the reporting deadlines are close in a number of noons, the necessary action should be taken immediately to establish both the necessity and thereafter the requirements of the particular noon in order to comply with the economic substance rules. In the event that the economic substance laws of the noon applicable to your business require action, immediate corrective action should be implemented to avoid unnecessary penalties. If actions have been taken, it may also be worthwhile to undergo a “health check” to ensure complete compliance.

Small businesses struggling to expand due to Brexit uncertainty

More than seven in 10 firms in a survey by the Federation of Small Business (FSB) said they did not expect to raise capital spending in the next quarter, the highest figure in two years.

The FSB says the current standstill over Britain’s path to Brexit has left small firms “hamstrung” and struggling to expand, hire and increase productivity.

The FSB survey also suggests growing caution among lenders as signs stack up of a slowdown in the UK economy.

More than four in 10 of its member firms said new credit was “unaffordable,” the highest in more than four years.

Lending to consumers also increased at its smallest annual rate in more than five years in May, according to separate data from the Bank of England.

In the manufacturing sector, a key index of UK performance slid to a six-year low on Monday, as a survey highlighted sinking output and employment levels.

Mike Cherry, national chair of the FSB, said: “It’s impossible for small business owners to invest for the future when we don’t know what the future holds.

“Lifting productivity among the smaller firms that make-up 99% of our business community is a must. But until we have the political certainty that enables us to take risks and innovate, achieving that goal will remain elusive.”

He also took aim at Conservative leadership rivals Boris Johnson and Jeremy Hunt, who have talked up their willingness to lead Britain out of the EU without a deal.

“We urgently need to see both prime ministerial candidates spell out their plans for supporting small firms and securing a pro-business Brexit – one that encompasses a comprehensive deal and a substantial transition period,” he said.

“Fast and loose talk about accepting a chaotic no-deal Brexit in four months’ time is not helpful.”

He said it was “understandable” lenders were more cautious, suggesting they were continuing to offer credit but were upping premiums to cover perceived increases in risk.

Mason Advisory listed in 1000 Companies to Inspire Britain report

The thriving North West IT consultancy celebrates five years in operation so this accolade adds to the celebrations. The sixth edition of the London Stock Exchange Group’s 1000 Companies to Inspire Britain report celebrates some of the fastest-growing, dynamic SMEs with companies representing over 40 sectors and spanning every country and region across the UK. It also examines the opportunities and challenges facing businesses and looks at the sectors and trends that will shape the future of British economics.

To be included in the report, companies need to show positive revenue growth over the last three years and demonstrate that they are outperforming their sector peers.

Established by Steve Watmough, Mason Advisory has a growing reputation in the UK and globally as an IT specialist, renowned for its high-quality consultants, specialist skills, and support through digital transformation projects and partnerships. It counts many well-known brands as customers, from sectors such as finance, life sciences, retail, FMCG, emergency services, health, energy, water, education, government and transport.

Steve says: “This recognition is such a huge honour for us and the whole team is so excited to be featured in the report. In the last five years, we’ve had consistent revenue growth, expanded the team and developed our customer base in the UK and abroad. We have grown from a specialist player to a leading IT advisory company, competing with the industry heavyweights in the £8.2 billion UK management consultancy sector.

“We are in a position to build on our success, and accolades such as this one, strengthen our reputation in the marketplace and allow us to take the business to the next level.”

Steve adds: “Despite the uncertain, disruptive times we are in, I’m proud of the outstanding results our team continues to deliver and their hard work and commitment behind this fantastic achievement. Our success is down to the high calibre of consultants on the team and our shared desire to bring digital transformation and technological innovation to our customers around the world.”

David Schwimmer, CEO, London Stock Exchange Group, says: “Congratulations to all the companies selected for inclusion in the sixth edition of London Stock Exchange Group’s 1000 Companies to Inspire Britain report, which identifies the UK’s most dynamic SMEs. SMEs drive growth, innovation and job creation and are the lifeblood of the British economy. We believe that supporting the growth of these businesses is critical to the UK economy and the creation of a society that works for everyone.”

Earlier this year, Mason Advisory was recognised by the Financial Times as one of the fastest growing companies in Europe, and one of the leading management consultancies in the UK. It was awarded the Queen’s award for Enterprise in the international trade category, and was also recognised by Great Place to Work ® as a centre of Excellence in Wellbeing.

With offices at MediaCityUK, Salford, and London, Mason Advisory provides IT consultancy and advisory services, solving complex business challenges through the intelligent use of IT resources. Its range of advisory services includes IT strategy and transformation, sourcing, architecture, IT delivery, service management, operating model and organisational design.

The London Stock Exchange Group announced the 1000 Companies to Inspire Britain at a prestigious ceremony on 26th June at the Group’s headquarters in Paternoster Square, London.

International Olympic Committee reappoints PwC

Speaking at the 134th session of the International Olympic Committee in Lausanne, chairman of the audit committee Baron Pierre-Olivier Beckers-Vieujant announced the committee’s recommendation to reappoint the Big Four firm.

“It is with complete confidence that the audit committee approved this proposal and recommended it to the executive board, which also approved this reappointment in the March session,” he said.

The 134th session then approved the reappointment by show of hands.

In August 2018, the IOC invited Deloitte, EY, PwC and KPMG to submit their proposals in a closed tendering process, which were then assessed by a selection board.

Baron Beckers-Vieujant said the audit committee decided to only include the Big Four as it believed these firms were the only ones capable of delivering on expectations from a global point of view and in line with the IOC’s reputation.

He added that the key argument in the firm’s favour was PwC’s “complete compliance with IOC’s highest standards in terms of the external auditors’ global independence vis-à -vis the IOC and the entire Olympic movement”.

He highlighted value for money and PwC’s commitment to reduce costs over the six-year term as key reasons supporting the choice – explaining that the Big Four firm had already offered to reduce costs in the first year from 402,000 Swiss francs (£324,800) to 391,000 Swiss francs.

Baron Beckers-Vieujant also noted that, although it is not mandatory, the audit committee requested PwC’s audit team change its leadership, as the IOC was “driven to make sure that from all angles they would maintain the highest level of independence expected by the session and the general public”.

PwC will serve a six-year term as the IOC audit committee wanted to align the appointment with the four-year Olympiad cycle.

Baron Beckers-Vieujant said that “since we are in the middle of one, we would appoint [PwC] for two plus four years if you will, and afterwards reappoint or appoint new [firms] for four-year terms”.

He also noted that under Swiss law the firm has to be reappointed by vote on a yearly basis.

Last week, PwC was appointed auditor for pharmaceutical company Diurnal Group following a formal tender process and, pending shareholder confirmation the November AGM, will audit the company’s accounts for the year ended June 2020.

PwC will succeed KPMG and according to a statement from Diurnal Group, KPMG confirmed that it was not aware of anything “connected with its termination as auditor that it consider should be brought to the attention of the board, creditors or shareholders of the company”.

ZF opens Factory in Pančevo

A leader on the car industry market, the German company ZF opens its factory in Pančevo within the first phase of the EUR 160 million investment. The factory will start producing machines, generators for hybrid and electric drives, gearshift switches and microswitches in the first half of June.

The Karanovic & Partners team, led by Senior Partner Marjan Poljak and Senior Associates ⃰ Ana Stanković and Ana Luković, advised ZF Group in this greenfield investment on all local law aspects of this project. Our legal experts provided full support in a number of different areas, including corporate, real estate, employment etc.

The beginning of the factory’s operations, on 10.8 ha of the North business zone in Pančevo, which the city has given to the investor free of compensation, will mean 540 new jobs for the people of Pančevo.

The Serbian Government pronounced this project an investment of importance for the state’s development. For Pančevo, this is the first direct greenfield production-technological investment in the last 40 years. The factory will open 1,000 new jobs in total, as well as enable a significant transfer of state-of-the-art technology and an increase of public revenues – 67% of which will remain in the local self-government.

ZF will start the second phase of investments this year as well, instead of 2022, as initially planned. The second stage entails the expansion of the production to an additional 30,000 square metres of space, and the establishment of a research and development centre, for which the company has set another EUR 60 million.

ZF operates in 40 countries around the world and has a global workforce of over 146,000 employees. In 2017, it recorded sales of EUR 36.4 billion. The company invests more than six percent of its sales in research and development annually, in particular for the development of efficient and electric drivelines. ZF group is committed to its Vision Zero – zero accidents and zero emissions being the end goal of all the company’s activities.