The UAE has seen some significant changes to its legal and social landscape in the last six months. These changes have been much more extensive and swift than anticipated, and illustrate the desire of the UAE to stay at the forefront of development in the region.
We recently detailed some of the adjustments that have been made in the employment sphere, following the entry into force of the new Labour Law at the beginning of February 2022. In this article, we will summarise some of the other newly-implemented changes in the UAE.
Commercial Companies Law
In late November 2021, Federal Law 32 of 2021 on Commercial Companies (the New CCL) was announced, replacing the 2015 law on Commercial Companies (as amended). The 2015 law was itself a landmark piece of legislation, heralding the largest overhaul of commercial regulation in the UAE in more than 30 years, including 2020 amendments, which removed the foreign ownership restrictions on certain onshore entities. The New CCL, which entered into force on 2 January 2022, takes that modernisation further, by making the following changes:
- Introducing the Special Purpose Acquisition Company (SPAC) as a valid form of entity in "onshore" UAE, along with creating the Special Purpose Vehicle as a separate company type. A SPAC will be classified as a public joint stock company for the purposes of the New CCL, but will be exempt from certain provisions of the new law. SPACs will require the approval of the UAE Securities and Commodities Authority (SCA), which has set out further guidance for the regulation of SPACs in the SCA Chairman of the Board Resolution No 1 of 2022 on the regulations for Special Purpose Acquisition Companies.
- Amending certain provisions in relation to limited liability companies, including changes to the notice periods and quorum requirements for shareholder meetings, reducing by half the amount, which must be allocated to a statutory reserve annually, and granting power to the authorities to appoint temporary boards where a company fails to constitute a new board.
- Amending certain provisions in relation to joint stock companies, including removing the prescriptions on the nominal value of shares and the percentage of capital for which the founders are permitted to subscribe, and adjusting director remuneration limits.
The New CCL brings the UAE's onshore commercial regime further in line with international best practice, and shows that the UAE is open to the kinds of transactions being undertaken elsewhere in the world. SPACs, in particular, are a feature of the M&A landscape in many jurisdictions, and it will be fascinating to see the uptake in the UAE.
Corporate Taxation
On 31 January 2022, the UAE Ministry of Finance (MOF) announced that federal corporate tax will be implemented on business profits for financial years, which start on or after 1 June 2023, meaning that the first profits to be taxed will be for financial years ending on or after 31 May 2024. The UAE has hitherto been a jurisdiction in which most companies – with the exception of oil and gas companies and branches of foreign banks – have not been subject to corporation tax. The initial press release contained only limited details, but the salient elements currently known are as follows:
- The tax will apply to all businesses and commercial activities, and be levied at 9 percent on profits over AED 375,000 (with zero percent applied to profits under this amount).
- No corporate tax will be levied on personal income from employment, real estate and other investments, or on any other income earned by individuals not arising from businesses or commercial activities licensed in, or permitted to be undertaken in, the UAE.
- Companies incorporated in free zones in the UAE, which are the recipients of guarantees to be free of corporate taxation for a period of 50 years from the date of incorporation of that free zone, will continue to benefit from this exemption to the extent that they are in compliance their regulatory obligations, including the proscription on conducting business in mainland UAE.
- Generous loss utilisation rules will be put in place, which will allow UAE groups to be taxed as a single entity or to apply group relief in respect of losses and intragroup transactions and restructurings.
- The UAE will not impose withholding taxes on domestic and cross border payments, or subject foreign investors who do not carry on business in the UAE to corporate tax.
- UAE businesses will be exempt from paying tax on capital gains and dividends received from qualifying shareholdings.
- Foreign taxes will be allowed to be credited against UAE corporate tax payable.
The implementation of corporate tax raises a number of questions, particularly following so closely after the removal of the restrictions that required onshore entities be at least 51 percent owned by UAE nationals or companies classed as UAE domestic entities. The interplay between these two developments will be critical: Will UAE domestic ownership be incentivised, potentially with a reduced corporate tax burden for majority-UAE-owned entities? Will the continued use of nominee structures be considered to be tax avoidance or evasion?
Historically, free zone companies, particularly those providing services, have been operating, and deriving most of their income, from clients in mainland UAE. This has not been policed by the authorities but given the new distinction between a tax-free free zone and taxed mainland, companies may need to be much more careful in how they operate and serve their clients. It is not clear, for example, if a free zone company's profit referable to a mainland client will be taxed and, if so, how such profit will be determined and what records will need to be maintained.
Clients will likely need to examine their accounting policies and systems to ensure compliance with their corporate tax obligations, in addition to their reporting obligations in respect of Value Added Tax. We await further legislative issuances on this matter, and will provide updates when available.
Other changes
Possibly the most significant change was not a legislative one: the December 2021 announcement that UAE government entities and all schools would transition to a 4-and-a-half-day week, with rest days on Friday afternoons, Saturdays, and Sundays, bringing the Saturday/Sunday weekend in line with much of the rest of the world. This alignment has already positively impacted UAE businesses, while hospitality operators have also reported a boost as a result of the change in the working week, which has been adopted by much of the private sector.
The UAE also announced a wide-ranging social legislative reform programme in early December 2021, adopting a new Federal Crime and Punishment law that amended the UAE's position on social issues. These changes, along with the commercial adjustments examined earlier and employment law changes outlined recently, can be seen as part of a concerted programme to align the UAE with much of the rest of the world in both economic and social perspectives. It is clearly hoped that these changes will drive economic activity in the UAE, and cement the country's place as one of the most prominent international commercial hubs in the next decade and beyond, and we expect these changes to be welcomed by businesses and investors, as well as the individual employees they affect.
Next steps
While the full impact of the myriad amendments to UAE law will not be known immediately, in the short-term businesses may wish to engage advisors in connecting with adjusting their constitutional documents to reflect the provisions of the new CCL. Companies might also consider whether they wish to make any changes to the ownership structures they have in place, if these were designed to be in compliance with previous versions of the Commercial Companies Law.
Authored by Charles Fuller, Imtiaz Shah, and Ashley Connick.
