UAE: DOING BUSINESS IN THE UNITED ARAB EMIRATES LEGAL PERSPECTIVE

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1.The Legal System

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The United Arab Emirates is a constitutional federation made up of seven emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al-Khaimah, Sharjah and Umm Al Quwain.

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The legal system in the UAE is based both on civil code principles and on Islamic Shari’ah. Under the UAE constitution, federal laws apply across all emirates, however, the constitution reserves sovereignty to each emirate over matters not exclusively reserved to the federal government’s jurisdiction.

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The sources of law in the UAE are:

The Constitution;
Federal laws and regulations;
Emirate laws and regulations;
Free zone laws and regulations;
Islamic law (Shari’ah);
Custom and practice.

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There is no system of precedent in the UAE.

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Islamic Shari’ah is a collection of legal tenets, laws and regulations used to interpret personal status in matters, including marriage, domestic relations, inheritance and lineage. However, in November 2020, the UAE announced reforms to personal, family and inheritance law suggesting certain flexibility in the interpretation of Islamic Shari’ah in the future.

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2.Foreign Investment in the United Arab Emirates

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The UAE is an oil-rich country producing approximately 3 million barrels a day, however, it has diversified its economy, becoming a regional and global centre for business, trade and finance and offering a relative “safe haven” in the region for investors.

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Benefits of the UAE:

Zero tax regime
Wide range of corporate vehicles
An extensive network of tax treaties
Full repatriation of capital and profit
Recognized financial hub
World-class infrastructure facilities and connectivity
Presence of internationally recognized financial, legal and tax service providers

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Restrictions on Foreign Investment:

Historically the Federal Commercial Companies Law No. 2 of 2015 (“the Companies Law”) restricted foreign ownership of corporate entities at 49%, mandating that UAE Nationals must own at least 51% shares in the entity. However, in recent years these restrictions have been relaxed significantly or removed through changes to the Companies Law.

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Foreign Direct Investment Law No. 19 of 2018 (“the FDI Law”) introduced options to attract foreign investment and permit foreign investors to own 100% of certain businesses on the UAE’s mainland. Particularly investment projects provided that they meet the minimum share capital required for each permitted activity. Other conditions include the ability of the investment project to:

use modern technology;
bring high added-value;
contribute to research and development; and
meet the requirements of licensing entities in the UAE.

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In November 2020, the UAE Cabinet announced its intention to amend the Companies Law and extend foreign ownership to 100% for UAE entities. Various new clauses will be added, and amendments made, to the Companies Law ultimately cancelling the FDI Law, making it far easier and cheaper to conduct business in the UAE.

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The full extent of these announced changes is not yet known. Still, it is expected that local authorities will determine the level of participation (and potentially mandatory appointment) of Emirati’s in such foreign-owned companies. However, the UAE is undoubtedly committed to positioning the country as a global hub for business and prioritizing economic growth.

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Exchanges:

The UAE is relatively new to the trading of securities. The following exchanges are located:

in the UAE, outside the financial free zones, licensed and regulated by the Emirates Securities and Commodities Authority (“SCA”) are:
 the Dubai Financial Market, a securities exchange located in Dubai;
 the Abu Dhabi Exchange, a securities exchange located in Abu Dhabi;
 the Dubai Global Commodities Exchange, a commodities exchange located in the DMCC;
in the DIFC, licensed and regulated by the DFSA:
 the Dubai Mercantile Exchange (DME), an energy-focused commodities exchange; and
 Nasdaq Dubai, a securities exchange.

Each exchange is subject to their own rules which are in line with the respective regulator, as well as those of the regulator in relation to the offering of securities, the listing of securities, market disclosures, regulatory notifications, takeovers, insider dealing, and market abuse.

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Fintech and Start-ups:

The UAE is committed to becoming a global leader in the fintech industry, with the DIFC and the ADGM incentivizing start-ups to test and launch under their licenses. In 2017, the DFSA launched an Innovation Testing License for fintech start-ups in the DIFC under which one may apply for a restrictive class of financial services license to test new products, services and business models, while only complying with rules appropriate for such testing. Similarly, the FSRA in the ADGM launched a RegLab Sandbox, which provides a licensing framework for start-ups and existing regulatory fintech companies to test their tech-solutions in specially- tailored regulatory environment. Other solutions are also on offer in both the DIFC and the ADGM, including blockchain-enabled financial services, cryptocurrencies, Robo advisory, crowd funding and digital banking products.

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3.Direct Investment in Equity

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There is no central public platform in the UAE that compiles company information. The options available for establishing a legal entity in the UAE are:

1.Incorporating a local entity
2.Registering a branch or representative office of a foreign company
3.Establishing a free zone entity or free zone branch

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1.Incorporating a local entity:

Locally incorporated entities must obtain a commercial license from the Department of Economic Development, alternatively from the relevant ministry or government authority in the relevant emirate. Federal Commercial Companies Law No. 2 of 2015 (“the Companies Law”) provides the following options for the incorporation of companies:

Limited liability company
Private joint-stock company
Public joint-stock company
Limited partnership
General partnership
Sole proprietorship

Local entities may have ownership restrictions mandating that 51% shares of the company must be owned by a UAE national, and entities may only carry out certain activities if wholly owned by UAE nationals. However, forthcoming amendments to the Companies Law suggest that this may no longer be the case soon.

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2.Registering a branch or representative office of a foreign company:

The Companies Law permits foreign companies to open branches or representative offices within the UAE, wholly owned by foreigners. However, a branch of a foreign company must be sponsored by a local service agent who must be a UAE national or a company that is wholly owned by UAE nationals. There are typically no minimum capital requirements for a branch of a foreign company in the UAE.

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3.Establishing a free zone entity or free zone branch:

Free zone entities are not subject to foreign ownership restrictions imposed by the Companies Law in the wider UAE. Entities incorporated in free zones have the following options of form:

Branch of a foreign company
Free zone company
Free zone establishment

There are commonly no minimum paid-up capital requirements for free zones companies; however, they must have sufficient capital to conduct their licensed activities. A free zone entity may hold one, or more, of the following licenses:

Trading license
Service license

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Manufacturing/Industrial license

A free zone company may only carry out its licensed activities within the requisite free zone or abroad and requires further licensing or permission to engage in business onshore or outside the authorized free zone in the UAE.

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Holding Companies:

Certain free zones in the UAE offer offshore holding companies. The purposes of holding companies that are permitted are typically limited to:

i)Holding shares in joint-stock companies and limited liability companies.
ii)Extending loans, guarantees and other forms of finance to its subsidiaries.
iii)Ownership of real estate and moveable assets necessary to achieve its objects.
iv)Management of its subsidiaries.
v)Ownership of intellectual property.

A holding company may only operate through its subsidiaries. Owners of holding companies are not entitled to residency visa or work permit for the UAE.

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General features of UAE legal entities:

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Local (LLC)

Free zone (LLC)

Offshore company

Ownership

49-100% foreign ownership depending

on economic activity

100% foreign ownership

100% foreign ownership

Minimum shareholders

2

1

1

Minimum capital

AED 1

AED 10’000 – AED

1’000’000

AED 1

Paid up capital

Not required

Differs between free zones

Not required

Types of shares

Registered

Registered

Registered

Directors (minimum and location)

1

At least one director present in the UAE

1

At least one director present in the UAE

1

Presence required

depending on economic substance requirements

Audited accounts

Required

Required

Not required

Time for incorporation

1 month

2 – 8 weeks

1 – 3 days

Language

Arabic/English

English

English

Registered office

Physical presence required

Physical presence required

Registered agent address is sufficient

*all requirements differ according to the authority and/or free zone

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4.Corporate Taxation

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The UAE applies:

No income tax
No corporate tax
No capital gains tax
No inheritance tax
No gift tax
No wealth/net worth tax

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Double taxation treaties:

The UAE has concluded 115 double taxation treaties (“DTT”) with many Organization for Economic Co-operation and Development (“OECD”) countries. These DTT aim at making the UAE more attractive for investment and reduce the taxes levied in certain foreign jurisdictions on profits remitted abroad by foreign companies operating in the UAE.

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Tax residence:

UAE entities enjoy full exemption from income and corporate taxation, no exchange restrictions, free profit repatriation, and can make use of the UAE’s extensive list of DTT provided they can produce sufficient proof and relevant certifications to evidence tax residency. The UAE authorities may grant residency permits, and tax residence certificates provided that the UAE entity has a physical presence and a local bank account.

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Economic substance:

Cabinet Ministers Decision No. 57 of 2020 concerning Economic Substance Requirements (“the Regulations”), and the accompanying Ministerial Decision No. 100 of 2020, were issued in September 2020 which must be complied with each future financial year. Those UAE based entities carrying out “related activities” are required to demonstrate economic substance for the preceding period. “Related activities” per the Regulations include banking; insurance; investment funds management; financial and leasing; headquarter companies; shipping business; investment holding; intellectual property; and distribution and service centres. The Regulations support the UAE’s commitment to meeting the European Union (“EU”) and the OECD requirements. UAE based entities must address and comply with the Regulations in respect of its core income-generating activity (“CIGA”) by providing sufficient evidence that it is directed and managed within the UAE and that said entity incurs proportional expenses, physical presence and has sufficient employees to operate in the UAE.

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VAT

The UAE Federal Tax Authority (“FTA”) was established in October 2016 to implement and administer VAT (value added tax) and excise tax. On 1 January 2018, the UAE introduced VAT under Federal Law No. 8 of 2017 on the suppliers of goods and services at a standard rate of 5%.

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5.Other types of foreign investments

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Commercial Agency, Distribution and Franchise:

The Federal Commercial Agency Law No. 18 of 1981, as amended (“Commercial Agency Law”) defines a commercial agency as any arrangement where a foreign investor is represented by an agent to “distribute, sell, offer or provide goods or services within the UAE for a commission or profit”. The UAE Ministry of Economy is the authority empowered to regulate commercial agencies, and franchise agreements are also subject to the Commercial Agency Law.

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The UAE does not distinguish between distribution arrangements and commercial agencies and the requirements include:

registration with the Ministry of Economy, which requires that the commercial agents to be UAE nationals or companies owned entirely by UAE national.
exclusivity, with the commercial agent entitled to receive commission for sales within the specified territory.

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The Commercial Agency Law also provides protection for commercial agents that allows for the agent to block parallel imports into the UAE, and further governs the termination of a registered commercial agency which rules are very stringent. It is therefore common that foreign investors avoid registering commercial agency agreements, wherever possible.

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Property Investments:

Real estate ownership and leasehold rights are regulated at the level of each emirate. Freehold ownership by foreign investors may be restricted, however it is common to grant foreign investors with “usufruct rights” or “musataha rights”. Musataha rights are similar to outright ownership for a limited period and gives the holder right over the land allowing the holder to be the outright owner of the buildings constructed on the land during the limited period. Foreign investors may be granted the right to freehold ownership without restrictions, or to usufruct, musataha or long leasehold rights over real property according to which emirate the property is located.

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6.Labour Laws

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Employment in the UAE is governed by Federal Law No. 8 of 1980, as amended (“UAE Labour Law”) and applies to all UAE employees. Specific categories of individuals are exempt from the Labour Law, including federal and emirate level government employees, domestic servants and agricultural workers, and staff employed by companies registered in the Dubai International Financial Centre (“DIFC”), which free zone has its own labour law under Employment Law DIFC No. 2 of 2019.

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Emiratisation:

There are official requirements for the employment of Emirati nationals, which includes the condition that companies must offer jobs to UAE nationals before expatriates, in some cases. Emirati employment is governed by Federal Decree-Law No. 11 of 2008, as amended, which sets out UAE nationals’ employment terms and rights.

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Work permit:

The Ministry of Human Resources and Emiratisation (“MOHRE”) approves expatriate employment applications, and no one may work without the relevant permit. UAE employers must apply for an expatriate work permit by submitting their certified qualifications and satisfying any other requirements set out by the MOHRE, who may refuse issuance at their discretion. The employee must also successfully pass a medical examination.

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Employment in the UAE:

UAE Labour Law affords certain protections for employees, including mandatory health insurance, working hours, vacation and public holidays, sick leave, maternity and parental leave, minimum wage, termination, and end-of-service gratuity payments. There is no social security for expatriates in the UAE; therefore the end-of-service gratuity regime takes the place of a formal pension scheme. Per UAE Labour Law, an employee who has completed a period of one or more years’ service is entitled to end-of-service benefits on employment termination. The employee’s end-of-service benefits generally include gratuity, pay in lieu of accrued leave, as well as notice period. However, in 2019 the DIFC introduced the Dubai Employee Workplace Savings (“DEWS”) plan, providing a progressive end-of-service benefits plan to restructure the previous requirements, offering a voluntary savings plan to DIFC based employees. The General Pension and Social Security Authority (“GPSSA”) governs UAE and GCC nationals pension plans.

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The MOHRE handles employee grievances through the ministry, including arbitrary dismissal and specific guidance relating to including valid reasons for termination are set out in UAE Labour Law. Termination may, in some instances nullify an employee’s entitlement to end-of- service gratuity.

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7.Intellectual Property

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The UAE does not have a comprehensive intellectual property law; however, brands, products and technologies can be protected. The primary intellectual property rights recognized in the UAE are patent, trademark, copyrights, industrial designs, confidential information, trade names, and domain names.

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The UAE’s intellectual property framework is broadly aligned with international standards, with laws including:

Federal Law No. 37 of 1992 on Trademarks, as amended;
Federal Law No. 7 of 2002 on Copyrights and Related Rights, as amended; and
Federal Law No. 31 of 2006 on Industrial Regulation and Protection of Patents, Industrial Drawings, and Designs.

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The UAE is also a party to several international treaties including, but not limited to:

WIPO Rome Convention for the Protection on Performers, Producers of Phonograms and Broadcasting Organizations, 1961
The Convention Establishing the World Intellectual Property Organization (WIPO), 1967
WIPO Berne Convention for the Protection of Literary and Artistic Works, 1971
WIPO Copyright Treaty, 1996
Paris Convention
Patent Cooperation Treaty
GCC Common Customs Law

In addition, Federal Law No. 19 of 2016 on Commercial Fraud enhances brand owners’ rights by imposing strict penalties on the possession of counterfeits for sale.

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Peculiarities regarding intellectual property in the UAE:

Enforcement of intellectual property rights takes place on an individual emirate level; therefore, coordination and cooperation are required to regulate counterfeit goods and enforce intellectual property rights. Further, registered intellectual property may not convey messages or images that conflict with local laws, culture and public order.

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8.Regulatory Agencies

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The UAE has several regulations in place for smooth and fair conducting of business. Businesses are obliged to comply with laws that:

Govern business;
Protect labour rights, consumer rights and intellectual property rights; and
Protect health and environment, ensure safety, and govern each jurisdiction

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Financial services:

The Central Bank of the UAE (“CBUAE”) and the Securities and Commodities Authority (“SCA”) are the central regulatory bodies for financial services in the UAE. Under Federal Law No. 14 of 2018 on the Central Bank and the Organizations of Financial Institutions and Activities, the UAECB regulates financial institutions, including those who wish to provide financing and engage in licensed financial activities in or from the UAE. However, certain free zones are self-regulated including the DIFC, which is regulated by the Dubai Financial Services Authority (“DFSA”), and the ADGM, which is regulated by the Financial Services Regulatory Authority (“FSRA”). Only criminal matters in relation to the DIFC and ADGM are governed by federal laws and fall within the exclusive competence of the UAE courts.

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Free zones:

Free zones are managed and operated by the relevant authority. Each free zone is designated around specific industry categories and only offers licenses to companies within those categories and there are over 80 independent free zones in the UAE.

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Customs Duty:

The UAE is a member of the GCC Customs Union. The customs duty rate is 5% on the majority of goods entering the GCC, with some goods imported free of duty and some goods are taxed at higher rates. Once paid in the UAE, no further duty should generally be applicable within the GCC. Imports in the free zones are not subject to customs duty since the area is deemed to be offshore for GCC customs purposes. Duty is only charged once goods leave the free zone and enter mainland UAE.

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Telecommunications Regulatory Authority

The TRA is the government entity responsible for regulating the telecom sector and enabling smart transformation in the UAE. Currently voice over internet protocol apps such as Skype, WhatsApp, and Snapchat calls are all blocked as the only licensed telecommunication services in the UAE are “Etisalat” and “Du”.

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Real Estate:

Dubai established the Real Estate Regulatory Authority (“RERA”) in 2007 which plays a crucial role in developing and supervising Dubai’s real estate regulatory framework and development and each emirate has a dedicated department to deal with property restrictions and regulations, as well as tenancy rights and duties.

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9.Alterative Dispute Resolutions

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Parties to contracts in the UAE are generally entitled to opt for foreign law to govern their relationship except matters relating to property rights in the UAE, employment matters and contracts concluded with UAE government entities, amongst others. In the event of a dispute, however, the party invoking the foreign law before a UAE court has the burden of proving the same. At its sole discretion, the court may apply UAE law to the contract should the party fail to establish such foreign law and determine its effects.

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It is therefore recommended and widely practiced, that contracts concluded in the UAE unequivocally agree to alternative dispute resolution, particularly arbitration. The UAE has several prominent and reputable arbitration centre’s, including:

Abu Dhabi Conciliation and Arbitration Centre (“ADCCAC”), which administers arbitrations under the Procedural Regulations under the ADCCAC;
Dubai International Arbitration Centre (“DIAC”), which administers arbitrations under the DIAC Arbitration Rules 2007;
Dubai International Financial Centre London Centre of International Arbitration (“DIFC LCIA”), which administers arbitrations under the DIFC-LCIA Arbitration Rules 2021;
Islamic Centre for reconciliation and Arbitration in Sharjah, and Ras Al Khaimah;
The Arbitration Law applied is largely based on the UNCITRAL Model Arbitration Law.

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Other alternatives to the local courts in the UAE include:

The DIFC Courts, which are common law courts operating in English out of the DIFC;
The ADGM Courts, which are common law courts operating in English out of the ADGM;
Mediation, which can be conducted at either the:
 Centre for Amicable Settlement of Disputes in Dubai;
 RICS Mediation Panel;
 DIFC-LCIA Arbitration Centre.

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Foreign judgments are difficult to enforce in the UAE with limited reciprocal treaties entered into with other countries, including the GCC convention of 1996 and bilateral treaties with France, China, India and Egypt. However, the UAE became a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (“the New York Convention”) in November 2006 which assists with the enforcement of arbitral awards in the UAE and abroad.

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10.Anti-corruption law and Compliance Programs

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Compliance:

Historically, the UAE has welcomed foreign business and created more favourable conditions for business owners than anywhere else in the world. Mounting international pressure however, has led to the introduction of reporting and physical presence requirements, as well as the introduction of authorized capital. These changes have a range of conditions and rules for the corporate and banking sectors of the UAE updating the requirements for the scope of documents mandated for customer identification, detailed information regarding the source of funds and their past customers’ business activities.

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As a result of the introductions, many of the free zones in the UAE have imposed mandatory compliance requirements to ensure that policies and regulations are upheld at a company level. Certain authorities require a compliance officer’s position to be fulfilled by a sufficiently qualified person by entities registered with them.

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The UAE became a US Foreign Account Tax Compliance Act (“FATCA”) partner in 2015 and has commenced the reporting of information for tax purposes pursuant the Common Reporting Standard (“CRS”) of the Organization for Economic Co-operation and Development (“OECD”) to address mounting international pressure toward transparency and accountability in offshore tax evasion. Similar to FATCA, the CRS requires all financial institutions resident in a participating jurisdiction to identify any reportable accounts, i.e. that of persons tax resident in a CRS participating jurisdiction.

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Cabinet Decision No. 58 of 2020 on the Regulation of Procedures Relating to Real Beneficiaries was also introduced, requiring all companies licensed or registered in the UAE to maintain a register of their real beneficial owners. The aim is to ensure that full details of UAE entities’ ultimate beneficial owners are easily ascertained and are held accountable, where appropriate.

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Anti-Money Laundering:

The UAE does not have any currency exchange controls or restrictions on the remittance of funds. Therefore, free zone entities are permitted to repatriate 100% of their profits from the UAE in accordance with regulations in place, depending on the free zone.

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The UAE is a member of the global Financial Action Task Force (“FATF”) and has implemented a framework to combat money laundering and terrorist financing. Federal Law No. 20 of 2018 on Anti-Money Laundering, Combating the Financing of Terrorism and the Financing of Illegal Organizations (“the AML law”), together with a range of regulations made by the UAE authorities including the UAE Central Bank, the SCA and the UAE Insurance Authority, ensures that international standards are met.

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In addition, the UAE has ratified the United Nations Convention Against Corruption and has enacted federal and emirate level legislation that targets bribery and corruption. Bribery of a UAE public official (which includes all customary government and ministerial positions and covers employees in state-owned companies or partially state-owned private companies) is a criminal offence in the UAE. Penalties for bribery can include forfeiture of the bribe, up to 10 years in prison, and fines which may be proportional to the bribery amount.

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11.Other peculiarities of the United Arab Emirates

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Residency:

The UAE has recently reviewed its immigration policy, introducing additional options for residency to an already comprehensive list. With the recent introduction of a long-term visa system for investors, entrepreneurs, gifted students and researchers for up to ten years. UAE residency options include the following:

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“Gold Card” permanent residency
 Existing UAE resident of at least five years  Up to 10-year visa
 Earning a monthly salary of at least AED 30,000/-
 Hold a senior job within their organization in the UAE
 Exhibit “exceptional ability” for specialist visa
Investor visa
 Public investment of AED 10 million  10-year visa
 Project of AED 5 million  5-year visa
Property visa
 Property in the UAE minimum value AED 5 million  5-year visa
 Property in the UAE minimum value AED 1 million  3-year visa
Company & Employment visa
 Onshore Company/Employee/Investor  3-year visa
 Free Zone Company/Employee  2-year visa
Retiree visa
 Savings of at least AED 1 million  5-year visa
 or Income of AED 20,000
 or Property in the UAE minimum value AED 2 million

(Additional requirements may be applicable depending on the option selected).

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Estate Planning:

Shari’ah law is the underlying system in the UAE for determination of personal status surrounding marriage, divorce, and child custody amongst others. As a result, estate planning and wealth management are crucial when setting up your business or expanding your portfolio to the UAE. Therefore, a Last Will and Testament is essential due to the potential for enforcement of Islamic Law on expatriate estates. The preferred forum for valid and enforceable testament would be the DIFC Wills and Probate Registry (“DIFC WPR”) which provides specific mechanism for expatriates to define issues of guardianship, dissolution of bank accounts and inheritance in respect of their assets located within the UAE.

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One may execute a Will to deal specifically with guardianship of their children, free zone companies or bank accounts, alternately may execute an all-encompassing document for treatment of their assets which can be a single document, alternatively can be entered into in duplicate concerning spouses called a “Mirror Will”.

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Wealth Management:

Trusts are not recognized in the UAE in the form currently known internationally. In the UAE, a Trust more closely resembles a company and thus, to protect wealth and manage ownership of UAE based assets, a Foundation may be utilized for asset protection and structuring purposes.

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The common law jurisdictions of Abu Dhabi Global Market (“ADGM”) with their Foundations Regulations 2017, and the Dubai International Financial Centre (“DIFC”) with their Foundations Law DIFC Law No. 3 of 2018, offer the establishment of Foundations, affording individuals, and entities access to structuring alternatives in the UAE. The advantage of a Foundation is that the entity acquires a distinct legal personality separate from the Founder. As such, the Foundation holds the title of the assets in its name and, therefore, protects assets from forced heirship rules governing inheritance under Shari’ah, creditor claims, as well as providing long term holding mechanism options.

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If you need further information, please contact Senat MEA Legal Consultancy FZ-LLC.