GCC Quarterly Review - Q4 2019
The fourth quarter of 2019 saw a number of legal developments in the Gulf Cooperation Council (GCC) region (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates). Our GCC Quarterly Review – Q4 2019 summarises a selection of the major developments in that period, with links to further reading where available.
Download the PDF version (8 pages) or read online below.
Reporting requirements for UAE businesses Businesses in the United Arab Emirates (UAE) will need to prepare to submit their first annual reports in 2020 under new economic substance and tax reporting rules introduced in the UAE in 2019. Where a business is engaged in certain types of activities in the UAE or a free zone (including the DIFC and the ADGM), it must now submit a detailed annual report evidencing that it is carrying out substantive economic activity in the UAE with effect from 1 January 2020, in accordance with UAE Cabinet Resolution No.31 of 2019 and Ministry of Finance Ministerial Decision No.215 of 2019. Broadly, this means that the business generates its main income from activities in the UAE, it is managed in the UAE and has employees, premises and expenditure in the UAE (there are special rules for holding companies). Sectors within the scope of these new economic substance rules include banking, insurance, fund management and holding companies. Companies which are majority owned by the Federal Government or the Government of an Emirate are excluded. Reports must be submitted within 12 months of each financial year end and there are fines for non-compliance. Businesses must also disclose whether any income from its activities is subject to taxation in another jurisdiction. Other new tax reporting requirements on multinational corporate groups, set out in UAE Cabinet Resolution No.32 of 2019, require a UAE company or branch which is part of such a group to file a tax report (except where another group company is required to file that information under laws of another country which shares tax information with the UAE). By introducing the new reporting requirements, the UAE is ensuring compliance with international standards on tax reporting and has now been removed from the European Union’s list of non-compliant jurisdictions for tax purposes. There is currently no generally applicable corporation tax in the UAE; however, the new reporting requirements could be a sign that the UAE is taking preparatory steps towards the introduction of a new income tax regime for companies.
UAE issues a new personal insolvency law New bankruptcy procedures are now available for use by UAE nationals and residents who find themselves in financial difficulty, under the UAE’s new Personal Insolvency Law (Federal Law No.9 of 2019). Key features of the procedures include:
- an individual can apply to court for a settlement procedure, if he has failed to pay his debts for less than 50 consecutive business days. A settlement plan proposed by the individual, if approved by the UAE courts, would involve the settlement of the individual’s financial liabilities with the assistance of an expert or several experts appointed by the UAE courts. During this process, creditor rights are suspended until the completion of the settlement process. If the plan is approved by the majority of creditors whose debts are not less than two thirds of the value of the total debts and ratified by the UAE courts, it is binding on all creditors (including any dissenting minority creditors); and
- an individual’s creditor(s) can apply to court to commence procedures for the insolvency and liquidation of the individual’s assets (provided that it is owed a minimum of AED200,000), if the individual fails to pay for more than 50 consecutive business days following demand. If approved by the court, the individual’s debts would be accelerated, and a moratorium imposed.
Both procedures are court-led and public (the decision to commence a procedure must be published in two daily newspapers).
New corporate governance guidance for UAE public companies The UAE Securities and Commodities Authority (SCA) has adopted a new Guide to Institutional Discipline Standards and Governance of Public Joint-Stock Companies, which aims to improve the governance framework for public companies set out in SCA Board Chairman’s Decision No. 7 of 2016 concerning Institutional Discipline Standards and the Governance of Public Joint-Stock Companies. Some key features of the guide include:
- fit and proper criteria for board members;
- a requirement for most board members to be independent, non-executive directors;
- provisions on executive and supervisory committees;
- greater transparency on the disclosure of interests of board members, the handling of conflicts of interest and risk management procedures;
- new provisions on environmental, social, and governance (ESG) principles and corporate social responsibility; and
- provisions on the governance of subsidiary companies.
The SCA has said companies will be given a grace period until the end of 2020 to comply.
Promoting securities in the UAE - “Qualified Investor” exemption updated The SCA has amended the definition of “Qualified Investor” in the SCA Chairman’s Decision No. 3/R.M. of 2017 Concerning Promoting and Introducing (the PIRs). Qualified Investors are types of investors who are considered capable of managing their investments independently. Issuers can promote securities in the UAE to some types of Qualified Investors with limited regulatory requirements. The new definition more clearly categorises the types of governmental and corporate entities and individuals who are considered to be Qualified Investors. It also adjusts some of the requirements to be met in order to be classed as a Qualified Investor. For example, foreign governments and companies wholly owned by them and entities licensed by a foreign regulatory authority may now be Qualified Investors. The amended definition now includes a new category of Qualified Investor, namely a natural person that is accredited by the SCA (or by a similar regulatory authority) to engage in financial activities or services, however it remains unclear as to what form such accreditation will take.
Revisions to the UAE corporate insolvency regime Some minor changes have been made to the UAE Bankruptcy Law (Federal Decree-Law No.9 of 2016) by Federal Decree-Law No.23 of 2019. Key points to note include:
- in preventive composition proceedings, notice of creditors meetings can be given, and voting by creditors at the meetings, can now be done electronically;
- when submitting a bankruptcy application, the debtor or the creditor making the application can now specify in it whether the application is for restructuring purposes or for bankruptcy and liquidation and the relevant grounds for the application;
- when making an order on a bankruptcy application, the court can state either that the conditions to commence bankruptcy procedures are met (as before), and now the court may also indicate if it has approved the possible debt restructuring the debtor and order the commencement of the restructuring plan;
- instead of appointing an insolvency practitioner registered in the UAE’s Experts’ Panel, it is now possible to appoint “another expert”;
- it appears that preferential creditors may no longer be able to vote on composition plans (in both preventive composition and in bankruptcy), but secured creditors still can; and
- added to the waterfall of payments of debts is now the professional fees incurred by a creditor to commence the procedures, including legal fees.
We have issued a series of notes on the Bankruptcy Law in which we provide an overview of its main features. This series is available via our Knowledge Portal.
UAE Central Bank to establish a Fintech Office The UAE Central Bank has announced that it will establish a new FinTech Office to support FinTech activities in the banking sector and facilitate the establishment of a UAE-approved regulatory framework in co-operation with other FinTech authorities in the UAE (including in the DIFC and ADGM) and in the wider Middle East region. The UAE Central Bank has confirmed that it will not be running any sandboxes. The SCA has also announced its membership of the Global Financial Innovation Network (GFIN), a body of international regulators and organisations which aims to support international financial innovation for consumers in the FinTech space. UAE authorities have already taken important steps towards regulating activities in the FinTech space. For example, the ADGM has already issued regulations on crypto asset activities (read more...), on the regulation of digital securities and guidance on the development and use of Application Programming Interfaces (APIs) in the ADGM (read more…). The SCA is expected to issue a new framework to regulate cryptoasset activities soon. You can also read about developments in the FinTech sector in our blog, FintechLinks.
UAE’s regime for taking security over moveable assets is updated Federal Decree Law No.24 of 2019 makes several changes to the regime for security over moveable assets under Federal Law No.20 of 2016 on the Mortgage of Movable Assets to Secure a Debt (Mortgage of Moveable Assets Law). The most important change expands the scope of the types of security over movables that can be registered at the Emirates Movable Collateral Registry. Now, possessory pledges of movable assets can also be registered, in addition to non-possessory pledges which are regulated by the Mortgage of Moveable Assets Law. Initially, possessory pledges taken under a different legal regime could only be registered during the one-year grace period after the law came into force, which ended on 15 March 2018. There is a requirement to check the register to ensure that there is no existing registered security over the assets before taking a possessory pledge over those assets. There are some additions to the other types of rights that may be registered in the register. There is also change in the notice period for sale of the assets on enforcement in the event of a breach of the agreement. The sale must now be carried out within the period set in the notice from the pledgee to the pledgor, whereas previously the sale was required within 10 days of notification.
Revisions to protect retail customers by the UAE Central Bank The UAE Central Bank has revised rules relating to retail customers in Resolution No.96 of 2019. Amendments to Regulation No.29 of 2011 regarding bank loans and other services offered to individual customers introduces fee caps (to be reviewed annually) for different types of products provided to retail customers. Banks are discouraged from defaulting to charging the maximum caps and the UAE Central Bank will supervise banks’ fees to ensure that rates are applied in a fair and appropriate manner. Banks and finance companies need to notify and seek approval from the UAE Central Bank to introduce new fees or increase fees by more than 5 per cent. The UAE Central Bank has also revised its rules on mortgage loans (set out in Circular No.31 of 2013) to give the mortgage lender the discretion to determine the maximum age at the final repayment date.
SCA proposes central clearing system in the UAE The UAE Securities and Commodities Authority’s Advisory Committee of Capital Markets is considering establishing a unified central clearing entity for the UAE’s two exchanges, the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX). This should save costs and increase operational efficiency. Establishing an independent central clearing entity is one aspect of a range of reforms proposed by the SCA as it works towards ensuring the UAE markets satisfy standards to be considered a “developed market” according to global indicators, such as the MSCI Indices. Other proposed reforms include cash settlement, new derivatives rules and an independent central depository.
Dubai Bounced cheque penalties in Dubai Certain minor offences under the UAE Penal Code, including bounced cheques, can be dealt with more quickly and with lower penalties imposed according to a recent order issued by the Dubai Attorney General. Senior prosecutors at the Department of Public Prosecution can issue penalty orders for bounced cheque offences. They can impose lower penalties, as the maximum fine (for cheques in an amount between AED 100,000 and AED 200,000) of AED 100,000 can be reduced pro rata to the amount of the bounced cheque. The threat of imprisonment (for up to three years) for the offence of issuing a bounced cheque seems to be lessened, particularly in light of a 2017 order issued by the Dubai Attorney General which provided for bounced cheques to be dealt with through court ordered fines rather than court hearings and jail time and an amendment to the Criminal Procedures Law in 2018 which introduced a new concept of penal reconciliation, which aims to end certain disputes in criminal matters in an amicable manner, including relating to bounced cheques.
New rules for jointly owned property in Dubai A new law provides enhanced protections for property owners of jointly owned property in Dubai and places greater obligations on developers and management companies. Some of the key features of Dubai Law No.6 of 2019 (which replaced Law No 27 of 2007 with effect from November) include:
- jointly owned real estate projects must be registered on the Dubai Land Department’s "Mollak” electronic records system;
- service charges must be approved by the Real Estate Regulatory Agency (RERA) and invoiced through Mollak;
- the management company must be approved by RERA. There are a range of obligations on management companies, including a requirement to submit 6-monthly reports to RERA and to obtain buildings insurance;
- developers’ responsibility for structural damage extends to 10 years from completion; and
- disputes must be referred to the Rental Disputes Centre in Dubai.
New commodities exchange to launch in Abu Dhabi Abu Dhabi is set to launch a new commodities exchange to offer trading in futures contracts based on Abu Dhabi National Oil Company’s (ADNOC) Murban crude oil. ADNOC is working in partnership with Intercontinental Exchange (ICE) to establish the exchange, with the support of nine of the largest physical traders of Murban. The exchange, to be known as ICE Futures Abu Dhabi (IFAD), will be based in the ADGM and operated by ICE, which is a US-based, leading operator of global exchanges and clearing houses. It is expected to launch in the first half of 2020, subject to regulatory approvals. IFAD has already been granted recognition by the Financial Services Regulatory Authority as a recognised investment exchange. As a result, the way that Murban is priced and traded will change. Under a new pricing system, customers will know what they are paying in advance using a Murban futures contract as its price marker (unlike under the previous retroactive pricing system). Individuals and companies will have the opportunity for the first time to trade in Murban futures on a regulated, transparent and accessible platform. Contracts traded at IFAD will be cleared at ICE Clear Europe, one of the world’s leading clearing houses.
DIFC companies’ regime transition period ends The one-year transitional period ended on 12 November 2019. Companies doing business in the DIFC must now be fully compliant with the new regime set out in the Companies Law 2019 (DIFC Law No.5 of 2018), Companies Regulations, Operating Law (DIFC Law No.7 of 2018), Operating Regulations and Ultimate Beneficial Owner Regulations (read more…).
New DIFC IP law and financial collateral regulations The DIFC issued a range of new or revised laws and regulations in the last quarter of 2019. These included a new law regulating the protection and enforcement of intellectual property rights (DIFC Law No.4 of 2019), a new creditor-friendly financial collateral regime which supplements the Law of Security (DIFC Law No.8 of 2005) for financial collateral assets, updated Security Regulations which revise the requirements for financing statements and the fee structure for filings (read more…) and new Prescribed Company Regulations (described below).
New DIFC Prescribed Company Regulations replace SPC regime The DIFC has issued new Prescribed Company Regulations under the Companies Law (DIFC Law No.5 of 2019). These Regulations consolidate, replace and expand the previous Special Purpose Company (SPC) Regulations and the Intermediate Special Purpose Company (ISPC) Regulations. Certain types of person can apply to establish a Prescribed Company in the DIFC for the purposes of certain types of business activities, without having a presence in the DIFC. The Prescribed Company Regulations expand the previous ISPC and SPC regimes by:
- allowing a broader range of persons to apply to establish a Prescribed Company, including FinTech entities, foundations and private trust companies already present in the DIFC, Authorised Firms and Funds (regulated by the DFSA or another financial services regulator) and Government or Government-related entities in the UAE; and
- adding aviation structures and family holding structures to the types of business activities for a which a Prescribed Company may be established.
The regulations clarify the basic reporting and disclosure requirements to which Prescribed Companies are subject, provide for more flexible office requirements and reduced fees and allow corporate service providers to play a greater role for Prescribed Companies. Existing SPCs and ISPCs are automatically converted to Prescribed Companies. There is a one-year grace period for compliance; actions to be taken include filing a confirmation statement and (if necessary) updating the objects and activities of the company in its Articles of Association.
DIFC Court refuses to enforce Kuwaiti judgment following proceedings in breach of jurisdiction clause It has been reported that the DIFC Court of First Instance has refused to recognise and enforce a judgment issued by the Kuwaiti Courts against an international bank under regional enforcement treaties (The GCC Convention for the Execution of Judgments, Delegations and Judicial Notifications of 1997 and the Riyadh Convention for Judicial Cooperation of 1983) on the basis that the Kuwait Courts did not have the required jurisdiction to determine the case. The Kuwaiti Courts had accepted jurisdiction under Kuwaiti law in relation to a payment dispute regarding a trust agreement between the bank and its customer under which the bank agreed to subscribe for and hold shares in investment funds on behalf of its customer. The trust agreement included an exclusive jurisdiction clause under which the parties had agreed that disputes would be heard in the bank’s home jurisdiction (and not in Kuwait). One of the conditions that must be satisfied before the DIFC Court can enforce a foreign court judgment under the under the GCC Convention or the Riyadh Convention is that the court which issued the judgment must have the jurisdiction to do so. This is a separate legal test under the Conventions, applying different rules than under Kuwait law as to whether the courts had jurisdiction (on which the DIFC Court made no assessment). The DIFC Court’s view was that the Kuwaiti Courts did not have jurisdiction under the GCC Convention or the Riyadh Convention to hear the dispute because the payment obligation in dispute was required to be performed outside Kuwait. The case is positive news in that the international bank succeeded in preventing the enforcement of a judgment against it issued by court to which the parties had not agreed to refer their disputes. We understand that the case is being appealed.
New DIFC listing regime proposed for SMEs The DFSA is consulting on a proposed new regulatory regime that will permit Small or Medium Sized Enterprises (SMEs) to list their shares on an Authorised Market Institution (AMI) in the DIFC. DFSA Consultation Paper No.129 proposes to simplify and streamline the approval process for SMEs to access equity markets, by making certain limited changes to the DFSA Rulebook to cover SMEs appropriately, such as the rules relating to minimum market capitalisation requirements, trading record, lock-in arrangements and fees. The reforms should enable SMEs to access equity capital markets in or from the DIFC.
ADGM to update commercial regulations Changes for ADGM companies are coming soon, as the ADGM is expected to amend the Companies Regulations 2015, the Beneficial Ownership Regulations 2018 and certain other commercial regulations, following a consultation in December 2019. Key proposed changes include:
- abolishing the requirement to issue paper certificates and licenses and moving to electronically issued certificates, in line with other local registries including the DIFC and the Abu Dhabi Department of Economic Development. Equivalent changes are proposed for foundations and partnerships;
- changing the name of “Annual Returns” to be “Confirmation Statements”, following the approach in the UK; and
- updates to align the beneficial ownership rules more closely with Federal rules on anti-money laundering and terrorism financing to avoid discrepancies.
New ADGM employment law With effect from January 2020, new ADGM Employment Regulations 2019 replace the ADGM’s Employment Regulations 2015. The new regulations increasingly align the ADGM’s employment regime with international best practices and aspects of the UAE onshore regime regarding employee benefits. Some key provisions of the new regulations include new overtime provisions for employees, tiered sick pay, reduced notice periods for termination of employment (and greater flexibility to agree alternative notice periods), enhanced anti-discrimination provisions and a new discretionary power of the ADGM Courts to impose a penalties on employers for failure to pay employees’ entitlements due on termination.
New ADGM Arbitration Centre Guidelines New guidelines published by the Abu Dhabi Global Market Arbitration Centre (ADGMAC) provide parties and tribunals with a set of practical, best practice procedures that they can choose to use in their arbitral proceedings, regardless of the seat, the applicable institution rules or the law governing the arbitration procedure (read more…).
Saudi Arabia set to launch new economic zones Saudi Arabia’s Economic Cities Authority has an extended mandate to establish and supervise new Special Economic Zones (SEZs), as well as economic cities, in the Kingdom. This is a key element reforms which are expected to improve the investment climate and private sector growth as part of a wider programme of modernisation under Vision 2030 and the National Transformation Programme. Central to Vision 2030 is the diversification of Saudi Arabia’s economy. Read more about Investing in Saudi Arabia: Your guide to foreign inbound investment in the Kingdom.
Foreign investment and listing in Saudi Arabia’s Tadawul Saudi Arabia is further opening up its exchange, Tadawul, to foreigners, with several important developments:
- Foreign Strategic Investors (FSIs) can own a controlling interest in Saudi Arabian companies listed on the Tadawul, subject to certain conditions following new rules issued by the Capital Markets Authority (CMA); and
- foreign issuers can list their shares on the Tadawul, following amendments to the CMA’s Rules on the Offer of Securities and Continuing Obligations (with effect from January 2020) (read more…).
New rules for bankruptcy procedures in Saudi Arabia New rules regulating bankruptcy procedures under the Bankruptcy Law (Royal Decree No.M/05 dated 28/05/1439H (corresponding to 13 February 2018)) in the Kingdom’s commercial courts has been approved by the Saudi Arabian Justice Minister and President of the Supreme Judicial Council. The provisions cover a range of issues including relating to the specialised units within the courts for hearing bankruptcy cases, procedures for submitting requests and records, precautionary applications and the judicial process and timetable for bankruptcy procedures. Read our overview of the bankruptcy regime.
Emerging Market status for Kuwait in 2020 Kuwait is to be reclassified to Emerging Market status on the on the MSCI Indices (the global indices tracked by investors) as of May 2020, following an announcement in December that Kuwait’s equity market rules now meet all the necessary requirements.
Year in Review 2019 and Year to Come 2020
Our Year in Review and Year to Come series brings together analysis, thinking and highlights from our lawyers around the world, in the form of topic-specific and jurisdictional guides. The guides aim to give an overview, with links to more information where applicable. Read more about developments in the UAE and Saudi Arabia as well as a range of other jurisdictions.