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New Family Business Law

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Regulates the benefits, incentives and work of family businesses, governance, management, transfer of shares and dispute resolution in order to enhance their role in the national economy.

On 10 October 2022, Decree-Law No. (37) on Family Businesses was issued and published in the Official Gazette and it will come into force three months after the date of publication, i.e. from 10/01/2023. The law has identified the family companies as any company established in accordance with the provisions of the Companies Law, and most of its shares are owned by persons belonging to the same family and are registered in the specific register prepared for this as a family business. As per this law, the Council of Ministers shall, upon the recommendation of the Minister of Economy, issue a decision specifying what is meant by one family.

Objectives of the Law

This Decree-Law aims to achieve the establishment of a comprehensive and accessible legal framework to regulate the ownership and governance of family businesses in the UAE, facilitate their transmission across generations, support the continuity of family businesses, enhance the role of the private sector in economic growth and community contribution in the UAE and provide appropriate mechanisms to resolve disputes associated with them and attribute their contribution to the UAE economy and competitiveness.

Types of servings and their transition

The Decree-Law also regulated how shares are transferred between members of the same family and between them and others from outside the family, and how each partner disposes of his share.

The shares were determined by two basic types according to the benefits granted to each type. The first type is called shares category (A) in which the partner has the right to vote in the general assembly of the company and receive his percentage of the profits.

The second type is called category (B) in which the partner is entitled to receive profits only without the right to vote in the general assembly. The decree authorized the memorandum of association to stipulate the conditions governing the conversion of shares (B) into shares (A) or vice versa and to be stipulated such as the passage of time or any other conditions, and it also allowed the  provision to divide shares (A) or (B) into categories according to the number of votes or profits allocated to them.

The Memorandum of Association may provide for other categories shares that differ in value, voting power, profits, priority rights and other rights or privileges, provided that the responsibility of the partner is to the extent commensurate with the rights and privileges allocated to each of those shares.

Bankruptcy and insolvency of family member shareholder

The Decree-Law also regulated the bankruptcy or insolvency of the partner in the family business and the right of any partner to have the right to priority purchase of the partner’s share at the price and within the period determined by the court hearing bankruptcy or insolvency.

The death of one of the partners was also organized, and the director of the company acts as the guardian of the shares of the  deceased partner, and supervises the procedures for transferring ownership to his heirs, each according to his legitimate share, and takes the procedures to amend the memorandum of association, after settling any rights or debts that may be related to these shares in favor of the family company or others, unless there is a provision in the Memorandum of Association to the contrary.

Family Business Management

It also organized the distribution of profits and how to manage the family company, the  appointment  and dismissal  of the director, his powers and responsibilities, and the organization of the governance of family affairs in relation to its relationship with the family company, through the establishment and organization of the work of councils and committees, such as the Family Association, the Family Council and the Family Office, which are specialized – each in the  field of tasks entrusted to him – to manage the affairs of the family and codify its relationship with the family business, including the education, training of its members and their work in the family company and its subsidiaries and entrepreneurship initiatives, and is concerned with the separation of ownership of the family company.

Family asset governance is about the ownership and governance of the family business, overseeing family investments, organizing charitable work and its own community contribution initiatives, and it contributes to the control of conflicts of interest and the reconciliation of views on disputes that may arise between family members and between them and partners.

Dispute Resolution

The Decree-Law also stipulated that the mechanism for settling disputes of family companies is to be established, whether in the memorandum of association the formation of a council of partners, family members or third parties, the purpose of which shall be to consider disputes that may arise between partners, between them and family members and between them and the family company, and to try to reconcile them.

Family Business Dispute Resolution Committee

The Decree-Law also provided the establishment of a committee in each Emirate called the “Committee for the Resolution of Family Business Disputes” by a decision of the Minister of Justice or the head of the local judicial authority, specifying its composition and the system of its work in the settlement of disputes of family businesses, chaired by a judge and assisted by two experienced and competent persons in the legal, financial, and family business management fields. The urgency it deems appropriate to maintain the continuity of the family business, prevent the interruption of its business or affect its reputation or financial position throughout the period of consideration of the dispute.

Benefits and incentives of family business companies

The Decree-Law on the benefits and incentives of the Most Successful Family Enterprises also decided, and made the Council of Ministers, upon the proposal of the Minister of Economy, and after coordination with the concerned stakeholders and the competent authorities, issue such decisions as it deems appropriate for the benefits and incentives granted to family owned companies registered in the Registry, and the controls, requirements related to these benefits and incentives, as well as the competent local authority, authorized for corporate affairs in each Emirate or Free Zone Authority, to grant any other benefits and incentives to family businesses in accordance with the controls and requirements issued in this regard.

Reda Hegazy  is a Partner  at Alsuwaidi & Company.

Reda is listed Legal Consultant in the Government of Dubai Legal Affairs Department, a Member of the DIAC 40, Young Practitioners Group in Dubai International Arbitration Centre (DIAC), a certified arbitrator and member of the International Commercial Arbitration Centre (ICAA) in Sharjah (Tahkeem).

UAE Supreme Court: First Tax Evasion Criminal Case

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Case brief

In May 2021, the UAE Federal Supreme Court ruled on the first tax evasion criminal case ordering payment of five times the amount of the evaded tax, amounting to almost 4.2 million Dirhams.

At a hearing in October 2020, the Federal Primary Court ordered the taxpayer to pay five times the tax evaded. The Primary Court had relied on an expert report to confirm the quantum of the evaded tax.

The taxpayer appealed this sentence and at a hearing in March 2021, the Federal Appeals Court ruled accepting the appeal procedurally but rejected the taxpayer’s defenses and upheld the Primary Court sentence.

Subsequent to this, the taxpayer challenged the Federal Appeals Court judgment before the Federal Supreme Court. The Federal Supreme Court upheld the sentence rendering it the first recorded Supreme Court case on tax evasion.

Previous address by the Supreme Court on tax evasion

Tax evasion was addressed by a court for the first time during civil proceedings in October 2020 when the Federal Supreme Court addressed tax evasion obiter dicta (in passing) in judgment number 227/2020 related to voluntary disclosures.

The Federal Supreme Court took the position that where a person discovers an error, they must disclose and correct the error (within twenty weekdays) — or be found to have committed tax evasion, as follows:

“That is due to the fact that the voluntary disclosure along with tax differences it contained is not only a guarantee for the State Treasury but also a means of rectifying the taxpayer’s error as such in the declaration – or the result of the tax assessment – therefore, the aforementioned had to, in all cases, correct the errors in his declaration for the purpose of maintaining the dues of the State; otherwise, he would have faced the tax evasion offense, which requires his penalization.”

Tax evasion in law

Articles 1 of both the Tax Procedures Law and the Excise Tax Law defines ‘tax evasion’ as the “…use of illegal means, resulting in the reduction of the amount of the due tax, non-payment thereof or a refund of a tax that the Person did not have the right to have refunded…”.

Article 26 of the Tax Procedures Law sets out the penalties for tax evasion as imprisonment and/or a penalty of up to five times the amount of the evaded tax

Federal Tax Authority powers

Article 50 of the Tax Procedures Law grants the Director-General, and tax auditors appointed by a decision of the Minister of Justice, the capacity of judicial officers for tax violations.

Under Article 30 of the Criminal Procedures Law, judicial officers have the power to inquire about crimes, search for their perpetrators and collect the necessary information and evidence for investigation and indictment.

Article 45 of the Criminal Procedures Law grants judicial officers the power to order the arrest of the accused, present and against whom there is enough evidence that they committed a crime.

Criminal complaints accusing a taxpayer of tax evasion are generally investigated by the State Funds department of the Federal Public Prosecution.

Please contact us for more details or assistance in this matter.

Author: Mahmoud Abuwasel

UAE Announces Foreign Ownership Law Reforms

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From 1 December 2020, the UAE government will allow 100% foreign national ownership of businesses. The presidential decree amends Law No. 2 of 2015 on companies and their shareholding.

His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, announced the amendments on 23 November 2020, noting that the UAE now provides a stable, favourable legislative environment for the establishment of businesses. Abolishing the need for companies to have Emirati shareholders will significantly enhance the UAE’s competitiveness on the international stage and attract foreign investment and entrepreneurs.

The amendments to the 2015 Commercial Companies’ Law eliminate key provisions requiring that a company be chaired by an Emirati national and for the board of directors to be majority Emirati. However, local authorities will preserve the power to decide the level of participation by Emiratis in any company. Companies in strategically important sectors, including oil and gas exploration, utilities, and transport, as well as state-owned entities, are exempt from the changes.

The amendments also mean that companies wishing to trade publically can sell up to 70% of their shares instead of the current 30% limit.

The changes follow amendments to the legal code made earlier in November. Unmarried couples are now permitted to live together, protections for women have been increased, and restrictions around alcohol consumption have been relaxed. These adjustments will allow expatriates to feel more confident about living long-term in the UAE.

The Emirates are also expecting Israelis to be among the many foreigners who will open businesses and purchase apartments in the coastal cities of Dubai and Abu Dhabi following the breakthrough US-brokered normalisation deal between the countries.

Helping boost the Covid-hit economy

There is no hiding the fact that the UAE, where the population is 80% expatriates, has been hit hard by the economic effects of the Coronavirus pandemic. The International Monetary Fund (IMF) has estimated that the UAE’s economy will fall by 6.6% in 2020, with vital sectors such as transport and tourism significantly hit by lockdowns. Lower oil prices are also weighing on the country’s finances, with the government expected to post a deficit of 9.9% of GDP, up from a 0.8% shortfall in 2019.

It is essential to put these figures into context – few nations will not see their economy shrink this year. The global economy is expected to contract by at least 3% this year, surpassing the 2008 financial crisis figure. Britain’s GDP decline is expected to be 11.3%, the United States 8.3%, Germany 6.6% and so on and so on. Every country will have to use initiative to ensure their economies recover swiftly – in this respect, the UAE is ahead of the curve.

Attracting investment and global entrepreneurs

Traditionally, many foreign-owned entities have been reluctant to establish onshore LLCs in the UAE because of the foreign ownership constraints which saw their ownership capped at 49% outside the free zones.

Lifting restrictions paves the way for the UAE to solidify its position as a hub for organisations that trade across the Middle East. Overhead costs will reduce, and the ease of doing business will dramatically increase.

Most business owners were delighted at the news of the legislative amendments. Ali Rao, Group CEO, Elixir Group, told Gulf Today: “The first of a kind in the GCC region, the 100% ownership of the business in the UAE will boost FDI, investment flows, recoup the economy affected by the COVID-19. The revolutionary step will also greatly encourage entrepreneurs to start new ventures and expand locally, regionally, and globally.”

Sanjeev Bhatia, CEO, SB Group and NETIX Global BV, said: “By revamping foreign-ownership laws, UAE is taking a giant leap towards economic diversification. This move will elevate UAE’s position in the Ease-of-Doing-Business index by several notches.”

“We can expect unprecedented dynamism in the business ecosystem instantly, in terms of IPOs, equity-based financing and entry of major venture capitalists from across the globe. Kudos to the UAE leadership for this monumental decision, which I’m sure will be looked back as a landmark some day.”

Our corporate law team can advise and represent you on all matters relating to the 2015 Commercial Companies’ Law amendments. Please contact our office at info@twslegal.ae or call +971 4 448 4284 to talk further.