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Family Business in the UAE: A Legal Overview

The Family Business Law, or Federal Decree-Law No. 37 of 2022, represents a transformative update to the legal framework governing family-owned enterprises in the United Arab Emirates (UAE). By introducing comprehensive standards, the law aims to ensure the growth, governance, and sustainability of family businesses, which play a critical role in the UAE’s economy. This landmark legislation addresses long-standing challenges faced by family businesses, offering them the legal clarity and tools necessary for resilience in an evolving economic environment.

Key objectives of the Family Business Law:

Strengthening Governance Structures: Establishes robust frameworks for transparent and accountable management of family enterprises.

Promoting Succession Planning: Provides guidelines for generational transitions, minimizing disputes and ensuring leadership continuity.

Encouraging Legal Clarity: Clearly defines the roles, rights, and obligations of family members, business owners, and stakeholders.

Enhancing Business Sustainability: Addresses key challenges faced by family enterprises, fortifying their long-term viability

Scope of the Decree-Law

The Decree-Law applies to Family Companies where the majority of the capital is owned by individuals from the same family, provided the company is registered in a unified Register of Family Companies established under the law. This includes most company structures recognized under the Federal Commercial Companies Law, excluding public joint stock companies and general partnerships, as well as businesses established in Free Zones.

Family businesses contribute significantly to the UAE’s economy, particularly in industries such as trade, real estate, and retail. However, they face unique challenges such as generational conflicts, governance issues, and lack of formal succession plans. Federal Decree-Law No. 37 of 2022 directly addresses these issues, aiming to strengthen the economic impact of family businesses and ensure their seamless operation in a competitive landscape.

Notable Features of the Federal Decree-Law

1. Family Constitutions and Governance Bodies

The law allows families to develop tailored Family Constitutions to regulate their internal affairs, governance, and decision-making processes. These documents can outline rules for leadership, shareholder rights, and dispute resolution. Families are also encouraged to establish governance bodies such as:

Family Assemblies to involve members in strategic discussions.

Family Councils for strategic decision-making.

Family Offices for financial and operational management.

2. Innovative Shareholding Options

The Decree-Law introduces flexibility in shareholding structures by:

Allowing the creation of different classes of shares with varied rights.

Permitting buy-backs of up to 30% of the company’s shares to facilitate the exit of family members.

Establishing mechanisms to prevent the transfer of shares outside the family, safeguarding the family’s legacy and control.

3. Dispute Resolution Mechanisms

Recognizing the importance of efficient conflict resolution, the law provides various options, including:

Arbitration.

Special Committees established in each Emirate.

Financial free zone courts.

This flexibility ensures that families can choose the method best suited to their needs, preserving harmony and business continuity.

4. Removal of Shareholder Restrictions

A significant update under the law is the removal of restrictions on the number of shareholders a Family Company can have. This change promotes inclusivity and allows for greater family participation in ownership.

5. Alignment with Personal Status Laws

The Decree-Law explicitly states that its provisions, or those applicable in Free Zones, do not constitute a violation of the UAE Personal Status Law. This addresses a critical aspect of succession planning, offering reassurance that compliance with the Decree-Law will not conflict with inheritance laws.

6. Incentives and Concessions

Family Companies registered under the Decree-Law may benefit from incentives and concessions granted at the discretion of the UAE Cabinet. While the specifics are not yet outlined, these benefits could enhance the competitiveness and operational ease of family businesses.

Additional Considerations

Integration with UAE's Economic Vision

The Family Business Law aligns with the UAE’s broader economic goals, such as diversification and sustainability. By fostering the growth of family enterprises, the law contributes to job creation and innovation, supporting the UAE’s vision to become a global economic hub.

Tax and Regulatory Implications

While the law offers numerous benefits, family businesses must consider its implications on taxation, inheritance laws, and financial reporting. Expert legal and financial advice is recommended to navigate these complexities effectively.

Role of Women in Family Businesses

The decree provides opportunities to enhance the role of women in family enterprises. By formalizing governance and succession processes, it encourages inclusivity and empowers women to take on leadership roles, reflecting the UAE’s commitment to gender equality.

Why the Family Business Law is a Game-Changer

The introduction of Federal Decree-Law No. 37 of 2022 reflects the UAE’s commitment to supporting family businesses, which form the backbone of its economy. The law’s innovative provisions, such as allowing multiple share classes and establishing a Family Business Registry, provide unparalleled flexibility.

Conclusion

While legislative solutions cannot guarantee the success of family businesses, they provide a robust framework for optimizing governance and operational efficiency. Federal Decree-Law No. 37 of 2022 is a is a milestone in the legal framework for family businesses in the UAE. By emphasizing governance, succession planning, and dispute resolution, the law provides a robust foundation for their sustainability and growth. Family businesses must proactively adapt to these new requirements, leveraging the legal clarity and support offered by the decree to thrive in the UAE’s dynamic economic landscape.

By aligning family business practices with global standards while respecting local traditions, the Decree-Law paves the way for family enterprises to thrive in an increasingly competitive world. For family businesses in the UAE, this legislation offers a unique opportunity to secure their legacy and strengthen their contribution to the nation’s economic future.

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Effective Strategies for Improving Corporate Governance in Small and Medium Enterprises

In light of the rapid global economic transformations and ongoing technological changes, small and medium enterprises (SMEs) have become the backbone of the economy in most countries worldwide. Amid this increasingly competitive environment, there is an urgent need to develop effective governance systems and practices that ensure the sustainability and growth of these companies. Corporate governance is not just a modern management term; it is an integrated system of rules and practices that ensures responsible management of companies and balances the interests of all stakeholders.

Given their unique nature and specific challenges, SMEs require a tailored approach to implementing governance principles. They differ from large corporations in their organizational structure, limited resources, and decision-making processes. However, adopting appropriate governance practices suitable for their size and nature of operations can yield numerous benefits, from improving operational efficiency to enhancing their ability to attract investments and achieve sustainable growth.

Importance of Corporate Governance for Small and Medium Enterprises

The importance of implementing an effective governance system lies in the numerous benefits it brings to the company, including:

Improving Decision-Making Processes and Reducing Operational Risks

Increasing Trust Among Investors and Partners and Facilitating Access to Funding

Enhancing Transparency and Accountability Within the Organization

Improving Relationships with Stakeholders and Strengthening Institutional Reputation

Ensuring Long-Term Sustainability and Facilitating Management Succession

Steps to Establish an Effective Governance System

Assessment and Planning

Conduct a comprehensive assessment of the company’s current situation.

Identify gaps in current governance practices.

Develop a clear action plan with specific objectives.

Developing the Regulatory Framework

Establish a balanced board of directors or advisory committee.

Clearly define roles and responsibilities.

Create written policies and procedures for governance.

Implementing Monitoring and Follow-Up Mechanisms

Develop an internal control system.

Create specialized committees (e.g., an audit committee).

Implement a risk management system.

Building a Governance Culture

Train employees on governance principles and practices.

Promote values of transparency and accountability.

Develop effective communication channels with stakeholders.

How to Implement the Governance System

Start Gradually: Implement basic practices first and then gradually expand.

Comprehensive Documentation:

Prepare a governance manual.

Document policies and procedures.

Establish a code of conduct.

Ongoing Review and Improvement:

Conduct periodic assessments.

Update practices based on findings.

Utilize feedback from stakeholders.

Challenges and How to Overcome Them

Small and medium enterprises face challenges in implementing governance, such as:

Limited Resources

Resistance to Change

Lack of Expertise

These challenges can be overcome by:

Starting with small, well-planned steps.

Seeking external expertise when necessary.

Focusing on long-term benefits.

In a world characterized by continuous change and increasing competition, corporate governance is no longer a luxury reserved for large companies; it has become a strategic necessity for small and medium enterprises seeking growth and sustainability. Adopting a gradual and thoughtful approach to implementing governance practices, considering the specific circumstances and capabilities of each company, can lead to a positive transformation in their performance and capabilities. Ultimately, investing in the development of an effective governance system is an investment in the company’s future and its ability to face tomorrow's challenges. Implementing an effective governance system is a strategic investment for small and medium

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Claim Your VAT Refund: Expert Guidance for Swift Processing

Recovering value-added tax (VAT) is a vital part of your company’s financial strategy. While getting your VAT back can improve cash flow and overall financial health, the recovery process can often be complicated.

Many businesses in the UAE encounter delays and issues that can make it difficult to receive their refunds on time. This guide will help you understand your rights regarding VAT refunds and provide practical tips to speed up your application process.

Know the steps and eligibility criteria to make your VAT refund smoother

To make the VAT refund process smoother, it’s crucial to know your eligibility and the necessary steps involved. Here’s what you need to keep in mind:

Is your business eligible for VAT refunds?

Not every business qualifies for VAT refunds. Generally, you can claim a refund if:

You have paid VAT on purchases related to taxable supplies.

Your VAT input (what you paid) is greater than your VAT output (what you collected) during a specific tax period.

You are a non-resident business that has paid VAT in a country where you don’t have a business presence.

Documentations you need for a successful refund process

Tax Invoices: These should include your details, the seller’s details, and the VAT amount paid.

Credit Notes: If you have returned any goods or services, ensure you have the relevant credit notes.

Supporting Documents: This can include contracts, customs declarations and exit certificates, payment confirmations, and any other documents that support your claim.

Save time and resources by complying with FTA regulations

Timely and accurate submission of your VAT refund files is critical. You need to follow the Federal Tax Authority (FTA) regulations to avoid:

Delays in processing your refund.

Possible penalties for non-compliance.

Common challenges leading to delays

Even with careful preparation, several factors can slow down your VAT refund. Here are some of the most common challenges:

1. Incorrect tax positions

Claiming ineligible input tax credits or failing to follow valid tax positions can get rejection of your refund application. Make sure all your claims are based on proper tax positions to avoid problems.

2. Non-compliant documentation

Incomplete or inadequate documentation is a major cause of delays. Ensure that all your tax invoices, credit notes, and supporting documents meet FTA requirements. Missing or incorrect paperwork can lead to extended processing times.

3. Lack of reconciliation

If you don’t regularly reconcile your books with your VAT returns & Customs statistical reports/ records, discrepancies can arise, leading to delays. Regular reconciliation helps keep your financial records in line with your VAT submissions.

4. FTA investigations

Large refund amounts or first-time VAT claims may trigger an investigation by the FTA. While this is standard procedure, it can significantly slow down your refund process. Being aware of this possibility can help you prepare.

Steps to Expedite Your VAT Refund Process

To ensure your VAT refund process goes smoothly, consider these steps:

1. Comprehensive review

Start by thoroughly reviewing your VAT returns, working papers, and refund calculations. This ensures you have enough documentation to support your claim and helps you spot any discrepancies.

2. Data preparation

Gather all necessary data and documentation required for your VAT refund application ahead of time. Organizing this information in advance will streamline the submission process and reduce errors.

3. Identify non-compliance

Take a close look at your business activities to identify any instances of VAT non-compliance. Addressing these issues early on can help optimize your processes and avoid complications later.

4. Timely submission

Submit your VAT refund application promptly and accurately to kick off the 20-day inquiry period set by the FTA. Delays in submission can lead to longer processing times, so aim to submit your application as early as possible.

5. Address queries efficiently

Good communication with the FTA is key. Respond to any queries they may have quickly and manage all correspondence efficiently. This proactive approach can help speed up your refund.

6. Seek professional assistance

Given the complexities of VAT refund claims, consulting experts can be extremely beneficial. Professional assistance ensures that your submissions are accurate and compliant, minimizing the risk of delays.

MBG's Expertise in VAT Refund Claims

At MBG, we understand that claiming VAT refunds can be a challenging task for many businesses. Our team of experienced FTA approved tax agents is here to help ensure your VAT claims are accurate, well-supported, and submitted on time. Here’s how we can assist you:

Tailored guidance

We provide personalized advice tailored to your specific business needs. Our experts will guide you through the complexities of VAT regulations, helping you maximize your eligible refunds.

Documentation support

Our team will help you compile and review all necessary documents, ensuring compliance with FTA regulations. This reduces the risk of delays caused by insufficient or incorrect paperwork.

Ongoing compliance monitoring

We offer continuous monitoring of your VAT compliance, keeping you updated on any changes in regulations that could impact your refund process.

Training and resources

MBG also provides training and resources to help your team understand VAT regulations and best practices to be adopted for VAT refund process. Equipping your staff with knowledge can lead to a more efficient refund process.

Conclusion

To expedite your VAT refunds and avoid unnecessary delays, it’s essential to comply with FTA requirements, maintain proper documentation, and submit accurate applications. By adopting the right strategies and seeking professional guidance, you can ensure your VAT refund process is efficient and timely, positively impacting your cash flow and overall financial health.

Contact MBG’s team of Tax Agents today to optimize your VAT refund process and confidently navigate the complexities of indirect taxation. Together, we can help you reclaim your VAT effectively and efficiently.

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A Comprehensive Guide to Freezone vs. Mainland Company Setup in 2024

The UAE has established itself as a global hub for businesses, offering a wealth of opportunities across various sectors. Entrepreneurs looking to set up shop in the UAE are often faced with a crucial decision: choosing between a business setup in a freezone or a company setup in the mainland. Each option comes with its own set of advantages and challenges. This guide aims to break down the key differences, benefits, and considerations for both setups, helping you make an informed decision in 2024.

1. Understanding Freezone vs. Mainland Company Setup

What is a Freezone Company?

A business setup in a freezone involves operating in a designated area that offers specific economic incentives and advantages. The UAE is home to over 45 freezones, each catering to different industries such as technology, media, finance, and manufacturing. Freezones are governed by their own regulatory bodies and offer businesses a flexible environment with benefits that include 100% foreign ownership, tax exemptions, and ease of import/export.

What is a Mainland Company?

A company setup in the mainland, also known as an onshore company, allows businesses to operate throughout the UAE without restrictions on trade locations. Mainland companies are regulated by the Department of Economic Development (DED) of each emirate and require compliance with specific UAE commercial laws. Mainland companies can trade both within the UAE and internationally, making them a popular choice for businesses looking for flexibility and broader market access.

2. Benefits of Freezone Company Setup

When considering a business setup in a freezone, the advantages are clear, especially for businesses looking for complete control over ownership and operations. Some key benefits include:

1. 100% Foreign Ownership

One of the biggest advantages of a company setup in a freezone is the ability for foreign investors to own 100% of the business. Unlike in the mainland, where certain business activities may require a local sponsor or partner, freezone companies can be wholly owned by non-UAE nationals.

2. Tax Benefits

Freezones can offer 0% corporate tax (based on the business model), which is a significant incentive for businesses looking to optimize their profitability. Additionally, companies in freezones are exempt from import and export duties, making them an attractive option for businesses involved in trade and logistics.

3. Streamlined Setup and Licensing

Setting up a company in a freezone is typically faster and more straightforward compared to the mainland. The regulatory bodies within freezones are designed to facilitate quick business setup in freezones, often with minimal bureaucratic hurdles.

4. Specialized Business Clusters

Many freezones are designed to cater to specific industries, such as Dubai Internet City for tech companies or JAFZA for logistics and trade. This creates a thriving ecosystem of industry-specific resources, expertise, and networking opportunities.

3. Advantages of Mainland Company Setup

While freezones offer specific advantages, a company setup in the mainland provides broader opportunities for businesses that require access to the UAE market. Some of the key advantages include:

1. Unrestricted Trade

Mainland companies have the flexibility to operate anywhere in the UAE, including both freezones and local markets. This is particularly beneficial for retail businesses, restaurants, and other service-oriented companies that need to interact with the local population. Freezone companies, on the other hand, may face restrictions when dealing with mainland markets unless they appoint a local distributor.

2. Broader Customer Base

With a business setup in the mainland, companies have access to the entire UAE market. They can engage in contracts with government entities, bid for large-scale projects, and operate retail outlets, providing greater flexibility and market reach.

3. No Restriction on the Number of Visas

Mainland companies can issue an unlimited number of visas, subject to office space and other DED requirements. Freezone companies may be limited by the size of their office space or type of business activity when it comes to visa quotas.

4. Key Differences Between Freezone and Mainland Business Setup

Understanding the core differences between business setup in a freezone and company setup in the mainland will help in making an informed decision.

Feature

Freezone

Mainland

Ownership

100% foreign ownership allowed

Foreign ownership allowed with some activities

Business Scope

Limited to freezone unless local distributor is appointed

No restrictions on business location

Taxation

0% corporate and income tax

Subject to VAT (5%) and potential corporate tax

Office Space

Office required within freezone

Office space required in mainland UAE

Visa Quotas

Limited based on office size

No limits, subject to DED approval

Market Access

Limited to freezone unless local distributor is used

Full access to UAE markets

Trade with Government

Limited

Full access to government contracts

5. Cost Considerations

The cost of setting up a company varies between business setup in freezones and company setup in the mainland. While freezone setups typically have lower setup fees, businesses that require multiple visas, larger office spaces, or unrestricted access to the UAE market may find the additional costs associated with a mainland setup worthwhile. Here’s a general breakdown:

Freezone Setup Costs: Freezones typically have lower initial setup costs and offer packages for startups, small businesses, and even virtual offices. The fees start from AED 6,000 and varies depending on the specific freezone and business activity.

Mainland Setup Costs: Mainland setups often come with higher initial fees, especially for businesses requiring physical office space and more visa quotas. The costs for mainland setup can start around AED 14000 and go upwards depending on the business activity and location.

Which Option is Right for You?

The decision between business setup in a freezone and company setup in the mainland ultimately depends on your business needs, industry, and growth plans.

If you’re looking to target international markets, benefit from tax exemptions, and prefer industry-specific zones, a freezone company may be the best fit.

However, if your business requires unrestricted access to UAE markets, the ability to trade locally, and greater flexibility in business activities, a mainland company would be the ideal choice.

By understanding the differences, benefits, and costs associated with each setup, businesses can strategically plan their company setup in the UAE and leverage the nation’s world-class infrastructure and economic opportunities in 2024.

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Key Updates and Compliance Strategies for Economic Substance Regulations from the MoF

The economic substance regulations (ESR) were introduced by the UAE’s Ministry of Finance (MoF) to align with global standards on transparency and prevent harmful tax practices. These regulations ensure that UAE-based businesses conducting certain activities have substantial economic presence in the country, rather than simply benefitting from tax advantages. Adhering to these rules is crucial for avoiding penalties and safeguarding the business’s reputation.

In this comprehensive guide, we will walk you through the MoF Economic Substance Regulations ESR, recent updates, compliance strategies, and the penalties that companies face for non-compliance.

Understanding UAE ESR Compliance Requirements

Under the UAE ESR compliance requirements, businesses that engage in “Relevant Activities” such as banking, insurance, shipping, intellectual property, lease finance, holding companies, and distribution and service center must meet certain economic substance criteria. Companies must demonstrate that they are conducting core income-generating activities (CIGAs) in the UAE, which involves having sufficient employees, physical assets, and incurring expenditure in the UAE proportional to the income generated from these activities.

Businesses are required to:

File an ESR notification annually through the Economic Substance Regulations UAE online MOF portal.

Submit an Economic Substance Report outlining their compliance with the regulations.

Pass the Economic Substance Test in UAE, which assesses whether the company has sufficient economic presence in the UAE.

Non-compliance with these requirements can result in ESR penalties and fines UAE, including the exchange of information with foreign tax authorities, damaging a company’s reputation internationally.

ESR Penalties and Consequences for Non-Compliance

The UAE Economic Substance Regulations impose various penalties for non-compliance, ranging from fines to more serious administrative actions. These include:

Failure to Submit ESR Notification:

Penalty: AED 20,000

Consequence: Non-filing will lead to immediate penalties and increased scrutiny for future compliance.

Failure to Submit the Economic Substance Report:

Penalty: AED 50,000

Consequence: Businesses that fail to submit their Economic Substance Report will not only face penalties but could also be reported to international tax authorities.

Failure to Meet the Economic Substance Test:

Penalty (First Year): AED 50,000

Penalty (Subsequent Year): AED 400,000

Consequence: Failing to meet the Economic Substance Test can result in heavy fines and, in severe cases, the suspension or non-renewal of the company’s business license.

Providing Inaccurate Information:

Penalty: AED 50,000

Consequence: Providing false or misleading information in the ESR notification or Economic Substance Report can result in severe financial penalties and reputational damage.

Failure to Maintain Proper Records:

Penalty: AED 50,000

Consequence: Businesses must keep detailed records of their core income-generating activities (CIGAs). Failure to maintain these records can lead to audits and further penalties.

Other Consequences:

Exchange of Information: If a business is found non-compliant, the Ministry of Finance may exchange information about that company with foreign tax authorities. This could affect a company’s international reputation and operations.

License Suspension or Revocation: The Ministry of Finance may take administrative action, including suspending or revoking business licenses, especially for repeat offenders.

Compliance Strategies for UAE Businesses

To avoid penalties, companies should adopt a proactive approach toward compliance. Here are several strategies that will ensure businesses meet all UAE ESR compliance requirements:

Follow a UAE ESR Compliance Checklist: Having a thorough UAE ESR compliance checklist is essential. The checklist should cover all aspects, from ESR notification filing to passing the Economic Substance Test in UAE. Monitoring submission deadlines and ensuring all relevant documents are prepared is vital to avoiding penalties.

Seek Filing Assistance: ESR filing assistance UAE can ensure that your business submits accurate Economic Substance Reports on time. Assistance can also help mitigate the risk of providing incorrect information, which could otherwise lead to penalties.

Regular Audits: Conduct Economic Substance compliance audits UAE to ensure that your business is consistently meeting the economic substance requirements. This is particularly important for businesses in UAE free zones or offshore entities that are subject to increased scrutiny.

How MBG Can Help: ESR Compliance Services UAE

At MBC Legal Consultants, we provide specialized ESR compliance services to help businesses navigate the complex MoF Economic Substance Regulations framework.

Our services include:

ESR advisory services: Tailored guidance to help businesses understand their obligations.

Filing assistance: Helping companies with timely ESR notification filing UAE and Economic Substance Notification and Report submission.

ESR audit services UAE: Conducting thorough audits to assess compliance with the UAE Economic Substance Regulations.

Legal support: Offering legal advisory services on how to meet ESR compliance requirements UAE, ensuring your business is fully compliant with UAE ESR laws for businesses.

As Economic Substance Regulations continue to evolve, businesses need to stay informed and compliant to avoid penalties and reputational damage. The consequences of non-compliance are severe, with significant fines, administrative actions, and possible international repercussions.

By adopting compliance strategies, including seeking UAE ESR advisory services and leveraging professional help for ESR filing assistance, businesses can ensure they meet the MoF Economic Substance Regulations. Contact MBG Legal Consultants for expert assistance in navigating the complex requirements and ensuring that your business stays compliant.