With the fast economic growth in emerging economies around the world, the Middle East has increased its awareness of stronger corporate governance in the past decade. Although the levels of sophistication in the governance laws and frameworks vary in the region, there has been a real focus on the implementation, as well as the enforcement of laws and requirements, pertaining to corporate governance in the Middle East.
Corporate governance in the Middle East is mostly driven by the need for more foreign direct investment in the non-oil producing countries. These countries are looking to invest in infrastructure and also in the creation of jobs. Many businesses in the Middle East are family-run and are now facing competition due to globalisation. These companies are now having to introduce and learn corporate governance systems, as well as professionalise the way they do business.
The latest UAE developments
There have been many corporate governance requirements that apply to private sector companies and are listed on the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM), and also to financial institutions regulated by the Central Bank of the UAE (Central Bank).
Corporate Governance Code
In 2009, the Securities and Commodities Authority (SCA), which regulates the ADX and DFM, introduced a new corporate governance regulation, applying to all joint stock companies listed on the Market.
The main points of the Corporate Governance Code are:
- At least one-third of directors must be independent directors and the chairman and managing director must be two individuals
- At least every two months there should be a meeting of the board of directors
- An audit committee and a nomination and remuneration committee must be formed
- A compliance officer must be appointed
- The board must have an internal control system to evaluate all implementations
- A yearly report must be submitted to the SCA.
Central Bank rules
The Central Bank of the UAE has a draft corporate governance law, issued in 2010. Although this was never officially made law, it has been implemented across the banks in the UAE, and is seen as the minimum standard by which Central Bank inspections will be based. There must be separation of ownership and control, and separation of board committees, such as audit and risk, as well as ensuring that board composition is similar to international standards.
The other provisions they must follow are:
- Appointing an independent chairman and CEO.
- The functions of the board of directors cannot overlap the general management roles.
- A Corporate Standards Manual must be created.
- Senior personnel are subject to approval by the bank
The Common Reporting Standard (CRS)
In response to a demand from the G20 nations for the implementation of a global standard for the automatic exchange of financial account information, the OECD developed a Common Reporting Standard (CRS) which was approved on 15 July 2014. The CRS is aimed at increasing tax compliance through a global automatic exchange of information between CRS-participating jurisdictions. It has also been endorsed by more than 100 jurisdictions, requiring them to obtain information from resident entities and automatically exchange that information with other jurisdictions on an annual basis. A list of countries that have committed to CRS can be found on the OECD website.
In accordance with the Cabinet Resolution 9 of 2016, the UAE government established the legal basis for the exchange of information in tax-related matters and committed to implementing in more detail:
- The Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC)
- The Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA).
CRS law requires financial institutions to obtain financial and personal information on their non-resident clients, and to automatically exchange specified reportable information on an annual basis with other relevant jurisdictions who have committed to the CRS. This automatic information exchange is a mandatory obligation, and in the UAE, the first reporting due date for the CRS is 30 June 2018 for calendar year 2017, and then by 30 June of the year following each reporting period. Reporting is an annual event.
CRS requires that all companies are classified for CRS purposes by passing a process of due diligence and analysis of the activity and structure, in compliance with the CRS criteria and definitions, in order to decide if reporting is required and what needs to be reported. Without CRS classification, it cannot be decided if there is any information to be reported or not.
Other legislative changes
There has recently been a cabinet decision that the UAE government will be reviewing the law on foreign ownership and company control. Currently, the majority of companies in the onshore UAE jurisdiction require a local Emirati partner or shareholder in order to set up their company. The proposed changes could reduce the barriers to entry for come companies, reduce business costs and further open the UAE market. These legal changes are under review, with possible implementation by year-end, and as yet we do not know what companies or sectors these changes will impact.
The UAE government is also suggesting extending the visa options for certain job titles / careers to allow 10 year visas (currently visas are renewable on a 2 or 3 year basis depending on the jurisdiction), this could allow certain nationalities to feel more secure in their future in the UAE. The changes are due to be applied by year end.
Stephanie Williams is legal and governance director, Middle East, at TMF Group
