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UAE businesses need to prepare for transition

June 9, 2016

After years of back and forth and speculation that the existing UAE commercial company law would be overhauled, Federal Law No. 2 of 2015 finally came into effect in July 2015. There was very little fanfare at the time of the announcement, probably because a compliance deadline of June 30, 2016 was allowed for.

Now with that date looming large on the horizon, UAE onshore companies should be sitting up and taking notice of the requirements and also the penalties for non-compliance.

The new law’s stated objective is to raise the levels of corporate governance, protection for shareholders, and the continued promotion of social responsibility of LLC (limited liability company) or public joint stock companies.

This is fantastic news for those of us who strongly believe that companies should maintain an accurate legal framework and financial information and it should provide a greater level of confidence in the UAE business community. Business owners will also have a greater understanding of their business models, break even points, profitability and liquidity.

So what are the most notable features you need to be aware of as an LLC business owner?

  • All companies are required to keep accounting records at their relevant head office for a minimum period of five years.
  • All companies are required to amend their existing memorandum and articles of association to reflect, and comply with, the changes introduced by the new Law.
  • LLCs are now permitted to be established as holding companies in order to conduct business solely through their subsidiaries.
  • The management of an LLC can be undertaken by one or more directors/managers as determined by the company’s memorandum and articles of association.
  • Other than with the consent of the general assembly of the company, a director/manager is not permitted to manage another competing company.

A director/manager is a person authorised to manage the company and must preserve the rights and works of the company with the care of a precise person. In addition, any provision in the company’s memorandum and articles of association exempting any director/manager from personal liability (that he/she bears in his/her capacity as an officer) is voidable.

How will the new requirements noted affect business owners?

Any company failing to make the necessary amendments to their memorandum and articles of association by the June 30 will be automatically dissolved. This stipulation covers the provisions for the number of managers of a company, non-compete by directors/managers and directors/managers duties.

Accounting requirements

Companies will be expected to accurately reveal, at any time, the financial position and enable shareholders to verify that the company’s accounts are being kept in accordance with the new Law.

The anticipated introduction of VAT in 2018 will also require accounting systems to be in place to capture and report VAT inputs and outputs. Establishing a robust and accurate accounting system will make the reporting and payment of VAT an easier task.

There will be investment required for accounting software and also a book-keeper or accountant if not already established. These will be new costs to the business and a rough estimate would suggest an annual cost of Dh80,000. This cost estimate takes into account salary, end of service gratuity, visa processing fees and annual flight ticket and accounting software.

The cost of compliance might seem high for an SME (small to medium enterprise), but there is an alternative. Outsourcing accounting to a third-party can save up to 40 per cent of the costs outlined previously. Iti also means not having to recruit a full-time member of staff and compliance with the new law can be achieved smoothly and professionally.

A review of your company’s memorandums and articles of association should be undertaken by a suitably qualified lawyer. This review will ensure your memorandums and articles comply with the new Law’s requirements and thus avoid any threat of the company being dissolved. In line with this a review of the corporate structure of the business would be advisable and manager contracts should be scrutinised.

For those with accounting systems in place a review of the reporting capabilities of systems employed should be undertaken. For those without an existing accounting system a free review by an outsourced accounting firm should be sought.

This review will highlight the data capture and reporting requirements of the company and will also recommend the right accounting software for your particular business. Retrospective accounts should be prepared and management should decide whether their ongoing accounting requirements are best met with an in-house accountant or through the use of outsourcing.

As the UAE continues to develop into a global standard market, improved corporate governance will be underpinned by further legislation and compliance requirements for companies.

Business owners should ensure they are aware of any changes introduced by the various government agencies and implement any new requirements to future proof their business and to improve their chances of achieving their stated strategic and commercial goals.

The author is Stephen Armitage Managing Partner, UAE Business Solutions.