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UAE company law change opens the door to tax-advantaged incentives for UK companies with a UAE subsidiary

Posted on 10 June 2024

Companies wishing to implement the UK statutory tax-advantaged Enterprise Management Incentive (EMI) to award share options to their UK employees and/or wishing to secure eligibility for Enterprise Investment Scheme (EIS) tax relief for their angel investors are ineligible for such prized arrangements if the corporate group has a non-qualifying subsidiary.

Historically, the United Arab Emirates (UAE) has been a jurisdiction which has proven problematic in this regard, due to local law requirements previously requiring control of a UAE entity to be held by a local Emirati.

The UAE implemented changes to Article 10 of the Commercial Companies Law, which came into force on 2 January 2022, to allow foreign nationals to have up to 100% ownership in onshore UAE companies.  The company ownership and foreign investments provisions were already incorporated into Federal Law No. 26 of 2020 and Federal Law No. 32 of 2021 codified these previous amendments.

Additionally, the new law no longer requires companies to have a UAE national or a local company as registered agents. With the previous requirement of minimum 51% shareholding of a UAE national gone, foreign investors can now fully establish a business in UAE, unless undertaking specific “Activities of Strategic Effect”, as defined in the Strategic Impact Resolution.

This means that companies who have previously been ineligible for EMI and EIS might now become eligible, if they are able to avail of the UAE law change to increase the group parent's ownership interest to a controlling interest.

The qualifying subsidiary test

Companies wishing to grant tax-advantaged EMI options must meet certain requirements. As EMI is very flexible and tax-efficient, it is the employee share plan of choice for qualifying entrepreneurial businesses and any alternative equity incentive is going to be less attractive. It can therefore come as a great disappointment if the qualifying conditions can’t be met.

One of the requirements is that all of an EMI company’s subsidiary companies must be “qualifying subsidiaries”. This usually means that the EMI company (i.e. the group parent company) must hold more than 50% of the share capital in any subsidiary and have control over that subsidiary. If this condition is not met, then options granted would not qualify for EMI tax-advantaged status.

If a company already has an EMI arrangement in place, changes to the group structure, for example the introduction of a new subsidiary or joint venture entity, may mean that the business cannot grant any more EMI options. A similar requirement applies for EIS purposes.

In Hunters Property PLC v HMRC 2018 UKFTT 0096 (TC) the case related to the EIS requirements, however the issues analysed in this case also have relevance to the test applied for EMI options.

The case considered (i) whether the EIS company controlled another entity ("G") which had been acquired after an EIS investment round; (ii) whether G was a subsidiary; and (iii) whether G was a “qualifying subsidiary” under the EIS legislation. G was a company limited by guarantee (i.e with no share capital).

It was held that the EIS company controlled G, because an intermediate subsidiary was the sole member of G. Further, the EIS share issuer company had the power to remove directors and appoint a majority of directors, which amounted to indirect control of G. G was therefore a subsidiary within the meaning of the Companies Act 2006.

However, G could not be a “qualifying subsidiary” because nobody could hold more than 50% of its share capital.I It was constituted by guarantee and not by share capital. Consequently, the acquisition of G scuppered the EIS tax relief eligibility.  

In an EMI eligibility context, such an occurrence would not have retrospectively disqualified subsisting EMI options already granted but would prevent the grant of any further qualifying EMI options.

Time to take a fresh look at your corporate group structure to optimise incentives

Commercial needs can sometimes mean entrepreneurial ventures take an expedited route to setting up in new jurisdictions when expanding geographically. The full impact of how a particular new entity is constituted is not always fully thought through at the time and problems can sometimes only come to light during an exit event due diligence process, at which point it is often too late for any remedial action or meaningful mitigation.

Entities that are joint ventures, companies limited by guarantee, LLCs and limited companies in jurisdictions where local laws mandate local agent controlling interest ownership can all present red flag risk and unexpected tax exposure.

The good news is that the UAE is opening its doors to foreign trade and becoming more flexible in relation to local entity ownership requirements. If your group structure has, or is going to have, a UAE corporate presence then it might be time to revisit eligibility for EMI and EIS as the historic barriers to entry are lifting. There is still a need to check whether the particular commercial activity will qualify a local UAE entity for access to the more flexible foreign ownership regime but a broad range of sectors and commercial activities are now eligible.  

This is also a cautionary note to not just bolt on a new entity to your group without a wider review of the collateral consequences.

For further information contact Incentives Partner Liz Hunter.

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