MANDATORY ADOPTION OF NEW ARTICLES OF ASSOCIATION FOR DMCC
Under the new DMCCA Company Regulations 2020, a new Articles of Association known as the Standard Articles has been introduced, replacing the previous Memorandum and AOA. Companies registered before 2 January 2020 must adopt the AOA within twenty-four (24) months of the new DMCCA Company Regulations 2020 which came into effect on 1 January 2020.
Rules
• A DMCC Company, at any point after being registered and issued a License, may adopt new non-standard Articles by Special Resolution. The adoption of new Articles takes effect on their registration by the Registrar.
• A Company’s License must be valid at the time of submission of the application and until process is completed. The application will be put on hold if the License expires during the process until License is renewed.
• There should not be any active Company sanction.
• If at any time, the Registrar notifies a Company that, in the opinion of the Registrar, the Articles of the Company contain a provision, which is contrary to, or inconsistent with the CR 2020, that Company must amend its Articles within twenty (20) Business Days of such notification in such manner as the Registrar may direct.
• The new Articles must be deposited with the Registrar within 15 (fifteen) Business Days of the Resolution to adopt new Articles or such other date approved by the Registrar.
• Any rights and obligations of the Shareholders and/or the Company, which have arisen under the Articles prior to the adoption of the new Articles, will not be affected unless the new Articles specifically provide otherwise.
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A key highlight of the clarification is the direct impact it has on transactions and payments made to shareholders, directors, officers, owners, and related parties that are involved with the business. This will include:
- Salaries and bonuses
- Management fees and consultancy payments
- Allowances, reimbursements and benefits
Reinforcing the fact that the deductibility of these payments will not be limited to just where they were incurred, but will also consider if they can be commercially justified. Businesses now would have to demonstrate if the commercial terms linked to the payment are in line with the market value conditions. But the FTA has also further detailed the conditionality that businesses have to meet before the transaction will be considered deductible. The conditions are:
- The expense is for genuine business purposes;
- The amount is commercially justifiable; and
- The value is at market level.
Any excess over market value may be disallowed for Corporate Tax purposes.
Conclusion
For every business to properly function, it has to ensure that it maintains supporting documents for its decisions. The clarification by the FTA about Article 36 of the UAE Corporate Tax Law further puts this point into the spotlight. With respect to the market value, businesses are now expected to maintain documentation such as:
- Employment and service agreements
- Board resolutions
- Benchmarking and salary studies
- Job descriptions and role clarity
- Evidence of services rendered
The clarification becomes more than just a guideline that clarifies the terminologies. It shapes the corporate tax structure with the broader principle of substance over form.