UAE Trends and Developments Contributed by: Victoria Mesquita, Ganna Vlasenko and Aran Au, Curtis, Mallet-Prevost, Colt & Mosle LLP
Taxation The UAE implemented a value added tax (VAT), which entered into effect on 1 January 2018. VAT applies on the sale of goods and services in the UAE and on imports into the UAE. Unless the supply of goods and services falls within a cat - egory that is specifically exempt or is subject to the zero rate of VAT, VAT will apply at the stand - ard rate. The standard VAT rate in the UAE is 5%. More recently, UAE Federal Decree-Law No 47 of 2022 on the Taxation of Corporations and Busi - nesses implemented a new corporate tax regime in the UAE which applies to accounting periods starting on or after 1 June 2023 and imposes a 9% rate of tax on taxable income exceeding AED375,000. Given the new tax environment in the UAE, per - sons looking to structure a securitisation origi - nated in the UAE will need to consider several key taxation issues such as: • the taxation of the transfer of receivables by the seller to the issuer; • the extraction of profit in a tax efficient man - ner; • the taxation of the servicing arrangements between the servicer and the issuer, including whether a local servicer could create a tax - able permanent establishment of an offshore issuer; • transfer pricing; and • ensuring minimal or nil taxable profits at issuer level and minimal indirect taxation. Whether the issuer is located onshore or off - shore will be critical in addressing some of these issues.
adoption of Accounting and Auditing Organisa - tion for Islamic Financial Institutions standards in the UAE, and therefore the Sharia rules regard - ing debt trading will apply to onshore securitisa - tions originated or otherwise sold to UAE Islamic financial institutions. Tranching A key feature of many securitisations is the tranching of liabilities of the issuer. By issuing various classes of securities with different levels of priority and return, investors who own the top tranches are senior in right of payment and insol - vency to the more junior tranches at the bottom. The holders of lower tranches are compensated in turn for the increased risk with a higher return, thereby slicing up the risk and allocating it to dif - ferent sets of investors depending on their risk appetite. Tranching is also useful as a credit enhancement tool for the senior tranches, as the junior tranch - es are structured to absorb losses first thereby providing a “cushion” to the senior tranches in the same way as equity provides a loss absorb - ing “cushion” to debt claims. However, the effec - tiveness of tranching depends on the recogni - tion of subordination provisions. In the UAE, the effectiveness of subordination arrangements in insolvency remains largely untested. There has been a recent helpful decision from the Dubai Court of Cassation, upholding the validity of a subordination agreement. The Court also held that the subordinated creditor bears the burden of proof to show that the higher- ranking debt has been paid. In the context of an insolvency, however, the liquidator may decide to ignore any subordination agreement on the basis that the mandatory insolvency rules in the UAE require that all unsecured creditors be treated equally.
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