Explore the unique challenges and complexities that arise in the field of M&A accounting within the United Arab Emirates. Gain insights into regulatory hurdles, cultural nuances, and financial intricacies to make your UAE mergers and acquisitions a success.
Technology companies in the UAE will typically be structured as private companies limited by shares. In the UAE there are multiple free zones (over 40 currently), a number of which are technology-focused. The Dubai Technology and Media Free Zone incorporates a number of areas including the Dubai Internet City, which houses many of Dubai’s local and multinational technology companies. For companies looking to do business with onshore UAE companies, it is preferable to establish a company, which will typically be a limited liability company. Also, it is good to hire an accounting firm in the UAE for tax reasons.
It is becoming increasingly common where companies looking to develop a regional footprint to establish a holding company in the Dubai International Financial Centre (DIFC) or the Abu Dhabi Global Markets (ADGM). This then provides greater flexibility in the future should a sale be contemplated as it avoids issues such as that referred to above.
ii Deal structures
Acquisitions of technology businesses in the UAE are most commonly structured as share acquisitions. There are a number of drivers for this:
- the intellectual property is likely to be held by the target company being sold or it will have rights over such intellectual property, or both – this becomes particularly relevant where the development of the technology being sold has been outsourced to consultants;
- there is no requirement to assign or novate contracts, which means in practice less disruption for customers and suppliers;
- value-added tax and corporate tax in the UAE have only been in effect since 2018 in the UAE and corporation tax only being applicable for financial years on or after 1 June 2023 (as currently proposed), therefore there have been limited concerns about historic tax liabilities to date;
- employees do not automatically transfer under an asset transaction and their employment is therefore terminated as part of an asset transfer, which ultimately means employees may not transfer as part of an asset transfer; and
- the target company is likely already to have the relevant licenses in place to carry on its business activities within the UAE.
The exception to the above may be where the technology being acquired is a division of a seller and is being sold as a discrete asset. The benefit of an asset sale is that the buyer can cherry-pick the assets being acquired and, importantly, elect to leave real or contingent liabilities with the target company (e.g., in connection with any disputes).
Given the early-stage nature of technology companies and particularly in light of recent challenges on valuations, there is an increasing desire from buyers to structure transactions with some form of earn-out or clawback provision should the business not perform in line with the seller’s projections.
iii Acquisition agreement terms Consideration and pricing
Private acquisitions in the UAE are increasingly being structured by way of an internationally recognized pricing mechanism. This is on the basis of either locked box or completion accounts. Depending on the structure and context of the transaction. It is also normal to expect consideration payment to include an element of deferred consideration or an earn-out mechanism.
Risk allocation and UAE M&A accounting complexities
The UAE market has developed a common law approach to buyer protection by way of warranties and indemnities. Also, in our experience, technology-related M&A transaction documents are governed by English law (or a law applying English law directly or conceptually. Things such as ADGM or DIFC laws), and the relevant English law practices and remedies in relation to warranties and indemnities would apply.
Under UAE law, it is accepted, however, that any contractually agreed terms will be generally honored by the UAE courts. Therefore, it is important to have clearly drafted terms of the contract. Things including the operation, and remedies for any breach, of warranties or indemnities.
Warranty and indemnity insurance (W&I) and UAE M&A accounting complexities
is becoming more popular in the UAE and, as transaction volumes increase, the premiums attached to such policies are reducing. Buy-side W&I is prevalent in technology M&A. Also, particularly where sellers are founders of start-up technology businesses. This gives the buyer comfort in recovering any loss in the event of a breach of warranty or indemnity (subject to such loss being covered by the insurer under its policy terms).
Limitations on liability are invariably included in any technology M&A document to mitigate the seller’s risk. Under the Civil Code, such limitations are generally permitted to be contractually agreed upon. This includes fixing compensation. However, Civil Code 5 provides for any limitation to be varied to reflect the actual loss suffered. Therefore, it is important for parties contracting under UAE law to be aware of these discretionary measures available to the UAE courts.
Good faith and Dubai merger financial hurdles
Under the Civil Code,6 there is an obligation for parties to perform a contract in a manner consistent with good faith. There is no statutory definition of good faith. However, parties must embrace the law, customs, and nature of the transaction in this regard. Also, they must consider the rightful interests of the other parties.
Interim protection and Dubai merger financial hurdles
Any M&A transaction is likely to have a gap between exchange and completion owing to the UAE’s local regulatory requirements for approval of the transfer of certain assets, particularly in relation to the transfer of shares.
Therefore, it is commonplace to have interim protections for the buyer on the seller’s activities in this interim period. Many interim periods are short in nature and, therefore, do not necessitate any ‘material adverse change’ protections. However if certain regulatory approvals (such as from the Ministry of Health and Prevention or the UAE Central Bank). There are conditions to completion. This may lead to longer periods between exchange and completion and require ‘material adverse change’ provisions to protect the buyer.
Dispute resolution and governing law for UAE M&A accounting complexities
M&A transactions in the UAE are undertaken utilizing the usual forums of dispute resolution, including arbitration and the courts. Contractual parties have the freedom to agree on these matters. Except in relation to employment, criminal matters, commercial agency, or public policy. Such matters shall always be subject to UAE law and decided by the UAE courts.
Given the international nature of the UAE and the businesses existing there. Parties often agree on a governing law and dispute resolution forum familiar to them. The courts of the ADGM7 and the DIFC,, are familiar with hearing complex English law disputes. Therefore, contracts are often governed by English law but are heard in ADGM or DIFC courts. We note that arbitration, given its more private nature, is also frequently used. Also, various well-established arbitral forums are available in the UAE. These include the ADGM Arbitration Centre or the Dubai International Arbitration Centre, which recently absorbed the DIFC-LCIA Arbitration Centre9.
iv Financing and Dubai merger financial hurdles
Typically, technology-related M&A in the UAE (and the wider Gulf region) is early-stage. Therefore, debt funding is unlikely to be available for the acquisition. It is more usual for technology M&A transactions to be self-financed by acquirers through existing cash resources. There are an increasing number of venture funds that are seeking to deploy significant capital in the technology sector in the UAE and wider Gulf region.
Corporate Tax in the UAE and accounting
The UAE introduced corporate on 1 January 2018 with a standard rate of 5 percent. However, some transactions are ‘taxed’ at a zero rate and others are UAE corporate exempt. The Federal Tax Authority has also published compliance guides and clarifications. These confirm the VAT treatment of supplies and recovery of input VAT. Corporate tax in the UAE is not payable on a transfer of shares. Also, importantly, the transfer of assets makes up a whole (or independent part of a) business. The reason is as a going concern will be exempt from corporate tax in the UAE. This is subject to it meeting all related requirements (which may require specific tax advice). Therefore, M&A asset transfers that are in connection with a going concern business will not attract a VAT charge. However, otherwise cherry-picking asset transfers are likely to be subject to corporate tax in the UAE.
Corporation tax for all sectors was introduced to the UAE on 1 June 2023. This follows from the UAE’s role as a leading economic power in the region. There are exceptions for foreign oil and gas companies and branches of foreign banks, where corporation tax is already applicable.