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DISTRIBUTION AGREEMENTS IN THE MENA REGION: NAVIGATING KEY LEGAL CHALLENGES

Distribution agreements in the MENA region are crucial for businesses looking to expand their market presence. These agreements typically involve appointing local agents or distributors who understand the regional market dynamics, navigate bureaucratic challenges, and leverage their contacts to facilitate business operations. However, the legal landscape varies across countries, with specific regulations governing exclusivity, compensation, and termination of agreements. Companies must carefully negotiate these contracts to mitigate risks and ensure compliance with local laws Dubai: This article provides an overview of the complexities of distribution contracts in Morocco, Algeria, Egypt, and Saudi Arabia. It highlights the risks foreign companies face when entering into commercial agency and distributor agreements in the MENA region and offers guidance on mitigating these risks. Key Difference between Commercial Agents and Distributors Commercial Agents: These individuals conclude commercial transactions in the name and on behalf of another company for a commission, thereby establishing a customer base for that company. Distributors: Unlike commercial agents, distributors purchase goods from a company at discounted prices and resell them in their own name, earning through the profit margin. Different regulations apply to commercial agents and distributors, as the former are generally more in need of protection. Key Considerations for Distribution Contracts in the MENA Region 1. Exclusivity Algeria: Exclusivity in distributor contracts is prohibited under competition law. Morocco: Exclusivity is permissible, but commercial agents are entitled to commissions on exclusive contracts even if they do not directly conclude sales. Egypt: Exclusivity applies to commercial agency contracts unless explicitly waived. Saudi Arabia: Exclusivity is not mandatory but is enforced if agreed upon. Certain products may require exclusive agreements. However, the Ministry of Commerce may rescind exclusivity if it restricts competition or causes inefficient distribution. 2. Nationality Restrictions Egypt and Saudi Arabia: Commercial agents must be Egyptian or Saudi nationals. In Saudi Arabia, the draft law may allow foreigners to act as agents or distributors if licensed by the Ministry of Investment and Commerce. 3. Termination Challenges Termination of commercial agency or distributor agreements is often difficult, even in cases of contractual breaches. To avoid prolonged disputes: Include clear termination clauses outlining material breaches. Limit exclusivity to specific products or regions to prevent potential blockages upon termination. 4. Registration Requirements Saudi Arabia: Commercial agents and distributors must register with the Ministry of Commerce. Foreign agents may also need to register with the Ministry of Investment under the draft law. Egypt: Only commercial agents require registration. Non-registration is subject to fines but does not invalidate the contract. 5. Notice Periods Morocco: Notice periods increase with the contract duration, starting at one month in the first year and increasing to three months from the third year onward. Egypt: Notice periods should be explicitly defined in the contract, as there are no default legal provisions. 6. Claims for Compensation High compensation claims are common upon contract termination, especially in Egypt, where the law protects agents for damages caused by non-renewal or termination. 7. Parallel Imports and Enforcement Issues Despite exclusivity agreements, parallel imports are not always preventable. Companies should register intellectual property rights locally and consider legal action to enforce compliance. Dispute Resolution and Jurisdictional Challenges Dispute resolution in the MENA region can be complex, as local courts may disregard choice of law clauses. Morocco: Does not allow choice of law clauses in distribution contracts. Egypt: Commercial agency agreements are mandatorily subject to Egyptian law and jurisdiction. Saudi Arabia: Courts often apply Saudi law to disputes, even if foreign law is specified in the contract. Arbitration is often a more reliable alternative, as arbitral awards are generally easier to enforce in the MENA region than foreign court judgments. Conclusion Distribution agreements in the MENA region present unique opportunities and challenges for businesses seeking to expand their market presence. By understanding the legal framework, key considerations, and country-specific insights, companies can effectively navigate the complexities of these agreements and establish successful partnerships with local distributors. Careful drafting and negotiation of the agreement are crucial to mitigating risks and ensuring compliance with local laws, ultimately contributing to the long-term success and growth of the business. ALKETBI TOUCH Engaging our knowledgeable team of lawyers when drafting and negotiating the distribution agreements in the MENA region, will be a crucial factor of success. ALKETBI tailored drafting and review of agreements and customized advice regarding compliance with local regulations, ensuring that the agreement is legally sound and enforceable. We will offer strategic guidance on negotiating terms with local partners and mitigating potential risks, setting you up for success.

OMAN’S FINANCIAL SERVICES AUTHORITY INTRODUCES CAPITAL MARKET INCENTIVES PROGRAMME

The Financial Services Authority (FSA) of Oman has announced its Capital Market Incentives Programme (CMIP), a transformative initiative aimed at driving economic growth and attracting investment into the Sultanate. Muscat: Spanning five years, the CMIP focuses on key reforms to strengthen Oman’s capital markets and support the development of businesses across various sectors. Key Pillars of the CMIP The CMIP is built around three strategic paths: Facilitating New Public Joint-Stock Companies: The programme supports the establishment of public joint-stock companies by leveraging new and existing family businesses, creating a pathway for these entities to access additional capital and expand their operations. Promising Companies Market on the Muscat Stock Exchange (MSX): A dedicated market for promising companies will cater to businesses transitioning from Limited Liability Companies (LLCs) and family-owned entities seeking investment or strategic exits. This initiative provides SMEs with new opportunities for growth and access to funding. Encouraging LLC-to-Closed Joint Stock Company Transformation: The programme incentivizes LLCs to evolve into closed joint-stock companies, enhancing their governance and access to capital markets. Impact on the Muscat Stock Exchange (MSX) The CMIP’s reforms are poised to significantly enhance the MSX’s attractiveness for both local and international companies. Key measures include: Tax Incentives: The Ministry of Finance has introduced income tax incentives, while the Tax Authority now allows the payment of income tax in instalments for up to six months from the due date. Government Tendering Benefits: Tendering authorities will give preference to listed companies, benefiting businesses frequently involved in government procurement. Regional and International Investment Appeal: Listed companies can leverage financial incentives to attract regional and global investors. The reforms will likely enhance the perception of Oman’s market among international investors and rating agencies. The Promising Companies Market: A Gateway for Growth The newly established Promising Companies Market on the MSX aims to support businesses that have outgrown their LLC status or seek additional investment. Key benefits include: Access to Funding: SMEs and family-owned entities can secure funding that was previously inaccessible, facilitating growth and expansion. Path to the Primary Market: Over time, this market is expected to serve as a stepping stone for companies to transition to the primary market, contingent on sufficient liquidity and a steady supply of listed companies. Sectoral Impact The CMIP will particularly benefit sectors not traditionally regulated by industry-specific bodies, including mining, construction, technology, and real estate. Family-owned businesses in these industries stand to gain significantly from the programme’s reforms and incentives. Looking Ahead The CMIP marks a significant step in advancing Oman’s capital markets. However, its success will depend on regular collaboration between the FSA, market participants, and other stakeholders. Continuous interaction will be crucial to ensure companies maximize the available incentives and embrace the opportunities created by these reforms. By fostering a dynamic and inclusive capital market, Oman’s FSA is paving the way for sustainable economic development and enhancing the Sultanate’s investment landscape. In Conclusion The introduction of Oman’s Financial Services Authority’s Capital Market Incentives Programme marks a significant milestone in the Sultanate’s economic development strategy. This initiative not only aligns with the goals of Oman Vision 2040 but also strengthens the financial infrastructure, paving the way for a more robust and diversified economy. As the programme unfolds, it promises to create new opportunities, enhance market liquidity, and contribute to the sustainable growth of Oman’s capital market. ALKETBI TOUCH Our team of consultants and experts can be instrumental in helping you take advantage and participate in such incentivized program providing tailored advice on compliance with regulatory requirements, ensuring that clients fully leverage the available incentives by offering strategic guidance on market entry, structuring transactions, and mitigating risks, we can assist you in optimizing your investment opportunities and achieve your financial goals.

BAHRAIN INTRODUCES DOMESTIC MINIMUM 15% TOP-UP TAX FOR MULTINATIONAL ENTERPRISES

The Kingdom of Bahrain has announced the introduction of a Domestic Minimum 15% Top-Up Tax (“DMTT”), effective for financial periods starting on or after January 1, 2025. This move positions Bahrain as potentially the first Gulf Cooperation Council (GCC) country to implement Pillar Two of the Organization for Economic Cooperation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) initiative. The DMTT reflects Bahrain’s commitment to aligning with international tax transparency standards and combating harmful tax practices. Manama: This new tax regime is aimed at ensuring that multinational enterprises (MNEs) operating in Bahrain meet a minimum effective tax rate of 15%, aligning with the OECD's Global Anti-Base Erosion (GloBE) Model Rules under the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) 2.0. Overview of the DMTT The DMTT will be triggered when an MNE group’s annual consolidated revenue equals or exceeds EUR 750 million in the consolidated financial statements of the ultimate parent entity (UPE) for at least two of the four fiscal years immediately preceding that fiscal year. If the aggregate results of constituent entities (CEs) in Bahrain do not result in an effective tax rate (ETR) of 15%, Bahrain will impose an additional tax to bring the rate up to 15% The legal framework for the DMTT is outlined in Bahrain’s Decree Law No. 11 of 2024 (“DMTT Law”), with regulations expected to follow, detailing the application of the law. The DMTT Law emphasizes adherence to the OECD Pillar Two model rules for interpretation and implementation. Key Features of the DMTT Law Scope: The DMTT Law applies to Multinational Enterprises (MNEs) with global revenues of EUR 750 million or more in at least two of the last four financial years. The tax is imposed on taxable income and payable by a designated filing constituent entity within the MNE group. Excluded Entities: Certain entities are exempt from the DMTT, including government bodies, international organizations, non-profits, pension funds, and certain investment and real estate entities. However, revenues from these excluded entities are included when calculating the EUR 750 million threshold. Tax Computation and Effective Tax Rate (ETR) Taxable income is calculated based on the financial accounting net income or loss, adjusted per the DMTT Law. The ETR for entities in Bahrain is calculated using a prescribed formula. If the ETR falls below 15%, additional tax will be imposed to meet the minimum rate. The law allows for substance-based carve-outs for certain payroll costs and the carrying value of specific tangible assets. Substance-Based Income Exclusion: Payroll costs and the carrying value of tangible assets are excluded from the tax base under specific carve-out provisions. De-Minimis Exclusion: Entities with revenue under EUR 10 million and income below EUR 1 million may elect to be excluded, subject to certain conditions. Tax Registration: Entities subject to the DMTT must register with the National Bureau for Revenue (NBR). Registration deadlines are yet to be specified. Tax Returns and Payment: Filing entities are required to submit tax returns for the relevant financial year and make advance payments during the year. Additional installments may be required in the following financial year. Transitional Provisions: Deferred tax assets and liabilities, unless explicitly excluded, will be considered when determining the ETR for the filing constituent entity. Impact on Multinational Enterprises The introduction of the DMTT marks Bahrain as the first Gulf Cooperation Council (GCC) country to implement such measures. This move is expected to bolster Bahrain's tax sovereignty and curb potential revenue losses from foreign tax claims on Bahrain-sourced profits. The DMTT framework aligns Bahrain with the OECD’s core tenets while selectively avoiding the administrative burden of the income inclusion rule (IIR) and undertaxed payments rule (UTPR) In Conclusion The introduction of the Domestic Minimum 15% Top-Up Tax (DMTT) in Bahrain represents a significant step towards ensuring that multinational enterprises operating in the Kingdom meet a minimum effective tax rate of 15%. By aligning with the OECD's GloBE Model Rules, Bahrain aims to strengthen its tax framework and contribute to global efforts to curb base erosion and profit shifting. This new tax regime will have important implications for MNEs operating in Bahrain, requiring them to assess their effective tax rates and ensure compliance with the new regulations. ALKETBI TOUCH Our professional ready to assist MNEs in overcoming the complexities of Bahrain’s DMTT. With extensive experience in corporate tax across the Middle East and various industries, we provide tailored advice to help you comply with DMTT regulations and understand its implications for your organization. We can support you in achieving seamless compliance and optimizing your tax strategy under the new regime. Contact us for more…

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