New regulatory regime for the private school sector in Dubai

Authored by: Hadef & Partners, Sector Groups

H.H. Sheikh Hamdan Bin Mohammed Bin Rashid Al Maktoum, Crown Prince of Dubai and Chairman of Dubai Executive Council, has issued (in February 2017) Executive Resolution No. 2 of 2017 to regulate the private school sector in Dubai (“Resolution”).

The new Resolution establishes, among other things, a legal framework to improve and strengthen stakeholder’s interests in the private school sector including school operators, students, parents and investors in Dubai. The Resolution covers primary and secondary institutions and is designed to promote best international practices. It also reiterates and confirms the position of Dubai’s Knowledge and Human Development Authority (“KHDA”) to oversee all aspects of private schooling sector in Dubai.

The Resolution applies to all organisations that offer private primary and secondary schooling in Dubai, including those in private development zones, free zones and the Dubai International Financial Centre.

The Resolution gives the KHDA the authority to issue initial permits and licenses for private schools and to levy penalties in case of violations. For instance, among other things, developers or investors must obtain KHDA approval for new schools, the academic plan, the curriculum of the school and also the very important tuition fee structure for the school, and existing schools must obtain the KHDA’s approval for any amendments to their education permits, or to change a school’s name, address, buildings or facilities. The Resolution prohibits any interference in the school’s affairs from any party other than the operator or the principal (i.e. headmaster).

The Resolution has many important considerations for all private schools including the following:

1. Clear obligations on the various stakeholders including the school, operators and the principal;

2. Fines of up to AED150,000 for violations of the Resolution which will be doubled for repeat offences as well as possible suspension of student admissions, expansion plans or new stages for the school and also possible cancellation of educational permits; and

3. Increased responsibility and therefore liability arising out of school transportation over and above that already established by existing RTA and federal laws. 

The Resolution will be valid from the date it is published in the UAE official gazette, and all private schools in Dubai will then need to ensure they are complying with the articles of this Resolution within one year thereafter. Please let us know if you would like us to provide you with a copy of the Resolution.

Location and security of tenure: Two critical factors for direct investment in the education sector in Dubai

Developers, investors, operators and brand owners alike all value location extremely highly when deciding where to put much needed investment into the education sector. Because Dubai’s education sector is largely dominated by private schools, location doesn’t necessarily mean as much in Dubai as it does in other parts of the World where geographical location often dictates, to a large extent, the catchment base of students for the school. However, that doesn’t mean location isn’t one of the most critical factors in investment decisions for schools in Dubai.

Pursuant to Executive Council Resolution 2 of 2017 the KHDA has full control over the issuance of educational permits and this includes permits for new school developments, the academic plan, the curriculum of the school and also the very important tuition fee structure for the school. The KHDA will take into account many factors when ascertaining the suitability of a school for a particular area and this will likely include ensuring there is a match between the likely student base in the immediate geographic area and the propensity of their families to meet the tuition fees for a school of that particular academic curriculum.   

Equally important to investors and developers is protection of that investment and this is largely underpinned by the interest they hold in the underlying land and school buildings. There are various rights available for school investors, developers and operators, including the following:

1. Dubai Land Department (“DLD”) registered freehold interests, which is the strongest and most sort after real estate interest in Dubai. Historically, freehold interests in school zoned land has been difficult to obtain although we have seen several instances in freehold areas of Dubai where master developers have granted freehold ownership of school zoned land;

2. The next best real estate interest is long term leasehold DLD registered interests including  Musataha (development leases) or Usufruct interests (essentially a right of use and occupation without development) and long term registered leases. Each of these attracts different DLD registration fees which can be quite significant and therefore it is critical one plans with these fees in mind; and

3. In addition, Ejari registered leases for periods of up to 10 years are available from owners of either the freehold or long term leasehold interests, and such leases are subject to rent disputes committee oversight. .

Leasehold land is available from the Government of Dubai Knowledge Fund established in 2010 (the “Knowledge Fund”) as well as historically the Dubai Real Estate Corporation (“DREC”). The Knowledge Fund typically allows leases of short periods renewable at the option of the school up to a maximum number of renewals (i.e. 9 x 3 year terms) which is registerable. DREC leases however are typically documented in a standard, non-negotiable format, only on a year to year basis without any registerable interests and renewal is by mutual consent.

Although DREC leases have historically almost always been renewed without issue the reality is the land lease is only valid for a year at a time and therefore they are not the preferred land right for new schools entering the market, by investors looking to invest into existing schools or by funds looking to acquire real estate assets with the option of leasing the same back to the school. If schools do manage to secure long term registered rights to the land, then they will greatly enhance their ability in the future to monetize the real estate assets either through a sale and leaseback structure or by outright sale of the school business along with the land and buildings. 

Key VAT considerations for the education sector

The imminent effect of VAT on the education sector has been the topic of much speculation in recent weeks.

Many commentators had assumed that education would be exempt from VAT, however the Ministry of Finance has now confirmed that companies in the education sector will pay a zero rate of VAT. Accordingly, you should be analyzing your activities now to determine which of these are likely to fall within the education sector zero rated status and which may not. VAT is here to stay and if you fail to plan accurately you could be needlessly exposing yourself to VAT risks such as paying too much VAT, an inability to reclaim VAT, an inability to levy VAT on customers and/or the risk of paying fines and penalties for failing to accurately account for VAT.

If education had been deemed an exempt area then the exemption categorisation would have meant no VAT could be charged on education supplies but would also have meant that VAT incurred in relation to making these supplies could not be claimed back. The position is more favourable to businesses under a zero rating system as it means that VAT incurred on the purchase of education related goods and services can be claimed back. The precise final position on the VAT treatment and also what is included or excluded from the zero rate status will only be fully known when the regulations are published, however that should not stop market participants planning now and this means considering initiatives such as:

1. Legal Audits: Analyze all of your contracts (especially existing ones) and determine the VAT treatment of the supply under the terms of that contract and determine whether that matches likely VAT treatment under the new regime for the education sector. This should be done in respect of all supplies made to you and also those you make to others if they are outside the likely confines of the zero rated status.

2. Identify Zero Rated and Standard Rated Supplies: Your normal activities of providing tuition and those directly associated with that are likely to fall within the zero rated status if granted in the final regulations, which may include for example: tuition fees, field trips, meals and accommodation. However, other supplies such as renting out your facility to others, supplying out of school summer activities or other uses not directly associated with your education permits may not quality for zero rated status and therefore may be vatable at the standard rate.

3. Identify Input VAT costs: Many substantial cost items associated with supplying education are likely to be standard rated and will therefore increase. You ought to be able to claim refunds if the zero rating status remains but you will not be able to claim refunds if education is determined to be an exempt supply. For example, school development, immovable and movable property maintenance, repair and replacement, new capex, commercial rents, school transport costs and staff are likely to be standard rated input costs for VAT purposes. Accordingly, you should be budgeting the true cost to your business and putting in place mitigation strategies to help you deal with these implications now.

4. Structuring your investments: Whether you are looking to take on a new development or looking to acquire an existing school or just want to more efficiently optimise your operations we highly recommend you seek expert assistance in structuring the development and/or acquisition so that the VAT treatment of your investment or acquisition is optimised. 

If you would like to discuss any of the above further then please contact one of our Education sector specialists now.