I. Key facts
What are the key facts on doing business in the UAE?
When considering doing business in a foreign jurisdiction, an investor must consider a wide range of commercial, political and capital security issues that will impact the final decision of investing in a particular country.
Over the last two decades the United Arab Emirates have proven itself to be a very attractive hub for investors to locate their business for many reasons, below are just a few of them:
- UAE boasts one of the most well-established infrastructure networks in the Middle East and North Africa Region (‘MENA Region’), a reputable banking system, a stable political system and a favourable tax environment. That coupled with a stable currency (which is pegged to USD) continuously ensures strong capital flows from across the region.
- There are no exchange control restrictions and unrestricted repatriation of income and capital is easily facilitated through numerous international banks located in the UAE.
- A very liberal foreign investments regime allows 100% foreign ownership of enterprises across over 45 Free Zones, some of which are industry specific.
- UAE’s legal system and culture are based on Islamic traditions, underpinned by the UAE leadership’s commitment to the values of tolerance, peaceful coexistence and equality among all members of the community. The UAE expatriates account for over 80% of the work force, and over 150 nationalities thrive and practice their own religions and cultures in a safe and secure family environment with one of the lowest crime rates in the world.
- The UAE provides businesses with the friendliest regulatory environment in the MENA Region, according to the World Bank Group’s 2016 “Ease of Doing Business Rankings”.
- In the Global Innovation Indicator 2017, the UAE was ranked the first in the Middle East region and 35th globally. In addition, the UAE is the top Arab country in the latest World Happiness Report.
- One indication of a Government’s success in creating a progressive and diverse society can be measured by the participation of women in the highest levels of Government. Currently, the UAE has eight women ministers in the Cabinet, three holding the portfolios of Youth, Tolerance and Happiness, nine women members of the Federal National Council, 23% of the total, including the Speaker, and four judges. Women are also playing an increasing role in business.
II. UAE’s legal system
What is the UAE legal system based on?
The UAE is a civil law jurisdiction, it is influenced by Sharia (Islamic religious law). However, Sharia is not the sole source of law, it is usually invoked only where the issue is one involving the personal affairs of Muslims, where there is no express legislation applicable to a matter, or the nature of the matter is such that it is meant to be compliant with Sharia.
The Federal Constitution distributes powers between the Federal Government, which is based in Abu Dhabi and the seven constituent Emirates. Because of that, it must be noted that the legal and judicial systems can vary between the Emirates, as each Emirate can regulate within certain areas of law independently.
However, the UAE law specifically permits parties to a contract to agree clearly and expressly in writing to refer their civil or commercial disputes to the jurisdiction of the English language common law court established in the Dubai International Financial Centre (DIFC) free zone in Dubai and Abu Dhabi Global
Market Courts (ADGM) free zone in Abu Dhabi.
At Fichte & Co we published a book on the UAE legal system, titled “The UAE Legal Guide”, providing a useful and practical overview of the key UAE laws and the UAE court system. More information can be found here: www.fichtelegal.com/The-UAE-Legal-Guide.
III. Key recent legislative developments
What are the key recent developments affecting doing business in the UAE?
Value Added Tax (VAT)
On 23 August 2017, the UAE published Federal Decree Law No. 8 of 2017 on Value Added Tax (“VAT Law”) which comes into effect on 1 January 2018 and sets out the framework within which VAT will be levied in the UAE. In this article (https://fichtelegal.com/news/uae-vat-law/) we have set out the key points in relation to the implementation of VAT based on the new VAT Law and the guides published by the UAE Federal Tax Authority
On 17 August 2017, the UAE published Federal Decree Law No. 7 of 2017 on Excise Tax (“Excise Tax Law”) which comes into effect on 1 October 2017 and sets out the framework within which excise tax will be levied in the UAE.
In this article (https://fichtelegal.com/news/new-excise-tax-uae/) we have set out the key points in relation to the implementation of the Excise Tax in the UAE.
The UAE’s new Bankruptcy Law was enacted on 20 September 2016 and it came into effect on 31 December 2016. The new Bankruptcy Law replaces Chapter 5 of the UAE Commercial Transactions Law on the same subject.
The most important feature of the law is the introduction of a regime that allows for the protection and reorganisation of businesses in distress.
In this article (https://fichtelegal.com/news/the-new-bankruptcy-law-uae/) we have set out the key points in relation to the implementation of the Bankruptcy Law in the UAE.
IV. Current opportunities & economic trends
What are the current business opportunities and economic trends in the UAE?
Spotlight of Entrepreneurship and Innovation
The UAE arguably holds the title for the entrepreneurial and innovation capital of the Middle East and North Africa region based on many indicators. The Global Entrepreneurship and Development Institute’s 2016 “Global Entrepreneurship Index” ranks the UAE ahead of every other Arab country in the region.
An ever-growing number of incubators, accelerators as well as governmental programs and training ensure the UAE’s flourishing startup scene and provides a lot of investment opportunities for businesses worldwide.
Emerging Businesses in the UAE
Smartphone penetration is especially high in the Region, with the UAE ranking in the top five countries globally. This coupled with a growing population of young tech-savvy individual attracts various digital technology businesses across the globe seeking to capitalize on those trends.
In particular, Fintech is an especially attractive area for this Region due to a very low credit card penetration rate and the UAE are driving the Fintech surge and innovation.
V. Establishing a business presence
How can investors carry out business in the UAE?
Investors looking to carry out business in the UAE may do so by one of the following:
- establishing a physical presence (either through incorporating an entity or by setting up a branch or representative office); or
- carrying out business indirectly by engaging a commercial agent.
Establishing a Physical Presence
In order to setup a physical presence in the UAE, it is necessary that the entity is licensed by, and registered with the appropriate government authority.
There are two key jurisdictions in the UAE for setting up a company:
- mainland, also known as ‘onshore’;
- free zones.
The appropriate jurisdiction depends on the nature of the activities of the intended company.
The choice of a legal form is an important consideration while setting up in the UAE as each legal form has its limitations and advantages, which shall be explained below.
In the event a foreign-based business wishes to carry out business in the UAE but does not wish to maintain a physical presence in the UAE, it may enter into a commercial agency relationship with a wholly local owned entity or UAE national.
However, if the commercial agent registers the contract with the Ministry of Economy and Commerce, the agent can obtain certain protection, including: (i) exclusivity, which allows the agent the exclusive right to import the goods that form the business of the agency; (ii) entitlement to commissions, which allows the agent to receive a commission for sales made by the principal or a third party in the UAE, in addition to commissions on sales made by the agent; and (iii) the agency agreement may only be terminated by the principal only for “material reasons’, and in the event the principal does not wish to renew such agreement upon expiry, a compensation must be paid to the agent.
VI. Establishing an ‘Onshore’ or ‘Mainland’ business in the UAE
What vehicles are available to register businesses ‘onshore’ or ‘mainland’ the UAE?
Foreign Investors looking to incorporate an entity ‘onshore’ the UAE may do so either under the provisions of the UAE Civil Code, or in accordance with the provisions of Federal Law No. 2 of 2015 concerning Commercial Companies (the “Companies Law”).
There are various types of legal entities to conduct commercial and professional activities through in the UAE, a full list of which is provided below. Incorporating entities within the mainland of the UAE have the following key advantages:
- a mainland company allows an investor to carry out business in any part of the UAE, certain activities, however, may require specific and additional approvals;
- while there are restrictions preventing foreign equity in a company from exceeding forty-nine per cent (49%), the profit and losses can be shared at a different ratio, thereby allowing certain benefits and flexibility to foreign investors;
- incorporating within the mainland allows an entity to conduct business with federal and local governmental bodies.
On the other hand, mainland entities have a few disadvantages, including:
- the presence of foreign ownership restrictions which limits the investment of a foreign investor in the UAE;
- in certain Emirates, there are certain conditions that require to be met in order to set up a mainland company, and certain activities are restricted to entities that are fully owned by the UAE nationals, or in certain cases, nationals of the Gulf Cooperation Council.
A. Companies governed by the Companies Law
There are seven (7) kinds of legal entities that can be incorporated under the UAE Companies Law:
Limited Liability Company (LLC)
An LLC is made up of a maximum of fifty (50) members and a minimum of two (2) members. An LLC requires that a minimum of fifty-one per cent (51%) of its capital be owned by a UAE national, while the remaining forty-nine per cent (49%) may be held by foreign nations. This requirement is waived for nationals of the Gulf Cooperation Council (GCC) nationals, who may hold one hundred per cent (100%) of the capital. A UAE national can be a sole member in an LLC company.
LLC is the most popular form of incorporating onshore UAE.
Joint Liability Company (General Partnerships)
Only the UAE nationals may establish a joint liability company, which is formed by two (2) or more partners.
The following are some of the features of a General Partnership:
- each partner is jointly liable to the extent of their personal assets;
- the company name shall consist of the name of all the partners;
- all the partners of the partnership are involved in the management of the partnership, unless the parties involved have entered into a contract to the contrary.
Simple Commandite Company (Simple Liability Partnerships)
A simple commandite company is an entity constituted of an active partner in charge of the management of the company, and a silent partner. Under this form of business, the active partner is liable to the full extent of assets, while the inactive partner is liable to the extent to such partner’s capital contribution.
A simple liability partnership has the following features:
- only UAE nationals are allowed to be general partners;
- the company name shall consist of the name of all the partners, in additional to a word describing the nature of business;
- a limited partner shall not be involved in the administration of the company, however in the event the limited partners projects himself as a general partner (without the authority of the general partners), he shall be held responsible for the company’s obligation arising out of such representation, regardless of his contribution.
Joint Participation (Joint Venture)
A joint venture is an association between a minimum of two (2) partners, one of whom must necessarily be licensed in the UAE. The joint venture is not considered a separate legal entity, and business is conducted in the name of one partner. The partners share in the profits and losses as per the contractual arrangement.
This structure allows a foreign investor to hold a share in the capital of the company and be involved in operational and managerial decisions, while simultaneously benefitting from the advantages that are enjoyed by local entities. Another benefit of a joint venture is that it exempts the foreign investor from obtaining the necessary permits and licenses, as the local partner has the necessary permits and licenses in place.
Share Commandite Company (Partnerships Limited by Shares)
A share commandite company is one that consists of general partners who must be UAE nationals, and other participating partners. This entity has a minimum capital requirement of AED Five Hundred Thousand (500,000). Participating partners cannot participate in the daily management of affairs. General partners are jointly liable to the extent of their personal assets, while participating partners who are liable to the extent of their share participation in the company. The company name shall consist of the name of all the partners, in addition to a word describing the nature of business.
Private Joint Stock Companies
A private joint stock company is one where the shares of the company are held privately. A private joint stock company requires a minimum of three (3) founding members, and a minimum capital of AED two (2) million. Private joint stock companies may be converted into public joint stock companies upon the meeting of certain pre-requisites.
As is commonplace across the world, a legal person signing the memorandum (MoA) and articles of association (AoA) at the time of incorporation, shall be regarded a founding member and shall be held liable for any violations of applicable law. The shareholders of a joint stock company have limited liability.
Public Joint Stock Companies
A public joint stock company is one whose capital is divided into publicly subscribed shares, or may also refer to an entity in which a UAE public body holds shares capital. Public Joint Stock companies have a minimum capital requirement of AED ten (10) million, and a minimum of ten (10) founding members.
A number of founders, usually three (3), may establish a Public Joint Stock company. As is commonplace across the world, a legal person signing the memorandum and articles of association at the time of incorporation, shall be regarded a founding member and shall be held liable for any violations of applicable law. The shareholders of a joint stock company have limited liability.
B. Companies governed by the Civil Code
Companies incorporated under the Civil Code are only permitted to carry out what is considered “non-commercial” activities, such as consultancy services. Companies incorporated under the Civil Code are of the following nature:
- professional services company: the most popular civil entity used by foreign investors is the professional services company that is incorporated for the purposes of providing services including engineering, medical and professional services. A key advantage of a professional services company is that it may be owned by a foreign national.
- speculative venture partnership: A speculative venture partnership is a contract between two (2) or more persons to engage in a speculative transaction, namely, to purchase property on credit, sell it and thereafter to share in the profits at a pre-determined ratio.
- mudaraba: a “mudaraba” is an Islamic Sharia’ partnership based on a contract whereby a partner contributes assets to the entity, while the other contributed by way of work and/efforts.
The above entities have the distinct advantage of allowing one hundred per cent (100%) ownership by a foreign national. However, such entities necessitate the engagement of a national agent who sponsors the application for a license made by such entity, and liaises with government agencies to obtain all necessary paperwork to carry on business in the UAE. It is important to note that a civil code company is similar to a sole proprietorship insofar as the fact that it is not a separate legal entity from its owner.
C. Other Forms
A sole establishment or sole proprietorship is a business entity that is fully owned by an individual, who controls the operations of the entity, contributes solely to its assets, while being entitled to one hundred per cent (100%) of all profits, and being liable to the full extent of its debts and any other obligations. A sole proprietorship must necessarily be owned by an individual, and not by a company.
While a sole proprietorship for professional services can be owned by an individual of any nationality, the same is not true for carrying out industrial or commercial activities, which can only be owned by UAE or GCC nationals.
Branch or representative office
The UAE laws permit foreign companies to conduct business within the country by setting up branch offices or representative offices. Branch and representative offices may be set up both within the mainland, as well as in the Free Zones.
A branch office is permitted to carry out activities similar to those of its parent company under the name of the parent company, and shares the same legal identity.
The exact nature of the activity that can be carried out by the branch office would depend on the licensing rules and the list of activities approved by the Department of Economic Development of each Emirate.
The scope of operation of a representative office is more limited as such an entity may only carry out marketing and administrative functions such as market research, solicit orders or establish relationships on behalf of its parent company.
A branch and/or representative office is required to obtain a trade license and is additionally required to appoint a national agent. Such agent would, within the scope of their operations, act as a sponsor of the foreign company with respect to its applications for licenses/permits, and facilitate interactions with government and local authorities.
VII. Establishing a business in the UAE Free Zones
What vehicles are available to register businesses in the UAE’s multiple Free Zones?
Free Zones refer to demarcated portions of the territory of the UAE which are considered to be outside the boundaries of the country for the purpose of the customs laws and procedures. In order to cultivate foreign investments, such specific area is governed by commercial and tax regulations different to the ones governing the rest of the country.
In 1985, the UAE’s first Free Zone, the Jebel Ali Free Zone was established in Dubai, and would serve as an example for other Free Zones in other Emirates, and would thus establish the UAE as a modern and commercial business hub. At the time of its establishment, the motto behind the Jebel Ali Free Zone was to provide incentives and facilities to a then underdeveloped region, in order to lure investments and foreign talent to the UAE. The most tempting incentive was that investors were able to circumvent the Federal corporate law of 1984, allowing 100% foreign ownership.
As of today, the 100% foreign ownership is still one of the primary reasons for foreign investors choosing to establish their businesses in a Free Zone.
There are a number of Free Zones in each of the Emirate, each has its own regulations, governing bodies, processes and costs. Each licensing authority has the power to register companies and grant licenses to carry out business activities. Each Free Zone is also governed by the Federal laws of the UAE or the local laws of the relevant Emirate, in the absence of specific laws pertaining to that particular Free Zone.
Benefits and limitations of Free Zone entities
Among others, the commonly offered advantages among Free Zones are as follows:
- 100% foreign ownership: in contrast to laws applicable to the rest of the UAE, foreign investors may own one hundred percent (100%) of an entity located within a Free Zone;
- 100% import and export tax exemptions: legal entities incorporated within a Free Zone are exempt from the payment of corporate and personal taxes for anywhere between ten (10) to fifteen (15) years (depending on the Free Zone);
- 100% repatriation of capital and profits: the Free Zones in the UAE allow repatriation of one hundred percent (100%) of the profits made by an entity, as well as its capital, to the country of origin of the investors, without any restrictions.
While predominantly advantageous, Free Zone entities have the following crucial disadvantages:
- Territorial restrictions: the foremost disadvantage of Free Zone entities is that they are not permitted to conduct business outside of the respective Free Zone that they are established in, and cannot cater to customers in other parts of the UAE. In the event a Free Zone entity is desirous of engaging with onshore businesses/individuals, it may do so by engaging an onshore distributor/agent who is licensed to resell the entity’s services/products, or by establishing a mainland entity.
- Limited scope of functioning: in most cases, each Free Zone caters to entities in a certain line of business or area of activity, and thus, not every potential investor can set up a business within a particular Free Zone.
Types of Entities
Prior to identifying which Free Zone to incorporate, there are a number of factors to be considered. Naturally, the primary factors to consider include the cost of formation, ease (or lack thereof) of carrying out the business, governing rules and regulation and the nature of the business to be carried out.
While certain Free Zones allow a wider variety of choices when it comes to the nature of the entity to be set up, most Free Zones commonly offer following legal entities:
- Free Zone Establishment: Free Zone Establishments (FZE) are akin to limited liability companies within Free Zones. FZEs may be established with one (1) shareholder who may be either an individual or a legal entity.
- Free Zone Company: The main distinction between an FZE and a Free Zone Company (FZCo) is with respect to the number of shareholders. An FZCo is an entity similar to an FZE with two (2) or more shareholders who may be either individuals or entities. Some Free Zones impose a maximum number of shareholders.
- Branch: Branch offices set up with a Free Zone are similar to those found onshore, where the branch is merely an extension of the parent company and does have not its own legal identity. One advantage of a Free Zone branch is that it is not required to appoint an agent to carry out its business activities, however, it cannot carry out business within the mainland of the UAE.
In addition to the entities mentioned above, certain specific Free Zones also allow other kinds of entities to be set up.
As of 2017, there are over forty five (45) Free Zones in the Emirates of the UAE, the most prominent ones being the Dubai International Finance Centre, the Jebel Ali Free Zone in Dubai, the Abu Dhabi Global Market, the Abu Dhabi Free Zone, the Sharjah Airport Free Zone and the Hamriyah Free Zone in Sharjah.
VIII. Commercial agency
What are the commercial agency arrangements available to carry out business in the UAE without setting up a legal entity?
An overseas investor who wishes to carry out a business within the UAE, but does not wish to do so by establishing a direct presence may do so by appointing a commercial agent. Federal Law No. 18 of 1981 on Commercial Agency Law (the “CAL”) is the primary piece of legislation governing commercial agencies. It defines “agency” as the “representation of the principal by an agent for the purpose of distribution, selling, display or rendering of a commodity or service in the United Arab Emirates against a commission or profit”. This method of carrying out business allows non-UAE entities to carry out business within the UAE.
Commercial Agency is usually established through a contract, where the agent’s obligations include the solicitation of clients, carrying out negotiations on behalf of the principal and concluding deals. Both the UAE nationals and the UAE companies may be commercial agents.
The CAL prescribes the following prerequisites that must be met with respect to agreements between principals and agents:
- In order to be a commercial agent, the agent must be a UAE national or a company incorporated in the UAE and owned wholly by UAE nationals.
- In order for the provisions of the CAL to apply to an agency relationship, it is necessary that the agency agreement is registered with the Commercial Agencies Registry. To be able to qualify as a registered agency agreement, the commercial agent must have an exclusive right to distribute the product in question, and be registered with the
- As per the terms of the CAL, the registration of an agency comes into effect only when both parties to the agency relationship have entered into an agreement that has been notarized subsequently.
- An agreement may be registered as a registered agency agreement only in the event the relationship between the principal and agent is exclusive with respect to the services and/or products to be marketed/sold by the agent on behalf of the principal. It is necessary that with respect to a particular product to be sold, a principal appoint one agent for such purpose, to the exclusion of other agents. A principal may appoint multiple agents in the different Emirates, but may not do so within the same Emirate.
Advantages and limitations of a commercial agency
Prior to making a decision to engage in a commercial agency, it is necessary that an investor considers the pros and cons of a commercial agency structure, the key highlights of which have been laid down below.
- Experience and expertise: A commercial agency arrangement allows foreign business to find a foothold in the local market by providing it with insights of local business customs and the knowledge of the market it seeks to penetrate.
- Access to restricted activities: As discussed above, there are certain business activities that foreign businesses are restricted from carrying out. Given that commercial agents are either the UAE nationals or the UAE companies, such commercial agents are permitted to engage in activities that would ordinary be forbidden to foreign investors.
- Material reason: As per the provisions of the CAL, a principal in an agency agreement cannot terminate a registered agreement or refuse to renew the contract in the absence of a material reason for termination or non-renewal. While the CAL does not specify what constitutes “material reason”, the provisions of the CAL tend to favour the agent, and as such, it may be difficult for the principal to establish the existence of a material reason to justify such termination or non-renewal.
- Compensation: Further, in the event the principal does not renew a commercial agency agreement upon its expiry, it shall be required to pay certain compensation to the agent. Despite the presence of provisions in an agreement that allows for termination/non-renewal of an agency agreement, and such provisions being adhered to, registered agents are entitled to claim compensation in the event of termination/non-renewal.
The degree of success of such claim and the extent of compensation so awarded would depend upon a number of factors, including the circumstances that led to such termination/non-renewal, the duration of the engagement, the commercial success of the relationship etc.
While unregistered agents cannot claim compensation under the CAL, they may still seek relief under UAE Commercial Transaction Law and the UAE Civil Code.
- Exclusivity: The CAL provides that all agency agreements with respect to a particular product of the principal within a certain jurisdiction (in this case, either a particular Emirate, or the whole of the UAE) are exclusive in nature, and grant the agent the exclusive right to import and distribute the products that are the subject matter of the agency. This provision does not allow a principal the flexibility of working with different agencies and therefore forces it to function within a somewhat rigid structure.
- Payment of commission: Under the CAL, commercial agents are entitled to receive commissions on sales of products made in the territory designated to them under the relevant agreement, irrespective of whether such sale was made by or through the agent, which is an unnecessary financial burden on the principal.
As can be seen from the details provided above, a registered commercial agent enjoys significant protection under the UAE laws, and it is imperative that these factors be taken into account prior to entering into agency agreements.
First published on Legal 500.