This article is the first one in a series of articles concerning various legal aspects of doing business in the United Arab Emirates that will be published going forward.
THE GULF CO-OPERATION COUNCIL
The Gulf Co-operation Council (“GCC”) member states, i.e. Bahrain, Kuwait, United Arab Emirates, Oman and Qatar continue to surprise with the rate of their development in a social, economical and legal sense.
GCC countries are a prime example of late but successful starters. Their dynamic growth was incepted upon discovery of oil resources (Saudi Arabia’s oil discovery dating 1938, Qatar’s 1940 and the UAE’s 1961) and oil exploration that commenced shortly thereafter. Although GCC states have only been established less than a century ago (Saudi Arabia’s foundation dating 1938, the UAE’s and Qatar’s 1971), they have shown significant economical growth to date.
UNITED ARAB EMIRATES FACTS
Out of the GCC, the United Arab Emirates (“Emirates”, “UAE”) stands out as far as attractiveness for non-GCC businesses is concerned. Situated in the south east of the Arabian Peninsula, on the Persian Gulf, bordering Oman and Saudi Arabia by land and Iraq, Kuwait, Bahrain, Qatar and Iran by the sea, the UAE is a federation of seven emirates (Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al-Khaimah, Sharjah and Umm Al-Quwain).
The UAE has a population of over 8 million. It has the sixth largest oil reserves globally, GDP per capital of USD 47,407, as per the IMF records and has been classified by the IFM as “high income developing economy”.
The UAE offers English- speaking population (despite Arabic being the official language), very low crime rate and a pleasant business environment all year around.
The UAE’s attractiveness for businesses particularly results from:
- Strategic geographical location (route between the EU, wider MENA region and Asia);
- Diversified and dynamic economy;
- Absence of corporate income taxes on investments;
- No foreign exchange controls; and
- 100% repatriation if capital and profits.
The UAE is unquestionably the “deal hub” of the Arabian Gulf and is an outstanding centre to seek and explore business partnership or M&A opportunities, particularly for businesses that are able and willing to contribute advanced technologies, well-grounded and properly- developed know- how and expertise in specialised areas such as infrastructure, healthcare, food production, heavy equipment/ machinery manufacturing/ maintenance, amongst others.
LEGAL SYSTEM
The UAE’s legal system is a federal one. Consequently, the UAE has both federal sources of law, enacted by the Federal National Council and also local (Emirate- level) laws enacted by legislative bodies of emirates (Ruler or the Crown Prince of each emirate), applicable in that emirate, only. As one would expect, federal laws prevail over the local ones.
The Emirates are a civil law jurisdiction, with the core pieces of legislation founded upon the Egyptian Civil Code (in turn, based on the French Civil Code).
Finally, contrary to a common misconception, Sharia law has only limited application and is mainly relevant to inheritance and family law issues.
DOING BUSINESS IN THE UAE Framework:
The UAE offers numerous business set up, partnership and joint venture opportunities.
It is also a jurisdiction where we have seen numerous very successful local, regional as well as global M&A transactions.
Moreover, its legislation provides a standard system of protection mechanisms that we would expect to see in some other civil law jurisdictions (e.g. Poland) that protect the interests of contracting parties.
Businesses established in the UAE can conduct a wider range of business activities, e. g. trading, professional services (legal, financial, auditing, medical, craftsmen and artisans) and industrial/ manufacturing.
Business licensing is usually a two layer step, with the business plan/ feasibility study initially reviewed by and approved by the Department of Economic Development or a free zone authority and, if required, a regulatory license issued by a relevant regulatory authority, e. g. Health Authority of Dubai, Securities and Commodities Authority, Central Bank, Telecommunications Regulatory Authority.
Available Entities:
The UAE offers a variety of legal forms, i. e.:
- Limited liability company;
- Private joint stock company;
- Public joint stock company;
- General partnership company;
- Simple limited partnership;
- Joint participation company; and
- Partnership limited with shares.
The most commonly used legal form of incorporation is a limited liability company. Branches and representative offices are also available.
Ownership Restriction:
Despite various investment incentives, there are some quite unusual requirements that UAE businesses need to meet for foreign investors to keep in mind.
A local ownership restriction (“Ownership Restriction”) set out under UAE Commercial Companies Law Federal Law No 8 of 1984 concerning Commercial Companies comes as one of the most important local requirements for investor consideration.
Under the Ownership Restriction, a non-UAE entity may own only up to 49% of the shares of a UAE company and the remaining 51% of its shares must be held by UAE national(s), i.e. natural or legal person(s), at all times.
In other words, a foreign investor cannot become a registered (or beneficial, as UAE law does not recognize beneficial ownership concept) holder of shares in excess of 49% of the company’s capital.
Imprisonment and/or a fine may be ordered against a company that is found in breach of the Ownership Restriction.
A business community response to the Ownership Restriction that has been quite commonly adopted is entry into a nominee/ side agreement with a UAE partner(s), whereby, in particular, the UAE partner(s) waives the exercise of any of the rights attached to and/or derived from the shares in favour of a non-UAE partner.
The nominee/ side agreement, however, is not an ideal solution from the legal standpoint.
Free Zones
Many business activities can be conducted from and in economic free zones. Free zones usually focus on licensing entities operating in specialised sectors, e. g. Abu Dhabi Airport Free Zone and air carriage, Masdar City and eco-friendly activities, Dubai Internet City and internet- related businesses, Dubai Healthcare City and medical sector. Their great advantage is that they permit 100% foreign ownership, provided your economic activity fits the profile of businesses to which the free zone caters.
In addition, some of the free zones have separate legal framework (e. g. Dubai International Financial Centre) that is more aligned with standards followed globally, which makes them particularly appealing to non-GCC parties.
CONCLUSION
Often are Managers of European companies as well as professionals practicing in the EU hesitant towards contracting with, making a business decision or a financial commitment that directly involves a party in a jurisdiction they are not familiar with. We naturally fear of unknown. Before we are ready to take action, we prefer becoming more familiar with local business communities legal regime.
The UAE, however, is much more advanced in a legal and business sense than one would imagine.
It is, then, an interesting hub to look for contracting parties in, search for partnership or business incorporation opportunities, particularly if there is European expertise, know-how and experience that we can contribute or share with local business community for mutual benefit of the parties involved.
The Emirates are a business- friendly state where European knowledge, expertise and experience are welcome.
Don’t wait for opportunities to dry out. Explore the UAE by making a feasibility study, visiting the Emirates and meeting sector relevant people.
Who knows, you may find yourself doing business by Burj Khalifa before you know.
Izabella Szadkowska, Senior Associate, Al Tamimi & Co., Dubai, United Arab Emirates More information: http://www.tamimi.com/en/lawyer/lawyers/izabella-szadkowska.html