UNITED ARAB EMIRATES
The United Arab Emirates consists of seven emirates: Abu Dhabi, Dubai, Sharjah, Umm al-Qaiwain, Fujairah, Ajman and Ra’s al-Khaimah.
Though small in size, the UAE has become an important player in regional and international affairs.
In 1971 the small, underdeveloped states were unified into a federation, the only one in the Arab world. In just over three decades, the nation has transformed from a tribal culture reliant on agriculture and fishing to an entrepreneurial success story with world-class infrastructure. The leadership has improved education, eliminated illiteracy, advanced health care and embraced change as the UAE modernizes, consistent with its history and cultural values.
The UAE is also strengthening institutions of government to ensure a transparent legal system with full regard for the quality of life of all citizens and residents.
The UAE is a member of the United Nations, the World Trade Organization, the Arab League and the Gulf Cooperation Council.
Free Trade Zones & Special Economic Zones
Establishing a business entity in one of the numerous UAE Free Trade Zones (FTZs) can be an attractive option for foreign investors and businesses. All seven Emirates already have, or are developing, such economic zones.
Free zones contribute to and stimulate the economy by attracting foreign direct investment, generating thousands of jobs, stimulating non-oil exports, encouraging the setting up of ancillary industries, and helping in the transfer of knowledge, expertise and technology to the country.
The major advantages in operating in a free zone are:
- 100% foreign ownership of the enterprise;
- 100% import and export tax exemptions;
- 100% repatriation of capital and profits;
- No corporate taxes for 15 years, renewable for an additional 15 years;
- No personal income taxes;
- Less documentation, mostly in English;
- Assistance with labour recruitment, and additional support services such as sponsorship and housing.
There are over 20,000 companies in 21 Free Zones around the UAE. The largest Free Zones, by number of companies, are the following:
- Jebel Ali Free Zone(6,000 companies);
- Sharjah Airport International Free Zone(3,900 companies);
- Dubai Airport Free Zone(1,300 companies);
- Dubai Media City(1,200 companies);
- Dubai Internet City (1,000 companies);
- RAK Free Trade Zone (7,500 companies).
An independent Free Zone Authority (FZA) governs each free zone and is responsible for issuing FTZ operating licenses and assisting companies with establishing their business in the FTZ. Investors can either register a new company in the form of a Free Zone Establishment (FZE) – a limited liability company governed by the rules and regulations of the Free Zone in which it is established – or simply establish a branch or representative office of their existing company based within the UAE or abroad.
The procedures for establishing a business in a Free Trade Zone are usually very straightforward and can be generally completed quickly, especially if there are no environmental issues involved. Individual Free Zones may have specific requirements, but general steps are:
- Questionnaire from the relevant Free Zone Authority which will assist in assessing a company’s requirements.
- License application, planning documents, and a consumer request for electricity.
- Provisional approval and lease agreement.
- Meetings with the authority to finalize details of the project.
Once a legal presence has been established in the Free Zone, the business will need to lease premises or land and acquire an operating license from the FZA. Different types of licenses apply in the different types of free zone, however, it is important to understand that companies with trade and industrial licenses can only conduct business within the Free Zone or abroad. To sell products in the UAE, a UAE official agent is required, and a joint venture needs to be formed.
When not to choose a Free Zone
There are a few scenarios in which a prospective company might not want to choose to do business in a Free Zone, and should instead opt for a regular joint partnership. These are if a company:
- Practices a regulated profession.
- Requires a lot of visas or warehouse/office space.
- Plans a long presence in the UAE and wants to reach a wider portion of the UAE market.
- Has a particular UAE company or individual with which to go into partnership.
Special Economic Zones
Besides Free Zones, the UAE has established strategic frameworks for increasing the number of small and medium-sized businesses in Special Economic Zones (SEZs). Abu Dhabi has set up the Higher Corporation for Specialised Economic Zones, which has since been renamed Zones Corp.
The Industrial City of Abu Dhabi and Khalifa Port and Industrial Zone are part of the Abu Dhabi SEZs, while Dubai Industrial City, Dubai Multi Commodities Centre (DMCC), Dubai International Financial Centre (DIFC) and the various entities under Tecom Investments such as Dubai Internet City, Dubai Media City, Knowledge Village, Dubai Studio City, and Dubai International Academic City can be classified as SEZs. The Emirates Industrial City in Sharjah also falls under the SEZ category.
It takes just 15 days to set up a new business in the UAE. The benefits of establishing a business in the country include corporate tax exemption for most sectors, no personal taxes, no currency restrictions and freedom to repatriate capital and profits. These relationships are sometimes conducted through general trading activities and specific joint ventures.
A foreign company wanting to do business in the UAE can choose to set up operations as a branch, representative office or registered company within one or more of the emirates, or it can appoint a commercial agent to sell its products in the UAE market or export them. It has to interact with authorities at the federal and emirate level and observe federal and local laws and regulations. While federal laws gain precedence over local laws, emirates individually have discretionary policies and procedures that affect the way business is conducted.
Ownership regulations: Under the law, all companies established in the UAE must have 51% ownership by UAE nationals or a company wholly owned by UAE nationals, except in the following cases:
- 100% foreign ownership permitted in Free Zones
- Activities allowing 100% Gulf Co-operation Council (GCC) ownership
- Wholly owned GCC companies entering into partnerships with UAE nationals
- 100% ownership for professional companies
- Instances where the law requires 100% local ownership.
However, even with 51% UAE ownership, companies cannot pursue those activities which are allowed only for UAE nationals or companies wholly owned by UAE nationals.
Licensing Categories and Procedures
Companies have to notarize their Memorandum of Association, which should be written in Arabic, and the Commercial Companies Law (CCL) requires them to also enter their names into the Commercial Register maintained by the local licensing authorities. A company cannot commence business if its name is not registered and its Memorandum of Association is considered void.
All businesses, whether industrial, professional, trading or services, must also obtain a trade licence from the emirate concerned before it can begin business in the emirate. Licensing procedures may vary from emirate to emirate.
There are three categories of licences for all business activity in the UAE:
- Commercial licences: covering trading activities.
- Industrial licences: for establishing an industrial or manufacturing activity.
- Professional licences: covering professional services, craftsmen and artisans.
Official approval is required from the appropriate Government ministry or department to set up a company to engage in certain activities, including:
- Financial institutions
- New industrial projects or expansion
- Medical institutions
- Air transport and services
- Publishing, printing, advertising, filming, photography
- Education and training
- Agriculture and animal welfare
- Customs clearance, freight forwarding, cargo services
- Telecommunications equipment
- Insurance companies and professional firms
- Legal consultancy
- Engineering and contracting
The CCL specifies the regulations governing operations of foreign businesses, defining the following seven categories of business organisation:
- General Partnership Company
- Limited Partnership Company
- Joint Participation (Venture) Company
- Public Joint Stock Company
- Private Joint Stock Company
- Limited Liability Company
- Limited Share Partnership Company
Some of these categories are restricted to UAE nationals, while foreign investors often prefer the Limited Liability Company. However, with increased stress on privatisation of the economy, foreign investors may also prefer Public Joint Stock Companies as an option.
Companies can also be set up under the Civil Transactions Law 5 of 1985 or Civil Code, which has a classification system that differs from the CCL and is closer to Islamic law. According to the Civil Code, the word ‘merchant’ does not apply to ministries, Government departments, public institutions, corporations, public benefit organisations, societies, clubs and professionals who carry out non-commercial activities.
The ‘civil’ companies registered by professionals are regulated by the Civil Code and are not ‘commercial’ entities in the legal sense, which means the person or company has no intention to trade as a profession and the activity carried out is not classified as trade.
General Partnership Company
Two or more UAE nationals can form a partnership in which they are liable to the extent of their total assets for all liabilities of the company. This opportunity is not extended to non-nationals because most of their assets are usually located outside the UAE. There is no minimum capital requirement but the name of the person who will manage the company must be mentioned in the Memorandum of Association, unless the Memorandum specifies otherwise. The UAE Government does not encourage establishment of such partnership companies.
Joint Participation (Venture) Company
Two or more partners can enter into a contract in which one or more partners actively conduct the business with third parties without disclosing the identity of the other partners to the third parties. No licence is required and the contract can be either written or oral, with sharing of profits decided mutually.
The partner who actively conducts the business enters his name into the Commercial Register to obtain a trade licence and is liable to the third party. If the existence of the joint venture is disclosed to the third party, the non-active partners also become liable, in which case the partnership is deemed a general partnership.
Public Joint Stock Company (PJSC)
The minimum capital required is AED10 million (US$2.7 million) and a minimum of 55 per cent of the shares (maximum 80 per cent) of the company must be offered to the general public. There should be at least 10 founding members and management vests with a board of three to 15 directors, majority of whom must be UAE nationals with a UAE national as chairman.
For this reason it is not popular with expatriate investors, although it is gaining in popularity with privatisation, because it is the only business entity to permit public offering of shares to raise capital. Companies engaged in banking, insurance or financial activities must be run as public-shareholding companies.
Private Joint Stock Company
It can be formed by at least three partners who fully subscribe to the company’s capital between themselves, the minimum capital requirement being AED2 million (US$545,000). With the exception of public subscription, all other CCL regulations are the same as applicable to public shareholding companies.
Limited Liability Company (LLC)
An LLC can be formed by a minimum of two and a maximum of 50 persons and managed by the foreign or national partners or a third party. The preferred choice of expatriate investors because it allows them to maintain control of its management, the company can engage in any lawful activity except insurance, banking and investment of money for others.
The liability of partners is limited to the extent of their shares distribution of profit and loss can be mutually agreed by them. Minimum capital required is AED150,000 (US$41,000).
Process to set up an LLC:
- Company name and activity must be approved by the relevant office of economic development, municipality and Chamber of Commerce.
- Articles of Association must be notarised according to the requirements of each emirate.
- Application package must be delivered to the Department of Economic Development or municipality, as appropriate.
- Following approval, the new company will be included in the commercial register and the Articles of Association will be published in the bulletin of the Ministry of Economy.
- A licence will then be issued by the Department of Economic Development or municipality or Chamber of Commerce of the respective emirates.
Foreign professionals and specialists such as architects, civil engineers, management consultants, economists, healthcare specialists, legal consultants, auditors, accounting firms, educational services, technical services etc can form sole proprietorships with 100 per cent foreign ownership to practise their professional activities.
Sole proprietorship is a simple business method whereby an individual practices a profession or provides a service on his own account with a trade licence issued in his own name and collects a fee, although certain activities are reserved for UAE nationals and for companies totally owned by UAE nationals. This form of business entity, which cannot undertake commercial activities, is referred to as a service establishment. The number of staff members is limited and a UAE national must be appointed as a local agent, who has no direct involvement in the business and is paid a lump sum or percentage of profits or turnover.
Branches and Representative Offices
A foreign company can establish a wholly owned branch or a representative office in the UAE to carry out business in the UAE. A branch is not a separate legal entity but is considered part of the parent company, with the parent company being fully liable for its activities in the country. The branch is thus a full-fledged business performing contracts and carrying out activities specified in its licence, which are similar to those of the parent company and include and repair services for the customers of its parent company.
Traditionally, a branch could not engage in ‘trading’ activity – buying and importing products of its parent company for resale in the country, which was a function reserved for local trade agents – UAE nationals or companies with 51 per cent participation of nationals. However, there has been some liberalisation since 2006 and some branches have been able to gain licences to trade goods manufactured by its parent company.
A representative office does not engage in sales, services or any type of commercial activity but only promotes the activities of its parent company, gathering information and soliciting orders and projects to be performed by the head office of the parent company.
To obtain a licence from an emirate to open a branch, the parent company must appoint an agent for the branch who is a UAE national or a company wholly owned by UAE nationals. The agent of sponsor has no equity participation or liability to the business, nor can the person represent the branch office or participate in its management. The agent’s services are limited to liaising with the Government to obtain licences, visas, permits and other authorisations for the branch, and the agent is paid a fixed sum for the sponsorship and cannot claim a share in the profits.
Process to set up a branch/representative office:
- A licence application must be submitted to the Ministry of Economy. If approved, the application is sent to the Economic Department of the emirate in which the business is to be undertaken.
- Once licensed by the emirate, the company is registered by the Ministry of Economy, fees for first approval being AED10,000 (US$2,700). A bank guarantee of AED50,000 (US$13,600) is also required for registration, which must be renewed annually, subject to payment of AED10,000 (US$2,700). Each branch can have several sub-branches, with the same licensing and registration procedures followed for the branches/sub-branches.