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Doing Business in the United Arab Emirates
Second Edition Contents
A. Introduction...... 2 I Country Background II Free Zones III Status of Shari’ah Law in the UAE
B. establishing a legal presence in the uae...... 3 I Incorporating a Local Entity II Opening a Branch or Representative Office (Outside a Free Zone) III Setting up a Free Zone Entity IV Holding Companies V Commercial Agency Relationship
C. General Legal Considerations...... 7
I Doing Business with the Public Sector II Import & Export Regulations III Foreign Exchange Controls & Anti-Money Laundering IV Bribery and Anti-Corruption V Taxation VI Employment Law VII Immigration VIII Real Property IX Intellectual Property X Data Protection and Privacy XI Governing Law XII Dispute Resolution XIII New Competition Law
Appendices...... 15
1 Pros and Cons of Means to Set Up a Legal Presence in the UAE 2 Companies Law and Free Zone Entities
Endnotes...... 19 This guide provides an overview of the principal legal issues for foreign (iii) Status of Shari’ah Law in the UAE investors considering doing business in the United Arab Emirates (the UAE). Foreign parties contemplating doing business in the UAE often assume that all aspects of law in the country are governed by Islamic Shari’ah. While the UAE federal constitution provides that Shari’ah is a main source of law, it is not the only source of law and its A. INTRODUCTION application is generally limited to (i) being used by the courts as an interpretative aid (i) Country Background where there is no express provision of legislation governing a particular question; (ii) religious, morality and personal law matters, particularly involving Muslims (such as The UAE is a federation of seven emirates comprising Abu Dhabi, Ajman, Dubai, inheritance, divorce, etc.); and (iii) transactions which are intentionally expressed to be Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain and was formed on Shari’ah-compliant, such as Islamic banking transactions. Outside of these rather limited 2 December 1971. areas, contractual terms that would be forbidden under Shari’ah are generally fully The UAE federal constitution was permanently accepted in 19961 and provides for enforceable under the laws of the UAE, including under the UAE Civil Code. For example, an allocation of powers between the federal government and the government of each a contractual term in a conventional commercial transaction requiring the payment of emirate. interest (which is a concept that is forbidden in Islam and is contrary to Shari’ah) is, in general, valid in the UAE and would normally be enforceable in the UAE courts. The constitution provides the legal framework for the federation and is the basis of all legislation promulgated at a federal and emirate level. Pursuant to the constitution, the federal government has exclusive jurisdiction in various substantive matters, including B. ESTABLISHING A LEGAL PRESENCE IN THE UAE foreign policy, defence and security. Legislation passed at a federal level has primacy In order to conduct business in the UAE, a foreign investor is required to establish a formal over the local laws of each emirate. The local government of each emirate is, however, legal presence (directly or through an agent) within the UAE through any of the following permitted under Article 113 of the constitution to regulate all local matters which are means: not subject to federal legislation or matters which are not expressly reserved in the constitution to the federal union (examples of such federal matters being foreign affairs, • Incorporating a local entity; defence and health). As such, the governments of each individual emirate retain • Registering a branch or representative office of a foreign company; substantial powers to regulate commercial activities, issue trade licences and effect the incorporation of corporate entities to the extent that such activity is not already regulated • Establishing a free zone entity; and under federal legislation. • Entering into a commercial agency relationship. The UAE judicial system varies significantly across the UAE and the free zones. Only five emirates submit to a federal court system — Dubai and Ras Al Khaimah have their Further details of each of these means is set out below. A matrix summarising the pros and own independent court systems. All of the emirates (except in respect of some of the cons of the means likely to be most relevant to foreign investors is set out in Appendix 1. free zones) follow uniformly similar rules of civil procedure and evidence, and trials are decided by a single judge or a panel of three judges, and not by a jury. In addition, some of the free zones have their own judicial systems, as well as their own rules of civil (i) Incorporating A Local Entity procedure and evidence. Unlike in many other jurisdictions throughout the world, it is not possible to buy shelf- companies in the UAE and there is no central “companies house” where information on the companies incorporated in the UAE is available. Only the company itself can provide (ii) Free Zones such information that is filed at the Department of Economic Development (or other similar The UAE federal constitution, the federal laws relating to free zones and the powers agency) of the emirate(s) where the company’s offices are located. reserved by the individual emirates under the federal structure, permit each emirate to As a general requirement, locally incorporated entities must obtain the following licenses: set up “free zones” for general or industry-specific activities. The purpose of free zones is to encourage foreign direct investment into the UAE. Free zone entities are not generally • A trade license from the Department of Economic Development (or other similar agency) required to have any UAE nationals as owners. This contrasts with most companies of the emirate(s) where office(s) will be located; and incorporated in the UAE outside of the free zones, where UAE nationals are typically • If applicable, authorisation from the relevant Ministry or government entity with required to own at least 51 percent of the company’s capital. jurisdiction over the type of business activities to be conducted.2
Various free zones have been set up in the UAE, most of which are in Dubai. Free zones Locally incorporated entities may be formed under the UAE Civil Code or incorporated are authorised to enact their own laws and regulations in specific areas, which in some under Federal Law No. 8 of 1984 Concerning Commercial Companies (as amended by cases override federal and emirate law on the subject matter. For example, the Dubai Federal Law No. 15 of 1998)(the Companies Law).3 International Financial Centre (the DIFC), which is a financial free zone within Dubai, has its own body of law, including corporate law, contracts law and employment law, as well as its own court system. Unless otherwise stated, references in this guide to matters (a) Entities Formed Under the UAE Civil Code/Establishments of law or practice applicable in the UAE generally refer to the wider UAE outside of the Entities formed under the UAE Civil Code are restricted to carrying out “non-commercial” free zones. or civil activities — these are activities that involve the promotion of the skills and expertise of the individual(s) conducting the business. Most consultancy services (including the practice of law, medicine, and research activities), the production of works of art or
2 Latham & Watkins | Doing Business in the United Arab Emirates Latham & Watkins | Doing Business in the United Arab Emirates 3 literature, and the sale of agricultural products by farmers are examples of activities that • The foreign shareholder may appoint all of the directors; may be conducted by a UAE Civil Code entity. • The foreign shareholder may appoint the general manager; The most common form of civil entity used by foreign investors is the professional • The foreign shareholder may veto major decisions of the company; services company. Such entities are only appropriate for carrying on service businesses, such as engineering, medical and consultancy services. The primary benefit of • The foreign shareholder may be entitled to all of the assets of the company on winding establishing a professional services company is that such an entity may be 100 percent up; and 4 foreign owned, although a national agent must be engaged by all such companies. The • The foreign shareholder may be entitled to more than 49 percent of the company’s profits. provisions of the Companies Law do not apply to entities formed under the UAE Civil Code. In relation to the remaining percentage of profits of the company, it is possible for additional commercial agreements to be put in place to give a foreign minority shareholder access to almost 100 percent of the profits.
(b) Entities Incorporated Under the Companies Law However, there is much commentary and debate in the UAE about the enforceability of any contractual side arrangements that may be put in place that purport to confer the full All locally incorporated companies (other than those formed under the UAE Civil Code) economic ownership and profits to a foreign minority shareholder, when the constitutional must be set up in accordance with the Companies Law. The Companies Law requires documents set out a 49 percent to 51 percent split. It is generally difficult to know how a companies to adopt one of the following forms: UAE court would treat side arrangements if asked to consider them, as the UAE courts are • Limited Liability Companies; not bound by precedent and do not report on discussions. Likewise, consideration should 7 • Private Joint Stock Companies; be given to the Anti-Fronting Law.
• Public Joint Stock Companies; The Anti-Fronting Law was enacted in the UAE in 2004 and was supposed to come into force in November 2007. However, a UAE Ministerial Cabinet Resolution deferred such • Joint Participation Ventures (or Private Unlimited Companies); enforcement until 21 December 2009. Although the UAE Ministry of Economy does not • Limited Partnerships (or Simple Commandite Companies); appear to have provided further clarification on the implementation date or any scheduled further deferral of this law since the resolution, there are differing and conflicting views on • Partnership Limited with Shares (or Share Commandite Companies); and its current enforceability. As such, enforcement of the law remains unclear. • General Partnerships (or Joint Liability Companies). In summary, the Anti-Fronting Law is designed to prevent “fronting,” being where a Appendix 2 summarises the key differences between the entities set out above. foreigner is able to undertake any economic or professional activity, which such foreigner would not be able to carry out under the other effective laws of the UAE, whether Of the entities listed above, most foreign businesses choose the limited liability company undertaken on the foreigner’s own account or in a venture with others and enabling such as foreigners can exert significant control over them and it requires a relatively small foreigner to evade applicable obligations. As such, it could be argued that the Anti-Fronting amount of minimum capital to start up. Previously limited liability companies in Dubai Law is aiming to prevent the use of nominee and side arrangements with UAE nationals. were required to have a minimum share capital of AED 300,000 and those in other emirates required a minimum of AED 150,000. However, following an amendment to Due to the uncertainty over the Anti-Fronting Law, side arrangements remain common in Article 227 of the Companies Law,5 shareholders now have the right to determine the the UAE but their legality and enforceability remains questionable. share capital of their limited liability companies, provided that such company will have sufficient capital to achieve its objects. Such an entity may, however, be inappropriate to achieve certain business goals. For example, businesses involving banking, insurance (ii) Opening a Branch or Representative Office (Outside of a Free Zone) or investment activity on behalf of third parties may only be conducted by a public joint Articles 313 to 316 of the Companies Law permit foreign companies to open branches stock company, and limited liability companies may not offer their shares for public or representative offices within the UAE. A branch or a representative office of a foreign subscription, which is a central feature of the public joint stock company. company may be wholly owned by foreigners.
The key limitation on entities incorporated under the Companies Law is that 51 percent A branch of a non-UAE company may only be registered in the UAE with the sponsorship of the capital of a company must be owned by a UAE national. However, certain of a local service agent who must be a UAE national or a company wholly owned by UAE services and investment activities are reserved for UAE nationals. For example, only nationals. The arrangement between the company wishing to set up the branch and the UAE nationals and companies wholly owned by UAE nationals may supply real estate local service agent will be set out in an agency agreement in English/Arabic which has to services, rental/leasing services relating to cars, services incidental to agriculture, be signed before a local notary public (the Sponsorship Agreement). The service agent forestry, farming and fishing, placement and supply of personnel, investigation and has neither power nor responsibility in respect of the branch and the foreign company security services, travel agencies and tour operator services, passenger and freight road would retain full control and benefit over the branch. A local service agent is usually paid an transportation and the ownership of pharmacies and medical warehouses. annual fee in the range of US$20,000 to US$25,000.8
It is possible for the constitutional documents of a limited liability company to allocate There are no minimum capitalisation requirements for a branch although the foreign up to 80 percent of the profits of the company to the foreign shareholder in Dubai and company is required to provide a standard form Arabic bank guarantee from a local bank up to 85 percent in Abu Dhabi. The constitutional documents may also incorporate the (which includes an international bank with a branch in Dubai) in the amount of AED 50,000 following provisions designed to protect the interests of a foreign minority shareholder: (approximately US$14,000) and to show details of its own capitalisation and good standing, together with its two most recent sets of annual audited accounts.
4 Latham & Watkins | Doing Business in the United Arab Emirates Latham & Watkins | Doing Business in the United Arab Emirates 5 Generally, the parent company of the branch must have been in existence for more than incorporated in the DIFC in regional structured finance transactions, availing of the more two years in order to open a branch in the UAE. international-standard regulatory environment and court system offered by the DIFC. While exceptions such as these do exist, free zone entities generally have physical The branch must have a certain specified business activity, which must be approved in operations within the free zone in which they are incorporated. Most free zones have a advance by the relevant local authorities. The activity of the branch must be the same focus on attracting and catering for a particular industrial or economic sector, as evident activity as the company establishing the branch (or its group). If the foreign entity is a Gulf in the names of free zones such as Dubai Internet City, Dubai Healthcare City or Dubai Cooperation Council (GCC) entity then no local service agent needs to be appointed. Media City. While the majority of the UAE’s free zones are situated in Dubai, free zones With regard to trading activities, branches are not permitted to physically deal in or trade outside of Dubai include the Khalifa Industrial Zone in Abu Dhabi, the Hamriyah Free in goods within the UAE other than goods manufactured by its parent or its parent’s Zone in Sharjah and the RAK Free Trade Zone in Ras Al Khaimah. group. It is, however, permitted to render maintenance and repair services to customers of its parent company.
It is important to note that approval for the issuance of a licence for a branch depends on (v) Commercial Agency Relationship the type of activity the proposed branch intends to carry on in the emirate. It is prudent If a foreigner wishes to import goods into the UAE but does not wish to maintain a therefore to obtain initial approval from the relevant local authorities for the proposed physical presence in the UAE it will generally enter into a commercial agency relationship activities of the branch prior to commencing the incorporation process. with a wholly local owned entity or UAE national. Commercial agents are generally used A representative office is more limited than a branch office in the scope of activities that by foreign manufacturers and traders who are engaged in the large-scale importation of it is permitted to undertake. A representative office may only conduct marketing and goods into the UAE on a regular basis. administrative functions on behalf of its foreign parent. A representative office typically Under a commercial agency, the foreign business and the commercial agent agree to gathers information on the local market, establishes relationships and solicits orders to the terms of the sales commission, the territory of the distributorship (at a minimum, be performed by the parent company. The parent company will generally be required to this would be one emirate) and the duration of the relationship. If the commercial agent engage a commercial agent if it wishes to conduct sales activities within the UAE. registers the contract with the Ministry of Economy and Commerce the agent can obtain the various protections afforded to agents under the UAE Commercial Agencies Law (Federal Law No. 18 of 1981, as amended by Federal Law No. 14 of 1988 and Federal (iii) Setting Up a Free Zone Entity Law No. 2 of 201010). These protections include: A key feature of a free zone entity is that it is not subject to the foreign ownership • Exclusivity — registered commercial agents have the exclusive right to import the goods restrictions imposed by the Companies Law in the wider UAE (although issues of foreign which are the subject matter of the agency; ownership may still be relevant if the free zone entity is used as a holding company for assets situated outside the relevant free zone). Free zone entities are also granted certain • Commissions — registered commercial agents are entitled to receive commissions on ancillary financial benefits (described further in Part C). the sales they make as well as commissions on sales made in the UAE by the principal or any other party; and A free zone entity will generally take one of the following three forms: a branch or representative office of a foreign company, a free zone company or a free zone • Termination — the principal may only terminate a registered commercial agency establishment. There is no minimum capital requirement for a branch or representative arrangement unilaterally for “material reasons.” Such reasons must be acceptable office, while in most free zones, a free zone establishment and a free zone company to the Commercial Agencies Committee. In practice, it is very hard to terminate are typically required to have a minimum capital of around AED 500,000, but the precise a registered agency arrangement. Further, a principal may not refuse to renew a requirements vary from free zone to free zone. A free zone establishment may be owned registered commercial agency agreement after its expiry date without the payment of by a single individual or company, whereas a free zone company typically requires two or compensation to the registered commercial agent. more owners. Unregistered commercial agencies on the other hand are not subject to the above The key limitation of a free zone entity is that it is generally permitted to conduct business restrictions. There is no formal procedure required for an unregistered commercial within its relevant free zone or internationally and is limited to performing solely those agency to be valid other than parties negotiating and agreeing the terms of their activities specified in its license.9 A free zone entity must typically hold one of the following arrangement. licenses issued by the relevant free zone authority: (i) trading license, (ii) service license, Generally limited liability companies in the UAE can import and distribute goods in their (iii) manufacturing/industrial license. In order for a free zone entity to engage legally in own right, but do still need to register to obtain the protections described above. sales within the UAE (and outside of the relevant free zone), the entity will generally have to retain a commercial agent or distributor or establish a branch onshore. C. GENERAL LEGAL CONSIDERATIONS
(iv) Holding Companies (i) Doing Business With the Public Sector In certain circumstances, entities incorporated in the free zones may be used as offshore Foreign businesses that do business with the federal government or the government of holding companies, meaning that they are used in transactions that do not involve any emirate or any other governmental body must comply with public sector procurement operations physically situated in the relevant free zone. Examples of this practice include rules as set forth in Financial Order No. 16 of 1975, the Federal Regulation of Conditions the use of companies incorporated under the offshore companies regime of the Jebel of Purchases, Tenders and Contracts as well as any local procurement rules. Ali Free Zone for use as a regional holding, or as a holding company for the ownership of real estate assets in Dubai. Additionally, special purpose companies (SPCs) can be
6 Latham & Watkins | Doing Business in the United Arab Emirates Latham & Watkins | Doing Business in the United Arab Emirates 7 (ii) Import & Export Regulations jurisdictions (including GCC countries) which UAE nationals and locally incorporated entities can benefit from. Currently, there is ambiguity regarding whether, under the laws As a member of the World Trade Organization (the WTO) and as a party to various of other GCC states whether free zone entities should qualify for the favourable tax regional free trade agreements throughout the GCC, the UAE has low rates of tariffs. treatment usually afforded to other GCC nationals/GCC-incorporated entities, particularly Import duties are normally charged on products imported into the UAE (outside of the where such entities are not majority or wholly-owned by UAE nationals. free zones), at rates that can vary according to the nature of the import (e.g., higher There is currently no value added tax or sales tax in the UAE, although the imposition of duties apply to alcohol and tobacco products). The duty may be alleviated by exemptions a GCC-wide value added tax has been widely discussed for the last several years. based on the importer’s status (e.g., free zone entity, majority owned by a GCC national, etc.) or exemptions based on the type of product. Generally, foreign parties cannot import There are also currently no federal personal taxes of any kind in the UAE — i.e. no goods into the UAE for the purpose of resale, other than a free zone entity directly for federal income tax, capital gains tax or inheritance tax. Certain municipality taxes are sale within the relevant free zone or for its own use. Note that there is a 5 percent export levied at the emirate level on designated services. duty for all goods leaving the Jebel Ali Free Zone for Dubai. It should be noted that, while there are generally no direct taxes in the UAE, there are a There are no duties or tariffs on exports. number of indirect taxes in the form of government fees. These include land transfer fees and fees payable to the notary public (since most corporate transactions, including share The UAE imposes a boycott of trade with Israel. transfers generally require the involvement of the public notary or other official body to grant registration). In addition, certain transfer fees are applicable in the free zones. For (iii) Foreign Exchange Controls & Anti-Money Laundering example, the transfer of shares in a free zone establishment (FZE) in the Jebel Ali Free Zone is subject to a transfer fee of a minimum of AED 20,000 subject to a maximum of The UAE does not generally have any currency exchange controls and restrictions on AED 50,000. the remittance of funds. Further, free zone entities are generally expressly permitted to repatriate 100 percent of their profits from the UAE in accordance with regulations in place in their respective free zones. (vi) Employment Law The UAE has recently strengthened its laws relating to the use of criminal proceeds Employment in the UAE is governed by the UAE Labour Law, Federal Law No. 8 of and terrorist financing activities. As the GCC is a member of the global Financial Action 1980, as amended, which imposes certain minimum standards on employing juveniles, Task Force (the FATF), the UAE has implemented anti-money laundering procedures working hours, vacation and public holidays, sick leave, maternity leave, employee to meet the standards of the FATF. The various free zones also generally have rules on records, safety standards, termination of employment and end of service gratuity preventing money laundering. For example, the DIFC requires companies incorporated payments. In January 2011, the Ministry of Labour and Social Affairs introduced, for the in the DIFC to appoint a senior manager as a money laundering reporting officer and to first time, a minimum wage limit for different categories of workers. Employee grievances submit an annual report detailing steps that such company has taken to implement its are handled by a special programme run by the Ministry, and the Ministry must also be anti-money laundering rules. informed if an employee is subject to the disciplinary code. Pensions and social security schemes in the UAE are governed by the Pensions & Social Securities Law, Federal Law No. 7 of 1999, as amended. (iv) Bribery and Anti-Corruption Some free zones have their own employment laws and employee grievance procedures The UAE has ratified the United Nations Convention against Corruption and has enacted although, generally speaking, these mirror the provisions of the UAE Labour Law. In federal and emirate level legislation to target bribery and corruption. some free zones, for example the DIFC, the free zone’s laws will take precedence over Bribery of a UAE public official (such term includes all customary government and the federal employment laws. ministerial positions and also covers employees of state-owned companies or partially Most employees working in the UAE, including in the free zones, have written contracts state-owned private companies) is an offence in the UAE. This applies equally to of employment. The Ministry of Labour requires a standard form contract of employment the public official and those who offer, accept and facilitate bribes, whether or not to be entered into and filed with the Ministry of Labour. Many employers also enter they actually benefit from the bribe. Private sector bribery within the UAE is similarly into further, more comprehensive employment contracts with their employees. Written prohibited, however the legislation only applies to the person accepting the bribe, not the contracts of employment are certainly advisable for any business in the UAE. There is person offering or facilitating the bribe. Penalties for bribery can include forfeiture of the no employment at will in the UAE (the UAE Labour specifies minimum notice periods for bribe, up to 10 years in prison and fines commensurate with the amount of the bribe. termination of employees).
Since September 2009, all institutions registered under the Ministry have been required (v) Taxation to make all payments of their workers’ wages and salaries through the Wages Protection System. This involves the transfer of monies through a few selected financial institutions There is no federal corporate or income tax levied in the UAE (except on oil companies that are authorised and regulated by the government. The Wages Protection System and banks). Certain emirates, including Dubai under the Dubai Income Tax Ordinance does not apply to some free zones, for example the DIFC. of 1969, have introduced a local income tax; however, these taxes have not been implemented as of the date of this memorandum. In addition, free zone entities may UAE federal law also sets out preferences for hiring UAE nationals and, for some be able to benefit from formal tax holidays for periods of up to 50 years (renewable 15 administrative positions, requires that only UAE nationals be employed (e.g., public year holidays are common). The UAE has tax treaties (concluded with a number of relations officers who liaise with the government at large companies, attorneys appearing in the courts, etc.). If a non-free-zone company has more than 50 employees, it must
8 Latham & Watkins | Doing Business in the United Arab Emirates Latham & Watkins | Doing Business in the United Arab Emirates 9 employ a minimum percentage of UAE nationals in accordance with the “Emiratization” Entities operating outside free zones are permitted to lease space in the UAE upon policy of the UAE Federal Government as originally expressed in Council of Ministers registration as a locally incorporated entity or as a branch or representative office. For Order No. 259/1 of 2004 entitled “Resolutions on Training and Employment of UAE entities operating within free zones, registration within free zones entitles and in most Citizens in the Private Sector” (the Resolution). The Emiratization policy applies to both cases requires one to apply for a lease or freehold from the free zone’s real estate the public and the private sector, and both local and international companies operating in authority. the UAE are subject to the Emiratization policy in the sectors for which such guidelines have been formulated. The Emiratization policy quotas are higher in the public sector, and have recently been amended for the private sector to require a blanket 15 percent (ix) Intellectual Property quota of UAE national workers, across all private sector industries. The Resolution UAE law recognises a broad range of national intellectual property rights, which are principally tasks the National Human Resources Developing and Employing Authority and similar in form to those under the UK, European and US systems. By virtue of the UAE’s the Ministry of Labour with developing further Emiritization guidelines. membership of certain worldwide conventions on intellectual property (e.g. the Madrid A key provision of UAE federal employment law is a requirement to pay a statutory end Convention, the WTO, TRIPS, Patent Cooperation Treaty 1970 (the PCT), etc.), there is of service gratuity (ESG) to employees upon termination of their employment. The ESG also recognition within the UAE of worldwide intellectual property rights. Registration of regime in the UAE takes the place of a formal pension regime. ESG is calculated at a intellectual property is handled by the federal Ministry of Economy. rate of 21 days’ salary per year for the first five years’ service and 30 days’ for each year (a) Patents (or Industrial Property) thereafter, up to a maximum amount of ESG equal to two years’ salary. ESG is payable as a lump sum on termination of employment. The DIFC has its own ESG regime, which Patents are protected under the UAE’s Industrial Property Law (Federal Law No. 17 is broadly similar to that applied in the wider UAE. Share incentive schemes are not of 2002), as amended by Federal Law No. 31 of 2006. The UAE operates under two common in the UAE. systems, the Patent Cooperation Treaty system for domestic patents and the UAE is also part of the GCC Patent system which provides a mechanism for regional filings of patent applications within the GCC countries. The GCC is not part of the PCT system, (vii) Immigration so patent applications of local interest only should be filed through the GCC system. The number of patents registered in the UAE annually is very small, and as the UAE As a country with a very high percentage of expatriates (85 percent to 90 percent of is an importing country, infringement issues are usually dealt with in the US or Europe. the total population) and visiting tourists, the UAE is generally accommodating to legal However, it is possible to register patents in the UAE to maximise protection. Obtaining immigrants and visitors. Visas are available for business and tourists visits, transit and a grant is expensive and takes a long time, because the examination for patentability is residency, and in the majority of cases, an attorney is not required to handle processing outsourced. Infringers of patents registered in the UAE are subject to limited damages, of visas. fines and possible imprisonment. Visitors from approximately 33 countries (including the US and UK) can obtain visit visas upon arrival at an airport in the UAE for no cost. Visitors from other countries can (b) Copyrights typically obtain tourist visas from certain hotels or tour operators. Business visitors can Federal Law No. 7 of 2002 Concerning Author’s Rights and Neighboring Rights gives be sponsored by an employer with a business license (e.g., a branch or representative copyright protection to a wide range of works. Copyrights are protected in the UAE in office, free zone entity, entity under the Companies Law, etc.). Nationals of the other accordance with widely accepted international conventions, though there are some GCC states do not require a visa. areas (notably in the area of ownership of employee works and the assignment of Employers can obtain residency visas, which last for three years, for a certain number of future copyright) where UAE law diverges from international norms. For employers it is employees, as determined by the federal government in relation to particular industries. important to ensure that copyright works such as software are written by more than one For entities located outside of the free zones, employers must register the employment author so as to avoid the worst consequences of the law limiting the assignment of future contract with the Ministry of Labour and Social Affairs before a residency visa can be copyright. Before suing under copyright it must be registered. This is largely to establish issued. In most free zones, the sponsor of each employee is the free zone itself and the title. In the court system, enforcement is based on criminal law principles, which means free zone interacts with the federal government directly, which makes the process more that fines are levied, which are often inadequate, but injunctions against future conduct efficient. Once a residency visa is obtained and the employee earns a certain salary, the are not awarded. Damages are per consignment before the court and not generally for all employee may sponsor his or her family for immigration, provided that he or she earns a infringement, and therefore are inadequate. minimum of AED 4,000 per month. (c) Trademarks and Trade Names
Federal Law No. 37 of 1992 (as amended by Federal Law No. 19 of 2000 and Federal (viii) Real Property Law No. 8 of 2002) gives protection to both trademarks and trade names. Trademarks Except in certain designated freehold areas or certain free zones, real property may and the applications procedures are slow and expensive and not computerised, so only be owned by UAE (or GCC in certain emirates) nationals or entities that are wholly searching is difficult. Registered trademarks are a federal right but business names owned by such persons. Most foreign residents and foreign businesses lease their are dealt with locally by each emirate, which makes for multilayer protection and homes and office spaces. However, JAFZA offshore companies are the only offshore enforcement. The UAE trademark office does not allow filing of multi-class applications structures permitted to own properties within Dubai and be delivered a title deed. for trademarks. Dubai customs seems to have efficient means of border control, but the However, if the JAFZA offshore company is owned by a foreigner then it may still only other emirates are less well equipped. In the court system, enforcement is based on own property in certain designated areas. criminal law principles, which means that fines are levied, which are often inadequate,
10 Latham & Watkins | Doing Business in the United Arab Emirates Latham & Watkins | Doing Business in the United Arab Emirates 11 but injunctions against future conduct are not awarded. Damages are per consignment While it may be helpful as a matter of practice to include such provisions, there can be before the court and not generally for all infringement, and therefore are inadequate. no assurance that a foreign jurisdiction or arbitration clause would be recognised by There is some discussion about reforming civil procedures. the UAE courts in practice. The Civil Code and general law in the UAE gives the UAE courts broad powers to hear and adjudicate matters involving a UAE party, and there is (d) Confidential Information therefore inevitably a risk that a UAE court could purport to take jurisdiction over a matter UAE’s Industrial Property Law (Federal Law No. 31 of 2006), which deals also with despite an express provision providing for an alternative jurisdiction. UAE legislation patents and industrial designs, specifically protects trade secrets. The UAE’s general provides that the UAE courts have jurisdiction to hear actions brought against UAE contract law, unfair competition law and various confidentiality provisions in specific nationals, UAE corporate entities and foreign citizens having an address or place of areas of law (e.g. employment law) also protect know how and confidential information. residence in the UAE, irrespective of any agreement between the parties in respect of The absence of a uniform trade secrets law means that there is a degree of uncertainty jurisdiction and applicable laws. as to protection of these rights under UAE law. A particular problem is that the statute for protecting confidential information is also the statute that protects patents, which results in conflicts in attempting to resolve competing rights. Consequently the best (xii) Dispute Resolution protection is through contracts with employees and third parties, and this does seem to (a) Arbitration be enforceable. In recent years, both the DIFC and the Ministry of Economy have looked International arbitration is the preferred method of dispute resolution for cross-border at issuing a separate draft law on trade secrets, but at the time of writing, neither law transactions relating to the UAE. The primary reason for that, and one of the key features has been enacted. UAE Courts will generally act to prevent the confidential information of international arbitration, is the relative ease with which arbitral awards can be enforced of one party being used or disclosed by another party, especially where there are in countries around the world. That is thanks to the 1958 New York Convention on contractual relations, including contracts of employment. the Recognition and Enforcement of Foreign Arbitral Awards, to which well over 140 countries are a party. The UAE acceded to the New York Convention in 2006, which (x) Data Protection and Privacy means that foreign arbitral awards should be as easily enforced within the UAE as UAE arbitral awards. As a result, many parties doing business in the UAE (both foreign While the UAE constitution and certain federal laws recognise an individual right to and locally based) tend to refer any disputes arising out of or in connection with their privacy in specific circumstances, the UAE has not established a federal data protection contracts to final and binding arbitration. regime of the type found in jurisdictions such as Australia, the European Union or Hong Kong. (b) Dispute Resolution Options in the DIFC
Notwithstanding the absence of federal laws, the DIFC and Dubai Healthcare City Recently, the DIFC Courts’ jurisdiction has been significantly expanded to include free zones have both enacted data protection laws and regulations that regulate the jurisdiction over matters which are referred to the DIFC Courts by private parties on a processing, storage and transfer of personal data. consensual basis, whether or not such parties are DIFC-domiciled entities, in addition to jurisdiction over all matters pertaining to the parent companies of DIFC registered In addition, certain other federal and local laws apply to the security and processing branches.12 The practical effect of these changes is to enable non-DIFC persons to opt of personal data in certain circumstances, including in relation to employee records, in to the jurisdiction of the DIFC courts, including through the inclusion of forum selection financial information, electronic commerce, communications, healthcare and cybercrime. clauses in ordinary commercial contracts and finance documents, irrespective of a nexus to the DIFC. (xi) Governing Law A common concern that remains with respect to DIFC court judgments is the procedure for enforcement of those judgments. At least within Dubai and the UAE, however, Jurisdictions which have, and rely upon, large bodies of case law (particularly common there are established procedures and codified guidelines which ensure DIFC court law jurisdictions such as the US and England) tend to have more developed bodes of judgments will be adequately enforced by the courts of Dubai or the other emirates of commercial and corporate law than the UAE. The same is true, to an extent, of other civil the UAE. Pursuant to the Protocol of Enforcement between the Dubai Courts and the law jurisdictions as well. Laws and cases in the UAE tend not to be as readily available, DIFC Courts (the Protocol of Enforcement), all judgments, orders and awards issued or or available with reliable English translations, as in these other jurisdictions. Accordingly, certified by the DIFC courts (for example, in the instance of the certification of a DIFC- where a foreigner is entering into contracts with a party located in the UAE (other than an LCIA arbitration award13) will be enforced by the Dubai Courts provided that the relevant entity connected to federal or emirate governments), it is quite common to see non-UAE judgment or order has been translated into Arabic and constitutes a final judgment. law selected and there is a notable tendency to select English law (or, in some instances, Crucially, the judge recognizing and executing the judgment at the Dubai Courts has New York law or the laws of another US state) as an alternative. no authority to review the merits of an order or judgment during any enforcement Care should always be taken to ensure that the selection of a governing law is made proceeding. The procedure established by the Protocol of Enforcement essentially expressly, that the selection of a governing law extends to non-contractual obligations facilitates the conversion of a DIFC court judgment into an order of the Dubai Courts. arising out of or connected to the relevant contract (where appropriate) and that the Thereafter, automatic enforcement can be achieved not only onshore in Dubai, but in selection and/or the law itself will be recognised in any enforcement action in the UAE. the other Emirates of the UAE, who as a constitutional matter are required to enforce the Parties should also be aware that the selection of a non-UAE law will not prevent orders of the courts of other Emirates within the union. mandatory rules of UAE law impacting on contractual obligations in some circumstances (especially where contractual obligations are performed in the UAE or where enforcement is sought in the UAE).
12 Latham & Watkins | Doing Business in the United Arab Emirates Latham & Watkins | Doing Business in the United Arab Emirates 13 APPENDIX 1
Nevertheless, it remains an open question as to whether the courts of other GCC states will similarly enforce an order of the DIFC Courts that has been converted into a Dubai Court judgment by virtue of the Protocol of Enforcement. In theory, there is a treaty Pros and Cons of Means to Set Up a Legal Presence in the UAE based instrument which should support pan-GCC enforcement — the GCC Convention for the Enforcement of Judgments and Judicial Notices and Delegations (the GCC Means Pros Cons Convention). This provides that all member states shall ensure that their domestic courts Incorporating a Limited • Allows entity to conduct a broad range of activities in • At least 51 percent of the company’s capital has to be enforce the final judgments of the courts of other member states. However, the GCC Liability Company (under all of the UAE (other than in the free zones). owned by UAE nationals. However, the foreign owner Convention authorizes the courts of member states to reject enforcement if the judgment the Companies Law) • Allows entity to conduct business with federal and may seek the following protections in the constitutional documents: in question is deemed to be contrary to the provisions of Islamic Shari’a, the provisions local governmental bodies (without the involvement of a commercial agent or national agent). • The right to appoint all of the directors of a member state’s constitution or public order. • Separate legal entity from its foreign owner. • The right to appoint the general manager • The right to veto major decisions (xiii) New Competition Law • The right to all of the assets of the company on a winding up 14 On 23 February 2013, the new Competition Law came into force in the UAE, although • The right to more than 49 percent of the profits16 there is a six-month transitional period expiring on 23 August 2013. The Competition Law • Can take up to several months to set up. Certain applies to enterprises (any natural or legal person or consortium) engaging in economic licenses, e.g. for industrial activities, will take longer. activity or holding intellectual property rights in the UAE. Where economic activity occurs • Must employ a specified number of UAE nationals if outside the UAE but has the ability to affect competition in the UAE, these practices and employ more than 50 people and fall within the scope of agreements will also be subject to the Competition Law. the Emiritization guidelines. • No general minimum capital requirement. A number of entities and sectors are excluded from the legislation, including federal and local governments, state-owned enterprises and small and medium sized enterprises. The following sectors have also been carved out of the legislation: telecommunications, Opening a Branch Office • Quicker than incorporating a local entity. • A branch office may only engage in activities that do not constitute “commercial business,” which typically financial services, cultural activities, pharmaceutical, utilities, waste disposal, • More activities permitted than for a representative office. means that branch offices are limited to professional transportation, oil and gas, and postal services. activities (although an exception has developed in practice for branches engaged in the sale of The structure of the Competition Law is similar to the regime in the European Union, products manufactured by its parent company). broadly covering: (i) restrictive agreements (including those that price fix and limit the • Not a separate legal entity from the foreign owner. free flow of goods), (ii) abuse of dominance, and (iii) merger control.15 • Must engage a UAE national agent to act as a Fines will be imposed where the Competition Law is not followed or breached, and service agent who will handle sponsorship and government paperwork. where companies repeatedly breach the law, such penalties may be doubled. In addition • Limited to employing the number of foreigners to the imposition of fines, the courts have the discretion to shut down establishments permitted under its business license. found in breach of the law for a period of between three to six months.
Opening a Representative • Quicker than incorporating a local entity. • May only handle marketing and administrative Office functions on behalf of a foreign parent. • Not a separate legal entity from the foreign owner. • Must engage a UAE national agent to act as a service agent who will handle sponsorship and government paperwork. • May only employ up to three or four foreigners.
14 Latham & Watkins | Doing Business in the United Arab Emirates Latham & Watkins | Doing Business in the United Arab Emirates 15 APPENDIX 1 APPENDIX 2
Pros and Cons of Means to Set Up a Legal Presence in the UAE Companies Law and Free Zone Entities
Means Pros Cons Type of Entity Limited Liability Private Joint Stock Public Joint Stock Joint Participation Companies19 Company20 Company21 Ventures22 Setting up a Free Zone • 100 percent foreign ownership permitted. • Generally, a free zone entity is permitted to conduct 17 Entity • Geographical proximity to entities carrying out similar business solely within its relevant free zone and Minimum Ownership 51 percent. 51 percent. 51 percent of shares26 (pre 51 percent of capital must activities. limited to performing solely those activities specified percent for UAE and post-public issuance). be contributed by the in its license.18 24 local partner • Commitment to zero taxes for a period of at least 15 Nationals years (renewable for an additional 15 years). • Each free zone authority is limited in the scope of activities it may authorise (e.g., only licenses for • Full repatriation of profits and capital expressly media and IT services in the Dubai Media City, etc.) permitted. • Many free zones require an actual physical presence • Sponsorship process for employees is streamlined in the free zone (e.g., leasing office space and at through the free zone authority. least one employee). • It is difficult and expensive to obtain space in the popular free zones (e.g., DIFC, Sharjah Airport International Free Zone).
Liability Limited Limited Limited Joint Commercial Agency • Does not require establishment of a physical • Third party handles all aspects of the foreign Relationship presence in the UAE. business in the UAE. • Once a commercial agency contract is registered with the Ministry of Economy and Commerce: • Exclusivity — registered commercial agents have the exclusive right to import the goods which are Minimum Capital No requirement AED AED 10,000,000 No requirement the subject matter of the agency. Requirement 2,000,000 • Commissions — registered commercial agents are entitled to receive commissions on the sales they make as well on sales made in the UAE by the principal or any other party.
• Termination — the principal may only terminate Number of Founding Two to 50 At least three Three to 15 At least two a registered commercial agent for “material Members/Partners reasons.” Further, a principal may not refuse to renew a commercial agency agreement after its expiry date without the payment of compensation to the registered commercial agent. Management or Director No restrictions Chairman must be a UAE Chairman must be a UAE No restrictions. Restrictions national national (by Nationality) Majority of directors must Majority of directors must be UAE nationals be UAE nationals
16 Latham & Watkins | Doing Business in the United Arab Emirates Latham & Watkins | Doing Business in the United Arab Emirates 17 APPENDIX 2
ENDNOTES
1 The UAE federal constitution was established as a temporary legal framework for the union of the seven emirates in 1971. In 1979, a draft “permanent” constitution was prepared which provided for the unification of the judicial systems and armed forces of each of the individual Simple Limited Partnership General Partnerships23 Free Zone Free Zone Companies emirates into combined federal entities. Dubai refused to accept the unification of either its Partnerships Limited with Shares Establishments24 courts or military forces under a federal umbrella until 1996, when it acceded to the unification of military forces only. The UAE federal constitution was permanently accepted by Dubai and the • Must have at least one • Must have at least one 100 percent. None. Can be 100 None. Can be 100 other emirates after the unification of military forces in 1996. Dubai continues to maintain its own general partner who is a general partner who is a percent non-UAE owned percent non-UAE owned UAE national UAE national court system which is not subject to oversight from the Supreme Court of the UAE. • Limited partners can be • Limited partners can be 2 These business activities (and the relevant government agencies) include, among others, the both UAE and foreign both UAE and foreign following: industrial projects (Ministry of Finance and Industry), engineering consultants and nationals nationals related technical services (municipality authority of the relevant emirate), law firms (Ruler’s Court of the relevant emirate), banking and financial services (UAE Central Bank), recruitment agencies (Ministry of Labor and Social Affairs); sea cargo, freight forwarding and cargo clearing (Department of Ports and Customs).
3 There is an exception to this general rule for entities that are (a) specifically exempted by the federal Cabinet of Ministers from the requirements set forth in the Companies Law; and (b) operating in any of four sensitive industries: oil and gas, electricity and gas production, • Joint for UAE nationals • Joint for UAE nationals Joint Limited Limited water treatment and transmission, distribution or other related activities thereof. Entities under subsection (a) are subject to specific requirements imposed by the federal government, and • Limited for foreign • Limited for foreign those under subsection (b) are subject to specific requirements imposed by the relevant emirate nationals nationals (and federal government), on an ad hoc basis.
4 Certain activities, even if carried out by professional services companies, are restricted to UAE nationals and companies wholly owned by UAE nationals (e.g. real estate agency and No requirement AED 500,000 No requirement AED 1,000,000 AED 500,000 brokerage activities, and education activities).
5 The UAE Federal Government issued a Federal Decree on 10 August 2009, amending Article 227 of the Companies Law. The amendment applies retroactively to limited liability companies set up on or after 1 June 2009.
6 The amendment to Article 227 impacts certain other provisions of the Companies Law. At least two At least three At least two One Between two Article 255 of the Companies Law requires a limited liability company to retain 10 percent of and five its net profit in each year in order to create a statutory reserve, thus leaving the remaining 90 percent of profits to be distributed as dividends. Once the statutory reserve amounts to half of the share capital of the company, the shareholders may suspend the retention of such profits, Must be managed solely Must be managed solely Must be managed solely No nationality requirements No nationality thus allowing all future profits of the company to be distributed as dividends. If a limited liability by UAE nationals by UAE nationals. by UAE nationals. however at least one of the requirements however at company is established following the above legislative amendment with a minimal share capital, directors and the company least two of the directors it is likely that the shareholders will have a larger pool of funds to be distributed as dividends, as secretary must be resident and the company the retention of half of the share capital ought to be easier and quicker to attain. in Dubai secretary must be resident in Dubai Article 289 of the Companies Law, which relates to the dissolution of a limited liability company, provides a trigger event for dissolution by the shareholders if the company sustains losses amounting to one half its capital. Any new limited liability company incorporated with a minimal share capital amount may easily reach the losses prescribed in this Article resulting in the winding up of the company (unless the shareholders elect to recapitalise the company).
7 UAE Ministerial Cabinet Resolution No.229/12 of 2007.
8 However, there is a growing practice in Dubai whereby local service agents are not required in certain circumstances.
9 The relevant licence will be issued by the free zone authority regulating the free zone in which the company is incorporated. In certain instances, a free zone entity may be able to apply for an additional licence from a UAE authority that has jurisdiction outside of the free zone (for example, the Dubai Department of Economic Development) if it is conducting certain kinds of permissible business in a particular emirate outside of the free zone of incorporation.
10 The 2010 amendments to the UAE Commercial Agencies Law strengthen the protection afforded to UAE nationals agents. The 2010 amendments remove the concept of a principal being able to unilaterally deregister a fixed term agency arrangement upon expiry of the fixed term.
18 Latham & Watkins | Doing Business in the United Arab Emirates Latham & Watkins | Doing Business in the United Arab Emirates 19 11 The Commercial Agencies Committee is a special committee, reintroduced by the 2010 amendments to the UAE Commercial Agencies Law, that is charged with the duty of reviewing terminations of agency arrangements.
12 Dubai Law No.12 of 2004 as amended by Dubai Law No.16 of 2011.
13 The Protocol of Enforcement extends to arbitral awards issued by the DIFC-LCIA, however, these awards must first be ratified by the DIFC courts before being enforced by the Dubai Courts.
14 Federal Law No.4 of 2012
15 In respect to merger control, at present the Competition Law contains a market share test, however, the precise threshold has yet to be determined by the UAE Cabinet. The expectation is that this will follow later this year.
16 Refer to section B(i)(b) above.
17 In most free zones there are three permitted forms that a free zone entity can take: a free zone company, a free zone establishment and a free zone branch. A free zone establishment and free zone company are required to have minimum capital of at least AED 500,000 in some free zones (and a higher threshold in others). Typically, a free zone company must have more than one owner whereas a free zone establishment may have a single owner. A branch has no minimum capital requirement, but is more limited in the types of activities that it may conduct as compared to the free zone establishment or free zone company.
18 Free zone entities with service licences have been known to provide services outside of their free zone. Free zone entities with trading or industrial licences generally require a local distributor or commercial agent to sell goods outside the free zone and within the UAE.
19 This is the preferred form of entity for foreigners wishing to enter the UAE (outside of a free zone). This is primarily because of the relatively small capital requirements and the flexibility to decide how management decisions will be made and how profits will be distributed, irrespective of the foreigner’s equity holding. One important limitation is that it cannot be used to transact the following activities: banking, insurance or investment for a third party, which are restricted to public joint stock companies.
20 The rules governing a private joint stock company are the same as the rules governing the public joint stock company, except that public joint stock companies are permitted to issue securities to the public.
21 The UAE federal government has encouraged certain high-profile projects to be undertaken via a public joint stock company in order to allow the issue of shares to the public. Further, any company carrying on banking, insurance or investment for a third party must be a public joint stock company. Note that in the case of some listed public joint stock companies, higher local ownership restrictions may be imposed or may be included in the company’s articles of association.
22 Joint participation ventures are often formed by foreigners who wish to set up in the UAE on a short-term basis to carry out a specific project, often with government bodies. Each participant in the venture will generally conduct business in its own name. The major drawback of a joint participation venture is that the liability of the participant who is conducting business is unlimited. In addition, if the liability of other participants is disclosed to third parties, each participant will be liable to third parties as if it were a general partner.
23 Foreigners are not permitted to join a general partnership.
24 There are general requirements as each free zone will have individual rules and regulations.
25 GCC Nationals may own 100 percent of entities incorporated in the UAE as a matter of law.
26 At least 20 percent and no more than 45 percent of the initial capital must be owned by the founders.
20 Latham & Watkins | Doing Business in the United Arab Emirates For more information, please contact Villiers Terblanche, Ahmad Anani or your Latham representative.
Villiers Terblanche Ahmad Anani Office Managing Partner Deputy Office Managing Partner +971.2.813.4848 +971.4.704.6350 [email protected] [email protected]
Al-Mirsal Please visit www.al-mirsal.com to view Latham’s Middle East blog, which is produced in English and Arabic and highlights industry and legal developments relevant to the region.
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