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ESTABLISHING A PRESENCE IN

This guide includes a high-level overview of the legal and regulatory environ- There are certain restrictions on foreign ment for establishing a business presence in the (Dubai), ownership for investors wishing to establish a in mainland Dubai. To facilitate United Arab (UAE). The overview describes the difference between foreign investment, a number of free zones establishing a presence in mainland (onshore) Dubai and establishing a have been established and provide an presence in a free trade zone (free zones). alternative to establishing a business under the Law in mainland Dubai. Furthermore, the guide examines the List” (discussed further below), along with The main advantages for foreign investors various forms of commercial entities that the recent introduction of the Economic of operating in a free zone rather than in can be established and provides an over- Substance Regulations and recent amend- mainland Dubai are: view of the most commonly used forms ments to the UAE’s Anti-/ • There is generally no tax on profits, to establish a Dubai-based business by Anti- Legislation. subject to certain time restrictions foreign investors. It is a summary document This guide has been prepared during the relating only to Dubai and is not a substitute • In most cases, 100 percent foreign COVID-19 pandemic; as such, it does not for obtaining appropriate and tailored legal ownership is permitted seek to address the issues relating to the advice. impact of the ongoing crisis. • For the most part, the regulations Specific issues that may influence the type governing free zones are published in of business establishment and its location The Business and English including the nature of the business, the Legal Environment • There are no restrictions on foreign nationality of the person or entity establish- Federal Law No. 2 of 2015 concerning exchange or repatriation of capital (in ing the business, and whether the business Commercial Companies (the Companies certain free zones) Operational support is to be undertaken in Dubai, in other Law) sets out the five forms of companies and business continuity facilities are emirates of the UAE or abroad, are not dealt from which a party wishing to establish readily available with in detail in this guide. a business presence in mainland Dubai A significant disadvantage of operating from considering establishing a must choose. In addition, an appropriate within a free zone is that businesses are presence in Dubai should first discuss their commercial or industrial license must be restricted as to the type of activities they specific requirements with their legal and obtained from the relevant governmental may conduct outside of that free zone. An tax advisers to ensure the appropriate legal authority prior to the entity commencing overview of some of the major free zones in form is adopted and the required licenses commercial activities. Certain business Dubai is provided later in this brochure. are obtained. This guide reflects the posi- sectors (such as financial services and Having said that, in 2018, the UAE issued tion as of September 2020, following the petrochemicals) may also require further Federal Law No. 19 of 2018 Regarding introduction of the Foreign Direct Invest- approvals from various ministries and/ Foreign Direct Investment (FDI Law) aimed ment Law No. 19 of 2018 and Cabinet Res- or other authorities that regulate specific at opening up the UAE mainland market to olution No. 16 of 2020 issuing the “Positive sectors. foreign investors in certain sectors of the economy where up to 100 percent foreign 1 Limited liability company ownership of companies in mainland Dubai would be allowed. In July 2019, the UAE 2 Public joint-stock company introduced the relaxation of foreign owner- ship restrictions for 122 business activities, FIVE 3 Private joint-stock company specifically in the manufacturing, agricul- forms of tural and services categories, pursuant 4  company to the FDI Law. This was followed by the companies permitted by (general partnership) UAE Cabinet issuing Cabinet Resolution No. 16 of 2020 containing the full Posi- the COMPANIES LAW 5  company tive List of economic sectors and activities (simple liability partnership) and the requirements for establishing FDI companies in mainland UAE. Some of these requirements include (i) minimum share capital for some activities, (ii) obligations to certain activities in Dubai through a rep- then no need to have a UAE national major- employ advanced technology in respect of resentative office or a branch of a foreign ity shareholder. company as will be further explained in this certain activities; and (iii) compliance with Historically, a practice of entering into guide. certain Emiratization requirements (Emira- certain side agreements has developed tization is an initiative by the UAE govern- Non-commercial activities (including profes- in the UAE in relation to the UAE national ment to employ its citizens in the public sional services) may be carried out through ownership requirements. Pursuant to such and private sectors). a civil company or a sole proprietorship, side agreements, UAE shareholders agree which both have unlimited liability. to assign their profits to the foreign share- Establishing a Business holders in an LLC in return for an agreed Limited Liability Company annual fixed fee. The enforceability of such Presence in Mainland side agreements is not certain, and the The limited liability company (LLC) is the prudent view is that a UAE court might con- (Onshore) Dubai most widely used form of company by sider such side agreements as an attempt The Companies Law applies to all compa- foreign investors looking to conduct com- to circumvent UAE ownership requirements nies, branch offices, and representative mercial activities in Dubai. An LLC is a in breach of the Companies Law and the offices of foreign entities established and private company and its shares cannot be UAE Federal Law No. 17 of 2004 concern- operating in mainland Dubai (i.e. outside offered to the public. Shareholders of an ing the Combating of Commercial Conceal- the free zones). LLC benefit from limited liability status. ment, as amended (the UAE Anti-Fronting The five forms of companies permitted by An LLC has a separate legal capacity that Law). The UAE Anti-Fronting Law techni- the Companies Law are: is independent of its shareholders. The cally entered into force on 31 December 1. Limited liability company liability of each shareholder to the other 2009 and criminalizes the practice of shareholders and to third parties is limited enabling a foreign national to conduct an 2. Public joint-stock company to such shareholder’s capital contribution economic or professional activity prohibited 3. Private joint-stock company to the LLC. The objects of an LLC must not or restricted by UAE laws and regulations. include insurance, banking, or investment 4. Partnership company (general The Companies Law, however, permits of funds for the account of third parties. partnership) shareholders of an LLC to agree on a An LLC must have an initial capital suf- disproportionate economic benefit split 5. Limited partnership company (simple ficient for it to achieve its objectives, and that deviates from their shareholding ratio. liability partnership) the founders of an LLC have the right to Profits and losses of an LLC may therefore determine the amount of such initial capital. Limited liability companies, public joint- be distributed disproportionately among the stock companies and private joint-stock An LLC is required to have at least 51 shareholders (including where the share- companies are the most commonly estab- percent of its shares held by UAE nationals holders are both UAE and foreign nation- lished types of legal entities in the UAE or companies wholly-owned by UAE nation- als). The ratio should be set out in the LLC’s and are also the most commonly used als. An LLC may also have 100 percent of memorandum and articles of association, or invested in by foreign investors. An its share capital owned by Gulf Cooperation provided that not less than 20 percent of overview of these three forms is provided Council (GCC) nationals; however, if any profits are distributed to the UAE national below. Partnership (general and simple non-GCC national becomes a shareholder shareholders. liability) companies are not commonly used in the LLC, the minimum 51 percent UAE The management of an LLC may be com- in the UAE for several reasons, including national ownership must be complied with. the restrictions on foreign ownership and prised of either a single manager or a man- The new FDI Law introduces an exception foreign management. agement board (functioning as a director to the above requirement by providing that and board of directors, respectively, would Alternatively, instead of establishing a local if the LLC can satisfy the requirements of in other jurisdictions). Generally, there are legal entity, a foreign business can carry out the FDI Law and the Positive List, there is no nationality requirements regarding the A public joint-stock company has a sepa- The scope of activities that may be carried composition of the board. rate legal capacity independent of its share- out through a branch of a foreign company holders. Like LLCs, 51 percent of the share is limited to those activities permitted by the Specific conditions may be required to form capital of public joint-stock companies must UAE Ministry of Economy from time to time, an LLC in mainland Dubai. These condi- at all times be held by UAE nationals. GCC which have traditionally excluded trading tions depend on the nature of activities to ownership also satisfies the UAE ownership of goods in addition to certain other service be conducted by the company. It should be requirements in public joint-stock compa- activities. noted that certain activities are restricted nies, although the articles of association of to those companies that are fully owned by A branch or a representative office is not a particular public joint-stock company are UAE nationals (e.g., commercial agency considered a separate legal entity from its capable of providing otherwise. and supply of labor). parent company. The liabilities of a branch A public joint-stock company is required or representative office therefore attach to Additional approvals from other local or to have an odd number of directors, which the foreign parent company establishing it. federal authorities may be required before may be between three and eleven; each obtaining a license from the Dubai Depart- Generally, foreign companies are required director is elected for a term of three years ment of Economic Development (Dubai to appoint a local service agent for licensing and may be re-elected for further three-year Economy), depending on the nature of the and registration of a branch or a represen- terms. The chairperson and a majority of activities that are to be carried out by the tative office in the UAE. The local service the board of directors must be UAE nation- company. For example, a company looking agent must be a UAE national or a company als. At least two-thirds of the directors must to carry out certain telecommunications wholly-owned by UAE nationals. be shareholders of the company. activities will need to get prior approval from Unlike a shareholder, a local service agent the UAE Telecommunications Regulatory A public joint-stock company cannot has no equity or management interest in the Authority. provide financial assistance to any branch or the representative office and does shareholder. not bear any of its liabilities or obligations. Public Joint-Stock Company Public joint-stock companies are required Private Joint-Stock Company to have at least five founding members A private joint-stock company requires (unless founded by the UAE federal govern- at least two founding members and a ment or the government of one of the seven minimum initial capital commitment of Emirates that make up the UAE, or unless it AED5 million. As an exception to the rule, is the result of a conversion of any company the law permits the incorporation of sole into a public joint-stock company), and an shareholder private joint-stock companies, initial capital commitment of AED30 million known as “sole proprietorship – private (approximately US$8.2 million). The articles joint stock” entities. A private joint-stock of association of the company may provide company may not have more than 200 for an authorized share capital, which may shareholders. Shares in private joint-stock be up to two times the issued share capital companies may not be offered for public of the company. The capital of a UAE subscription. In all other respects, provi- public joint stock company is required to sions of the Companies Law applicable to be divided into negotiable shares of equal a public joint-stock company also apply value. The nominal value of each share to a private joint-stock company. A private must not be less than AED1 (approximately joint-stock company may be converted US$0.27) or exceed AED100 (approxi- into a public joint-stock company. Private mately US$27). All of the company’s shares joint-stock companies with more than 75 must have equal rights and must be subject shareholders must comply with corporate to equal obligations. Partly paid shares governance rules. are permitted, provided that at least 25 percent of their value is paid upon their Branch or Representative Office issue and the remainder of their nominal of a Foreign Company value is paid up within three years of such Foreign companies are permitted to issue. Between 30 percent and 70 precent establish wholly-owned branches and of shares must be offered to the public. representative offices in Dubai. The primary With the exception of shares in public difference between a branch and a repre- joint-stock companies wholly-owned by the sentative office is that a branch may carry UAE federal government or the government out activities similar to those of its parent of one of the Emirates, shares in all public company and generate revenue in the UAE. joint-stock companies must be listed on a By contrast, a representative office may securities market in the UAE (the Dubai only promote its foreign parent company’s Financial Market or the Securi- activities by gathering information and ties Exchange). soliciting orders but may not carry on its parent company’s activities. The compensation of a local service agent Production , , and Establishing a Business is typically an annual fee stipulated in a Dubai Outsource City. local service agency agreement between Presence in the Free Zones •  the local service agent and the foreign Provides quality healthcare and an The free zones operate independently of company, in consideration for certain integrated center for clinical and well- each other and each has its own Free Zone administrative and licensing assistance that ness services, medical education and Authority (FZA), responsible for issuing the local service agent may perform for the research. the necessary licenses to operate in its branch or the representative office. respective free zone. As each free zone is • Dubai Multi Commodities Centre (DMCC) External approvals from other authorities different, it is necessary to liaise closely with A commodity market place, providing may also be required before obtaining a the relevant FZA in order to determine its industry specific market infrastructure license and a registration certificate from particular requirements. and a full range of facilities for the Dubai Economy, depending on the nature of and precious metals, diamonds and An individual or entity wishing to operate activities to be carried out by the branch. coloured stones, , and other in a free zone will need to establish an In general, annual fees are due to the rel- commodities industries. DMCC is also operating entity to carry out its business. evant authorities for the renewal of licenses home to a general free zone for non- The type of legal entity that may be estab- and certificates of registration, in addition to commodities-related business that has lished differs in each free zone. Broadly, the one-time establishment fees paid at the become increasingly popular in recent the following are the most common types of outset. There are also other incidental fees years. entities that may be established in the free relating to the issue and maintenance of zones: • Dubai Airport Free Zone (DAFZ) immigration, labor, and residency permits. A general trading, import, and export • Free Zone Establishment (FZE) Moreover, office space needs to be leased free zone located next to Dubai An FZE may have only one shareholder within mainland Dubai in order for a license International Airport. and holds separate legal capacity from to be issued by Dubai Economy to any its shareholder. entity operating in mainland Dubai. • Dubai Silicon Oasis (DSO) A high-tech free zone for the micro- • Free Zone Company (FZCO or FZ-LLC) electronics and the semiconductor An FZCO or FZ-LLC is similar to an The Free Zones industries, amongst other IT and FZE with a separate legal capac- ity independent of its shareholders. Numerous free zones have been estab- technology sectors. However, in contrast to an FZE, it may lished in Dubai, each with its own individual • Dubai Logistics City (part of Dubai have more than one shareholder. industry focus and regulatory environment. World Central) (DLC) Businesses operating in the free zones A logistics-oriented free zone catering • A Branch Office of a Foreign or Local are not subject to many of the restrictions to all modes, logistics Company imposed by federal and local laws and businesses, and value-added services, A branch office of a foreign or local regulations. The following are some of the including light manufacturing and company is not considered a separate more well-known free zones established in assembly, DLC is located near Dubai’s legal entity from its parent. The liabili- Dubai: International Airport. ties of a branch of a foreign or local company attach to the parent company •  Free Zone (JAFZ) The type of business activity to be under- establishing the branch office. Located next to the largest port in the taken will dictate which free zone is , JAFZ is primarily targeted appropriate in light of both commercial and • A in the DIFC at import and export businesses.. regulatory considerations. Further informa- A private limited company holds separate legal capacity and may have • Dubai International Financial tion on these and other free zones can be one or more shareholders. There is no Centre (DIFC) provided on request. minimum capital requirement for the Primarily for financial services provid- establishment of a DIFC private limited ers, the DIFC has its own legal system, company and the capital is divided into courts, financial services regulator (the transferable shares. Dubai Financial Services Authority), and stock exchange (NASDAQ Dubai). • Dubai Development Authority (DDA) Principally for business activities that are related to information technol- ... businesses operating in the free zones are ogy, e-commerce, media, printing and publishing, media production, broadcasting, information agencies, not subject to many of the restrictions imposed training and education, DDA acts as an umbrella to a number of smaller by federal and local law and regulations. and more specialized free zones such as , , Dubai Knowledge Village, Dubai • An Offshore Company in JAFZ Other Legislative Changes to Economic Substance Regulations An offshore company in JAFZ may Consider When Establishing a The UAE Cabinet of Ministers Resolution have one or more shareholders No. 31 of 2019 Concerning Economics and holds separate legal capacity Business in Dubai Substance Regulations (ESR) was issued on from its shareholders. An offshore 30 April 2019 in response to an assessment company cannot carry on business Data Privacy Protection Laws by the European of the UAE’s tax with companies or individuals resident The UAE does not have a comprehensive framework in light of the European Union’s in the UAE, and no residency permit data protection law at its federal level. Code of Conduct Group on Business Taxa- or any kind of visas can be issued However, there are a number of laws in tion. The ESR specifies the requirement for to an offshore company. There is place that govern privacy and data secu- all companies in the UAE (including those no minimum capital requirement rity. In December 2019, the UAE Cabinet in all free zones) to have economic sub- for the establishment of an offshore confirmed that it was planning to take stance or a presence in the UAE. company. While it is not required that steps to strengthen consumer protections The ESR apply to companies that generate an offshore company maintains a across the UAE, particularly with respect to income by undertaking one or more of the physical existence or office in JAFZ e-commerce transactions. “Relevant Activities” identified by the ESR, or Dubai, it is permitted to do so. It which include: is also permitted to maintain a bank In Dubai, the DIFC Authority and the Dubai account in Dubai (inside or outside Healthcare City Authority have passed com- 1. Banking business the free zone). An offshore company is prehensive laws and regulations regarding 2. Insurance business required to appoint a registered agent data protection laws, the most recent being approved by the FZA. DIFC Law No. 5 of 2020 which provides an 3. Investment fund management business updated data protection regime and came Setting up a free zone branch is often the 4. Lease-finance business into effect on 1 July 2020. Entities estab- simplest option to establish a business 5. Headquarters business lished in free zones are required to follow presence in a free zone, although the laws and regulations of their respec- 6. Shipping business consideration should be given to the tive free zones and other federal laws as desirability of ring-fencing liability within 7. Holding company business applicable to the free zone entities. a new company with limited liability. As 8. Intellectual property business noted above, depending on the particular 9. Distribution and service centre business free zone, there are minimum capital Value-Added Tax in the UAE requirements for incorporating free zone Value-Added Tax (VAT) was introduced in A Relevant Activities Guide was issued by establishments and companies. the UAE on 1 January 2018 at 5 percent on the Ministry of Finance to provide more several goods and services. information on each Relevant Activity, the The types of licenses that will be granted relevant Core Income-Generating Activities by the relevant FZA will depend on the type There are three categories for VAT in the (CIGAs) and examples for each Relevant of industry serviced by the free zone. The UAE: the standard 5 percent VAT, zero- Activity. Companies that carry out one or licenses include trade licenses, industrial rated supplies and exempt supplies. more of the above activities must maintain licenses, retail licenses, service licenses, The Federal Tax Authority is responsible actual economic substance and must warehousing licenses, and professional for administering, collecting, and enforcing submit an annual compliance report/noti- service licenses. federal taxes. It also provides guidance and fication to the relevant regulatory authority, Annual fees are due to the relevant FZA for conducts audits. which should include the information set these licenses together with a one-off set up Companies that have an annual turnover out in the ESR and the published guid- fee. There are other incidental fees relating above AED375,000 are required to register ance demonstrating to the authority that to immigration and, where applicable, for VAT. Those that have a turnover under the company maintains actual economic an annual rental payment for office or AED375,000 but above AED187,500 can substance. industrial space. The licensing fees are voluntarily register for VAT. One of the requirements to demonstrate subject to change by the relevant authority economic substances (if a company and are dependent on the free zone and VAT applies equally on tax-registered busi- carries out one or more Relevant Activity) the type of license applied for. A discussion nesses managed in mainland UAE and in under the ESR is that a company needs to with the relevant FZA regarding the type of the free zones. However, if the UAE Cabinet undertake one or more CIGAs relevant to license required and any applicable fees defines a certain free zone as a ‘designated its Relevant Activity or Activities in the UAE. should be held at the outset. zone’, such free zone is treated as outside the UAE for tax purposes. The transfer CIGAs are activities that are fundamental to of goods between designated zones are a company for generating income from one tax-free. or more Relevant Activity. Other ways that a company can demonstrate economics +44.(0)20.7350.8195 [email protected] Managing Partner, Europe andMiddleEast Managing partner, , Brussels,Dubai,andDohaoffices Tony Griffiths Contacts: Learn moreaboutourDubaiofficeatklgates.com. of IllegalOrganizations(AMLLaw).The the FinancingofTerrorism andFinancing Anti-Money LaunderingandCombating Federal Decree-LawNo.20of2018on provide guidanceontheoperationofUAE (AML Regulations).TheAMLRegulations ant toCabinetResolutionNo.10of2019 were issuedon29January2019pursu New Anti-MoneyLaunderingRegulations Anti-Money LaunderingLegislation penalties. inaccurate information)resultsinsignificant test ortoprovideinformation(or Failure tomeettheeconomicsubstance substance intheUAE. company didsowithappropriateeconomic that incomefromtheRelevantActivity, the need todemonstratethat,ingenerating notification thatmustbemade,whichwill a secondarysubmissiontotheESRreport/ from theendofrelevantperiod.Thisis Substance Returnwithintwelvemonths year, itisexpectedtofileanEconomic from suchactivityduringthelatestfinancial a RelevantActivity, andifitreceivedincome If acompanydeterminesthatitdidcarryon in theUAE. employees, physicalassetsandexpenditure ments astohavinganadequatenumberof substance isbysatisfyingtherequire - - or designatednon-financialbusinesses entities thatqualifyasfinancialinstitutions AML Regulationsspecifythatonlythose on request. happy toprovidemorespecificadvice summary ofthekeyconsiderations.We are in theregion.Theaboveisonlyabrief the businessthatislikelytobetransacted considerations, andthelevellocationof on anumberoflegal,licensing,andtax seeking toestablishinDubaiisdependent The structuretobeusedbyabusiness required licencesareobtained. the appropriatestructureisadoptedand their legalandtaxadviserstoensurethat their specificrequirementsindetailwith ing apresenceinDubaimustfirstdiscuss Finally, businessesconsideringestablish customers andactivities. to identify, manage,andmitigatehigh-risk that theyhaveinternalprocessesinplace Regulations totheirbusinessandensure the applicationofAMLLawand within theabovecategories,mustconsider businesses operatingintheUAE,whichfall the obligationsofAMLLaw. Therefore, and professions(DFNBP)willbesubjectto

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