LW.com 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.