SETTING UP IN THE UAE

SETTING UP IN THE UAE

Ali Al Aidarous

International Legal Practice

In the present article the authors look at the various options available to foreign investors to pursue business activities within the UAE. While the authors have tried to provide the reader with a concise overview of the various options available, the present publication is for information purposes only and does not replace legal advice.

The UAE At A

Glance

The United Arab Emirates (the “UAE”) officially known as “Dawlat al-Imarat al Arabiyya al-Mattahida” or “State of the United Arab Emirates” is a federal union founded on 2nd December 1971 by the Emirates Abu Dhabi, Ajman, Dubai, Fujairah, Sharjah and Umm al-Quwain. The six founding Emirates were joined by Ras al Khaimah in 1972 which joined the union on 10th February 1972.

Geographically, the UAE is situated in the southeast of the Arabian Peninsula in Western Asia on the Persian Gulf, bordering Oman to the east and Saudi Arabia to the south, as well as sharing sea borders with Qatar to the west and Iran to the north.

Islam is the official religion of the UAE, and Arabic is the official language.

The UAE's political system is a federation of absolute monarchies which is based on its 1971 Constitution. The rulers of each Emirate retain absolute power within their own Emirate, and choose among themselves the president of the federation.

Pursuant to the 1971 Constitution, the federation Government has reserved powers in matters pertaining to foreign affairs, security and defense, nationality and immigration, education, public health, currency, postal, telephonic and other communications, air traffic control, air craft licensing, labor relations, banking, territory waters and extradition. Matters not expressly reserved to the federation are of the competence of the individual Emirates.

The UAE’s legal system is of a civil law tradition with an Islamic law influence. It is principally based on Egyptian law which in turn is based on European continental civil law tradition.

The UAE’s wealth and prosperity is largely due to the discovery of oil in the early 1960s. The UAE’s oil reserves are ranked as the world's sixth-largest and are primarily located in the Emirate of Abu Dhabi.

In recent years, the UAE has emerged as the preferred gate way to the Middle East for many foreign investors.

Economic Outlook

Despite, the global economic downturn, billions of dollars continue to be invested in large scale infrastructure

projects, such as Kahlifa Port, Saadiyat Island and KIZAD free zone in Abu Dhabi and Al Maktoum International Airport in Dubai, which, will further reduce the UAE economy’s dependence on oil and attract foreign investment.

Setting Up: The

Great Divide

One of the most important considerations to make when deciding to establish a presence in the UAE is to decide whether to set up a presence “off-shore” in one of the UAE’s numerous free zones or whether to set up “on-shore” in one of the Emirates. Among the factors which will influence this decision will be the type of activities to be undertaken, the location of the target market and the form of presence required. As often in these types of situations, there is no one-size-fits-all solution and every scenario will need to be considered on its own merits after obtaining appropriate advice.

A summary of the main advantages and disadvantages for each of the forms of establishments “on shore” and “off shore” is set out in Schedule hereto.

Setting Up

Off-Shore

A free zone can essentially be described as an “off shore jurisdiction” within the UAE. The concept of free zones was introduced in the UAE as a means to encourage foreign direct investment in the UAE.

Many of these free zones are sector specific such as the Dubai Media City, the Dubai Knowledge Village, the Dubai Healthcare City and the Dubai International Financial Centre (DIFC) in Dubai and Masdar City Free Zone, KIZAD, Abu Dhabi Airport Free Zone and twofour54 in Abu Dhabi. Certain free zones (such as Jebel Ali Free Zone in Dubai, RAK Free Zone in Ras Al khaima, Sharjah International Airport Free Zone in Sharjah, KIZAD in Abu Dhabi) offer well developed infrastructure (such as office space, warehousing, industrial facilities and labor accommodation).

Free zones can enact their own laws and regulations in specific areas, which apply within the territory of the free zone and to entities established therein, and which in

certain cases override the federal and Emirate law on the subject matter. This is the case for the Dubai International Financial Centre (DIFC), a free zone for financial services, which has its own body of law which is written in English and which defaults to common law. It also has its own courts based on a common law tradition.

Free zones offer a number of important benefits: full foreign ownership of companies is allowed (compared to only forty nine percent for companies incorporated outside the free zones), tax concessions are guaranteed, no restrictions on the repatriation of capital and profits apply; and freedom from currency restrictions and import duties.

While the tax benefits in the free zones may be alluring, it should be noted that at the time of writing there are no corporate or income tax outside the free zone either (except on banks and petroleum companies).

Moreover, all too often prospective investors are lured by the benefits listed above, while they remain blissfully ignorant of the restrictions that apply when setting up in a free zone and which can be determining when deciding to establish a presence in the UAE. The most important of these restrictions is that a free zone entity may, at least in theory, only operate within the territory of the free zone where it is incorporated and, therefore, to conduct business activities outside the free zone, the free zone entity will need to be licensed and establish a legal presence “onshore” within the relevant Emirate through one of the forms set out below. While policing and enforcing this restriction is straightforward for trading and manufacturing activities, it is however far more cumbersome and impractical for service related activities. The lack or impossibility of enforcement has somehow perpetrated the myth that an entity established in free zone can provide services outside that free zone.

Setting Up

On-Shore

A variety of options are available to the foreign investor seeking to conduct business within the UAE and to establish a presence there.

A foreign investor can decide either to establish a physical presence by setting up an establishment (also known as a sole proprietorship); a legal entity either in a form provided for under the UAE Civil Code or incorporated under Federal Law No. (8) of 1984 (as amended by Federal

Law No. (13) of 1988 and Federal Law No. (1) of 2009) on Commercial Companies (the “UAE Companies Law”); opening a branch or a representative office under the UAE Companies Law; or by foregoing a physical presence all together and appointing a commercial agent.

Establishments Or Sole

Proprietorships

In essence an establishment or sole proprietorship is a business carried on by an individual for his/her own account and pursuant to a trade license issued to its proprietor. Important to note however is that this form of business does not create a separate legal entity which is distinct from its proprietor and as a result the proprietor is fully liable for the obligations of the business.

While a foreign investor can establish a sole proprietorship, he/she will still need to appoint a UAE national or a company wholly owned by UAE nationals as his/her national service agent as a pre-condition to obtaining a license. The role of a national service agent is a purely administrative one. The national service agent is not involved in the business and has no ownership rights in respect of the establishment or its assets. The national service agent assists the establishment when dealing with UAE authorities and government departments for obtaining licenses, permits and visas. Usually, the national service agent will require a fixed annual fee payable in advance as remuneration for his services.

Civil Companies

The UAE Civil Code provides for the following forms of entities: the professional services company; the speculative venture partnership and a Shari’a complaint arrangement known as a mudaraba.

A professional services company is a company where two or more persons agree to be bound to carry out work and to be liable thereafter to third parties against payment of consideration, whether they share equally or unequally in the distribution of the work, and provided that work is of a single and inseparable nature.

A speculative venture partnership is a contract between two or more persons to purchase property on credit, to sell it at a profit and subsequently to share the profits as agreed between them.

A mudaraba is a contract where one of the parties to the contract contributes a certain amount of capital and in

exchange the other party contributes his efforts or labor in order to make a profit.

The main difference with commercial companies is that these entities do not pursue “commercial” activities but make use of intellectual faculties, acquired information or manual skills. While civil companies cannot engage in commercial activities, they are not inasmuch prevented from pursuing profit.

Among foreign investors the professional services company is the most common. As is the case with an establishment, the professional services company does no not create a separate legal entity which is distinct from its owners and as a result the owner remains fully liable for the obligations of the business. Moreover, while the professional services company can be wholly foreign owned, a UAE national still needs to be appointed as national service agent as a pre-condition of obtaining a license.

Commercial Companies

Forms Of Commercial Companies

The UAE Law on Commercial Companies distinguishes seven forms of companies: (1) the general partnership (the “GP”); (2) the commandite company or simple limited partnership (the “SLP”); (3) the joint venture company (the “JVC”); (4) the public joint stock company (the “PJSC”); (5) the private joint stock company (the “PrivJSC”); (6) the limited liability company (the “LLC”); and (7) the

commandite company limited by shares (the “PLS”) .

Of these seven forms of companies, foreign investors cannot participate in the GP which is reserved for UAE nationals. Subject to certain restrictions, foreign investors can participate in the remaining forms. A table summarizing the main features of each of the company forms listed above is set out in Schedule [⦁] hereto.

Limited Liability Company

The company form of choice amongst foreign investors is the LLC. In the Emirate of Abu Dhabi alone there are about 25,200 LLC currently in existence as opposed to 104 PrivJSCs, 532 PJSCs and 1,748 branches of foreign companies.

The reason for this being that an LLC offers significant control to foreign investors while requiring a minimum amount of capital. As such it is possible to allocate the profits independently from the shareholding and to provide that the foreign partner, holding forty nine percent of the shares, perceive up to eighty percent of the

profits while the UAE national partner, holding fifty one percent of the shares, perceives only twenty percent of the profits.

Moreover (depending on the nature of the business, the degree and the type of investment to be made by each of the parties, etc.), it is possible, through side agreements and the like, to vest the de facto control of the LLC and its assets with the foreign partner.

It should however be noted that, while these type of arrangements are common in the UAE, their enforceability have as yet not been convincingly tested before the UAE Courts and may fall short of anti-fronting legislation.

Branch

Another form of establishment popular with foreign investors in the UAE is the branch which is also provided for in the UAE Companies Law.

By definition a branch is not a separate legal entity of the foreign company but rather can be described as a mere extension thereof in the UAE. As a result there are no ownership restrictions, but the foreign company is nevertheless required to appoint a UAE national or a company wholly owned by UAE a national as service agent for its branch in the UAE. For a description of the role of a national service agent see paragraph 0 above.

An important limitation, but a logical one given the nature of a branch, is that the branch can only engage in the same activities as the foreign company. Moreover, further restrictions may apply to these activities if for example those activities are reserved to UAE nationals or if such activities can only be pursued through a particular form of company.

Representative Office

A representative office is similar to a branch inasmuch that it is not a separate legal entity distinct from the foreign company but rather a mere extension thereof.

The main difference with a branch is that it cannot engage any business activities other than the promotion of the services and/or products of the foreign company and the facilitation of business between local clients and the foreign company.

As is the case for setting up a sole proprietorship and a branch, the foreign company will to appoint a local service agent before obtaining a license for its representative office.

In certain Emirates, however, local authorities do not recognize representative offices as being distinct from a branch and will therefore insist that a branch set-up with a license for representational activities.

Note On The Draft UAE Law On Commercial

Companies

On 4th December 2011, it was announced that a draft federal law relating to a new companies law (the “New Companies Law”) had been approved by the Council of Ministers. Since then, however, the New Companies Law has been awaiting a final process leading to its approval by the Supreme Council, followed by signature by the President and finally publication in the Official Gazette. Even though many have reported that such publication would occur in the early months of 2012, at the time of writing the New Companies Law has still not come into force.

While it cannot be exactly determined if and when the New Companies Law will come into force, the reform of the Companies Law has been long anticipated. In the fast growing economy of the past decade, the 30 years old Companies Law has shown its limits in terms of flexibility and governance. Some external pressures reinforced the need for a reform. While the UAE joined the WTO on 10th April, 1996, it submitted, its trade policy for review only on 20th March 2006 and the WTO suggested that the UAE change its companies law to attract and accelerate foreign investment. The World Bank “doing business” ranking has also been an incentive for the reform of the UAE Companies Law.

The New Companies Law, in its current draft, introduces the following long awaited changes (without this list being exhaustive):

 Foreign ownership restrictions: the New Companies Law allows the Cabinet to issue resolutions determining the types of companies that may be held in full by a foreign investor or where foreign ownership may exceed forty nine percent of the capital of that company;

 National service agents: the New Companies Law makes it optional to have a national service agent;

 Free zone entities: under the New Companies Law free zone companies company may register to operate in the UAE outside of their free zone, subject to the authorization under the relevant free zone regulations and registration under certain conditions to be defined by a Cabinet resolution;

 Single shareholder companies: under the New Companies Law, it will be possible to incorporate a private joint stock or an limited liability company with a single shareholder (physical or legal person);

 Financial reporting obligations: under the New Companies Law accounting obligations are reinforced and refer to uniform international accounting standards;

 Corporate governance: under the New Companies Law directors’ duties and liabilities are emphasized and strengthened.

It should be noted, however, that the above reflects the proposed amendments as set out in the current draft of the New Companies Law and, while this draft seems to be in an advanced stage, awaiting final approval, only the final text thereof as published in its original Arabic version in the Official Gazette will be the prevailing one.

In the absence, however, of the publication of the New Companies Law in the Official Gazette, the existing UAE Law on Commercial Companies provides the framework for commercial companies.

Licensing Requirements, Pre-Approvals And

Additional Requirements When Dealing

With Public Sector

Any business operating on shore in the UAE, regardless of its form and regardless of its ownership, is required to obtain the appropriate license from the relevant authorities.

At the licensing stage, there are several levels of licensing requirements that need to be complied with before a business can engage in its activities. There are licensing requirements at a federal level administered by the UAE Ministry of Economy & Planning, in addition there are the licensing requirements at the level of each Emirate and, depending on the type of activities or the type of industry envisaged, there may be further licensing requirements imposed by or pre-approvals required from regulators (such the UAE Central Bank for banks and financial institutions or the UAE Insurance Commission for insurance companies) or government departments (such as ADEC for education establishments in Abu Dhabi or the GHQ of the Armed Forces for defense contractors). Moreover, whenever dealing with the government or governments departments at the federal level or at the level of an individual emirate, or when dealing with government owned companies, additional requirements

may apply which the foreign investor should consider beforehand.

Commercial Agency

Rather than establishing a physical presence in the UAE, many foreign manufacturers who trade high volumes on a regular basis wish to forego the expense of permanent presence and prefer to distribute their products in the UAE through the appointment of a commercial agent.

In the UAE, a distinction is made between the registered commercial agencies, regulated by Federal Law Nr. (18) of 1981 Concerning Commercial Agencies, as amended (the “UAE Commercial Agencies Law”), and unregistered commercial agencies, governed by the provisions of the UAE Commercial Code and the UAE Civil Code.

Registered Commercial Agencies

Under the UAE Commercial Agencies Law, registered commercial agencies offer significant protections to the commercial agent, of which the principal should be aware before entering into such an arrangement.

Moreover since the provisions of the UAE Commercial Agencies Law are considered of public order and any agreement between the parties to the contrary will be conserved null and void.

It should however be noted that (i) under the UAE Commercial Agencies Law only commercial agencies with UAE nationals or companies wholly owned by UAE nationals can become registered commercial agencies and (ii) moreover before such a commercial agency can be registered the commercial agreement itself needs to comply with certain conditions of form and of substance. The protections offered by the UAE Commercial Agencies Law to the registered commercial agent, include:

 Exclusivity: the registered commercial agent has the exclusive right to import the goods which are the subject matter of the agency in the territory and can request UAE customs to seize goods imported by any other person, including the principal.

 Commissions: the registered commercial agent is entitled to receive commissions on the sales he makes as well as commissions on sales made in the designated territory by the principal or an authorized the party.

 Termination: the principal can only terminate a registered commercial agency either with the consent

of the registered commercial agent or unilaterally for “material reasons”.

 Renewal: the principal cannot refuse to renew a fixed-term registered commercial agency agreement after its expiry without the payment of compensation to the registered commercial agent.

Unregistered Commercial Agencies

Unregistered commercial agencies on the other hand do not provide any of the above protections to the commercial agent and unlike registered commercial agencies, the commercial agent does not need to be a UAE national or a company wholly owned by UAE nationals. Nevertheless, the principal will want to make sure that his prospective agent has the required license to engage in the activities provided for under the commercial agency.

Other

Considerations

Public Procurement And

Defense Contracting

The UAE is not a signatory to the WTO Agreement on Government Procurement.

Since the UAE is a federation, the majority of the procurement is done at the level of the individual Emirates. Local governments and government agencies give preference to local companies and suppliers. Companies are required to register with the local government or agencies before they can participate in government procurements. As a result, a foreign company will often establish a joint venture with a local company to bid for a project and avail itself from the local company’s license. Only where local expertise is not available, will foreign companies be considered.

In relation to defense contracting, the UAE has introduced its own offset policy in early 1992. Under the UAE’s offset program, defense contractors are required (subject to certain criteria being triggered) to invest part of the contract’s value back into the local economy, by way of investment in an offset project.

Import And Export

Regulations

The members of the Gulf Cooperation Council (GCC) have adopted a uniform customs law unifying the customs procedures in each of the member countries.

Goods imported from outside the GCC are subject to a common external customs rate, while there is free movement for goods from within the GCC common without any custom restrictions or duties.

As a member of this customs union, the UAE applies the GCC common external tariff of five percent for most goods imported into the UAE (outside the free zones).Inter alia, the following are exempt from custom duties: goods destined for use by diplomatic or consular missions, defense forces or charitable organizations as well as personal and household items and returned goods, other goods agreed to be exempt as per the unified customs tariff of the GCC.

Duties in excess of the standard five percent are levied on tobacco (one hundred percent) and alcohol (fifty percent). Outside of free zones, imports can only be processed by a designated trade agent. A trade agent requires a trading license, granted only to UAE nationals and to companies that are at least fifty one percent owned by UAE nationals. There is an embargo on goods from Israel.

The UAE does not apply export taxes, charges, and levies.

Exchange Controls And

Currency

There are no exchange controls in the UAE, nor any restrictions on the remittance of funds, except for transactions involving Israeli parties or currency.

The UAE Dirham is freely convertible and is pegged to the US Dollar (1 USD = 3.6725 AED).

Taxation

On a federal level, there are no corporate income taxes, except for oil producing companies and branches of foreign banks.

While corporate income tax legislations have been adopted at the level of certain individual Emirates, such legislations have not been implemented.

In addition, there is no personal income tax, no capital gains tax, no withholding tax, no VAT or sale tax. There are property taxes in most Emirates.

The UAE has double taxation treaties with various countries which seek to reduce the tax burden of foreign companies and expats established in the UAE. These treaties typically do not require that the income be taxed in order to benefit from the exemption of double taxation. As a result, the UAE has become a popular destination for many expats and foreign companies, seeking to escape the fiscal stranglehold in their home country.

Employment and

Emiratization

The Federal Law No. (8) of 1980 on Labor and Employees and its implementing regulations (the “UAE Labor Law”), regulates all aspects of the labor relationship between employers and their employees(including working hours, vacation, public holidays, sick leave, maternity leave, termination of employment etc.). Labor complaints are generally heard by the Ministry of Labor.

Certain free zones however have their own employment laws which take “precedence” over the federal employment laws and have their own procedure to handle labor disputes.

To curb abusive practices prevailing at the time of the construction boom, the Ministry of Labor has introduced a Wages Protection System through which employers are obliged to transfer the salaries of their employees. Companies which fail to adhere to the Wages Protection System are subject to punishments and fines, and are not be able to obtain work permits. The Wages Protection System is in the process of being introduced in certain free zones.

Moreover, the Ministry of Labor has recently introduced minimum wages for certain categories of workers. In order to employ a foreign workforce, an employer must obtain for his employee a labor card and a residence visa. Outside of the free zones, the employer is the sponsor of the foreign employee and must register the labor contract (which is a standard form) with the Ministry of Labor. Upon issuance of the labor card, the employer can then apply for a residence visa for his employees. In most free zones, it is the free zone authority (subject to certain guarantees to be provided by the employer) which will act as sponsor of the foreign employee and will handle the formalities with the relevant authorities. Once the residence visa issued, the foreign employee can sponsor his family provided he earns the required minimum wage.

As part of its efforts to create more job opportunities for UAE nationals, the UAE has introduced a program of Emiratization. As a result both public and private sector companies must employ a minimum number of UAE nationals, depending on the size of their workforce. For example, companies with more than a hundred employees, must appoint a UAE national as government relation officers who will liaise between the company and the Ministry of Labor.

There are also quotas imposed on certain industries such as the banking sector and the insurance sector in the UAE which need to meet an annual Emiratization target of four percent and five percent annually.

Moreover UAE nationals benefit from certain specific protections provided for in the UAE Labor Law. For example:

 UAE nationals working for private companies are entitled to the same social security and pension benefits as UAE nationals working for the Government.

 The Ministry of Labor has also fixed the minimum wage for UAE nationals.

 Employers must notify the Ministry of Labor 30 days in advance in case of terminating a UAE national.

Competition Or Anti-Trust

Laws

There is no competition or anti-trust legislation in the UAE. The WTO has listed the absence of anti-trust law as an obstacle to attract foreign investment.

Intellectual Property Rights

In recent years, the UAE has embarked in a program to increase awareness regarding intellectual property protection. By creating a framework for the protection of intellectual property rights, the UAE aims to attracting foreign investment and trade in intellectual property related activities.

The UAE is a party to various international conventions and bilateral treaties dealing with intellectual property rights and has also implemented various laws protecting patents (Federal Law No. 17 of 2002 Concerning the Regulation and Protection of Industrial Designs), trademarks (Federal Law No. 37 of 1992 Concerning Trademarks) and copyrights (Federal Law No. 7 of 2002 Concerning Author’s Rights and Neighboring Rights).

Dispute Resolution

Under the 1971 Constitution, each Emirate is entitled to maintain its own judiciary. While the Emirates of Abu Dhabi, Dubai and Ras Al Khaimah have developed their own local courts, the remaining four Emirates (Ajman, Fujairah, Sharjah and Umm Al Quwain) have adhered to the UAE Federal Judicial Authority.

As a result, two court systems co-exist within the UAE: a Federal court structure adopted by each of the Emirates of Ajman, Fujairah, Sharjah and Umm Al Quwain; and a local court structure maintained by each of the Emirates of Abu Dhabi, Dubai and Ras Al Khaimah.

The rules of evidence and of procedures are, however, set out in Federal laws and apply therefore in each of the seven Emirates regardless of whether the Emirate has adhered to the federal court structure or has adopted its own local structure.

Proceedings in before UAE courts are in Arabic and only UAE nationals holding a valid license have a right of audience before the UAE courts.

Arbitration in the UAE is well developed and often seen as a viable alternative to the local court system for high value disputes. The main arbitration centers are Dubai International Arbitration Centre (DIAC) and the Abu Dhabi Commercial Conciliation & Arbitration Center (ADCCAC) and the DIFC LCIA Arbitration Centre.

Common Mistakes

Lack of Detail

A foreign investor who wishes to set up in the UAE will need to do his homework. He will need to determine from the outset the type of activities he wishes to engage in and the geographical scope thereof (one or Emirates, the GCC) before identifying the appropriate form of establishment and the modalities thereof.

Underestimating The Time

Establishing a business in the UAE takes more time than in most Western countries and returns are not immediate. In order to be successful in the UAE, a prospective investor requires patience and has to be willing to invest for the long term.

Underestimating The Costs

Setting up a business in the UAE can be relatively expensive. The decision to save on appropriate legal advice and not to involve local counsel from an early stage may prove in the long run to be a false economy with considerable consequences.

Underestimating The Legal

Environment

The UAE has a civil law tradition based on Egyptian law which in turn is based on European continental civil law traditions. The legal framework in the UAE is therefore largely similar to that found in continental Europe, subject to some local particularities.

The preponderance of international law firms of a common law tradition has, however, led to common law concepts (such as trust, beneficial ownership and leaseholds) which neither exist nor are recognized under UAE law being forcefully transposed into UAE law. Moreover, as a relatively young country, the UAE’s legal instruments are in constant development. As a result the legal landscape is ever changing and may at times appear opaque and ambiguous, making local expert advice paramount.

The Choice Of A Local

Partner

If the business requires little or no assistance from the UAE national, then the choice of a silent partner as sponsor of the branch or a fifty one percent shareholder will be most appropriate. The remuneration for his services will be in line with his lack of involvement and will generally be a lump sum.

On the other hand, where the business would involve large government contracts, or where the business would cover more than one Emirate, or a more active involvement from the partner is required, it may be more appropriate to have an influential individual as a local partner. In any event, prospective investors should be wary of any expats offering sponsorship services as only UAE nationals, or companies wholly owned by UAE nationals, can act as sponsors.

Finding Investors

The local partner of a business (be he a commercial agent, a sponsor of a branch or a fifty one percent shareholder) is

rarely an investor in the business; more often than not he will not want to invest and will simply require either a percentage of the turnover, a fixed fee or a mix of both as remuneration for his services.

The venture capitalists, the private equity firms or the family offices who do invest in new or existing ventures, only do so if the venture and its backers have a proven track record. Moreover, such local investors will want what they consider adequate safeguards in place, which at times may be disproportionate to level investment required and result in them controlling the venture and ultimately acquiring the technology.

At times, under the UAE’s offset program, funds may be available for projects which encompass an element of technology transfer and/or training and employment of an Emirati workforce, but strict conditions apply.

Free Zone And On-Shore Set-Ups

Advantages Disadvantages

Free Zone

 Full foreign ownership of companies is allowed (compared to only 49 percent for companies incorporated outside the free zones)

 Tax concessions are guaranteed

 No restrictions on the repatriation of capital and profits apply;

 Freedom from currency restrictions and import duties;

 Reduced red-tape, process for setting up and sponsoring employees are [investor friendly]

 Certain free zones offer well developed infrastructure (such as office space, warehousing, industrial facilities and labour accommodation)

 Geographical scope of activity is limited to the free zone. Therefore, in order to conduct business activities within the UAE outside the free zone, the free zone entity will need to be licensed and establish a legal presence within the relevant Emirate

 Currently there are no corporate or income taxes outside the free zones

 Many free zones focus on a particular industry and therefore may not be open to business with activities which are not related to that industry

 Many free zones require an actual physical presence within the free zone as a condition of obtaining a license

 Limited space in certain free zones due to their popularity

On-Shore Sole

Proprietorships

 Paperwork is limited  In principle can only be set up by physical persons

 Does not create a separate legal entity which is distinct from its proprietor

 The proprietor is fully liable for the obligations of the business

 Need to appoint a UAE national or a company wholly owned by UAE nationals as his/her national service agent as a pre-condition to obtaining a license

 Limited possibility to employ foreign nationals

 Depending on the Emirate, unknown and unfamiliar to local administrations, which may make the establishment of a sole proprietorship time consuming

Professional Services Company

 Paperwork is limited  Does not create a separate legal entity which is distinct from its owners

 The owners is fully liable for the obligations of the business

 Need to appoint a UAE national or a company wholly owned by UAE nationals as his/her national service agent as a pre-condition to obtaining a license

 Limited possibility to employ foreign nationals

 Only for activities which are non-commercial

 Depending on the Emirate, unknown and unfamiliar to local administration which may make the establishment of a professional services company

Advantages Disadvantages

time consuming

LLC  Separate legal entity from its owners

 LLC can operate in the entire UAE, subject to compliance with local licensing requirements if the LLC sets up a physical presence in an Emirate other than the one where it has been incorporated

 Broad range of activities, although LLCs are prohibited to pursue certain activities such as banking and insurance activities

 No minimum capital requirement, although capital should be sufficient for the activities contemplated

 Despite foreign ownership restrictions, it is possible to allocate the profits independently from the shareholding and to vest the de facto control of the LLC and its assets with the foreign partner

 Foreign ownership restrictions, means that 51% of the shares need to be registered in name of a UAE national or a company wholly owned by UAE nationals

 Can take several months to incorporate

 Subject to Emiratization requirements

Branch Office  Faster to set up than an LLC

 More activities than representative offices

 Does not create a separate legal entity which is distinct from its owners

 The owners is fully liable for the obligations of the business

 Need to appoint a UAE national or a company wholly owned by UAE nationals as his/her national service agent as a pre-condition to obtaining a license

 Limited possibility to employ foreign nationals

 Activities need to be the same as in the jurisdiction of incorporation

Representative Office

 Faster to set up than an LLC  Does not create a separate legal entity which is distinct from its owners

 The owners is fully liable for the obligations of the business

 Need to appoint a UAE national or a company wholly owned by UAE nationals as his/her national service agent as a pre-condition to obtaining a license

 Limited possibility to employ foreign nationals

 Only representation and marketing activities

 In certain Emirates a representative office can only be established by way of a branchoffice

Registered Commercial Agency

 No physical presence required

 Appropriate alternative for goods traded in high volumes on a regular basis

 Success of the business in the UAE is entirely dependent on the UAE national commercial agent

 Protection provided by law to the UAE national commercial agent:

Advantages Disadvantages

agent has the exclusive right to import the goods in the designated territory and can request UAE customs to seize goods imported by any other person, including the principal

o Commissions: the registered commercial agent is entitled to receive commissions on the sales he makes in addition to commissions on sales made in the designated territory by the principal or an authorized the party

o Termination: the principal can only terminate a registered commercial agency either with the consent of the registered commercial agent or unilaterally for "material reasons"

o Expiry and Renewal: the principal cannot refuse to renew a fixed-term registered commercial agency agreement after its expiry without the payment of compensation to the registered commercial agent

Main Features Of Commercial Companies

Form JV JVC PrivJSC PubJSC LLC SLP PLS

Ownership Restrictions 100% owned by UAE nationals 51% of capital must be contributed by the UAE partner 51% must be registered in name of a UAE national 51% must be registered in name of a UAE national 51% must be registered in name of a UAE national  General partner(s ) must be UAE national( s)  Limited partner(s ) can be UAE and foreign nationals  General partner(s ) must be UAE national( s)  Limited partner(s ) can be UAE and foreign nationals

Liability Unlimited Unlimited Limited Limited Limited  Unlimite

d for the general partner(s )  Limited for the limited partner  Unlimite d for the general partner(s )  Limited for the limited partner Minimum Capital No requirement No requirement AED 2,000,000 AED 10,000,000 No requirement , provided capital is sufficient to meet its objectives No requirement AED 500,000 Members/ Partners/ Shareholders Minimum two Minimum two Minimum three Minimum two maximum fifteen Minimum two maximum fifty Minimum two Minimum three Management/ Directors Can only be managed by a UAE national No restrictions  Chairman must be a UAE national  Majority of directors must be UAE nationals  Chairman must be a UAE national  Majority of directors must be UAE nationals No restrictions Can only be managed by the general partner(s), i.e. UAE national (s) Can only be managed by the general partner(s), i.e. UAE national (s)

About The Authors

Yves A. Delaey

Mr. Delaey is Of Counsel at AAA, specializing in transactional work with a focus on cross-border corporate and banking and finance transactions. He holds a Masters of Law from the Catholic University of Leuven and an LLM in Banking and Finance from King’s College London, earned in 1998 and 1999 respectively, as well as a Postgraduate in Corporate Finance from the Business School of the Catholic University of Leuven. He was admitted to the Brussels’ Bar in 1999. He previously worked with Linklaters (in Brussels, London and Luxembourg) and the United Nations (in Kosovo). He moved to the Middle East in 2006, first working as a Legal Consultant with Clyde & Co (in Abu Dhabi) before moving in-house for a Saudi conglomerate. Mr. Delaey is fluent in English, French and Dutch and conversant in German.

Contact:

Tel: +971 (0)2 6439-222 Fax: +971 (0)2 6349-229 Email: [email protected]

Dr. Jean-Michel Morinière

Dr. Morinière is Of Counsel at AAA specializing in corporate and commercial law with a particular focus on contracts, defence, projects, logistics transport and shipping, insurance and re-insurance. Dr. Morinière is a lecturer at several universities including Paris Sorbonne University Abu Dhabi and a frequent speaker at international conferences on transport and maritime law. He is a registered avocat in France and holds a PhD in maritime law from the University of Nantes. He has previously worked with Quimbert & associes, HonigBuffatMettetal, and Clyde & Co. He is fluent in English and French.

Contact:

Tel: +971 (0)2 6439-222 Fax: +971 (0)2 6349-229

Abu Dhabi Office Abdullah Al Mulla building Mezzanine Suite 02 Al Murroor Street Al Nahayan Camp Area Po Box 71284

Abu Dhabi

Tel: 00.971.2.6439.222 Fax: 00.971.2.634.9229

Dubai Office Zalfa building Suite 101

Sheikh Rashid Road Garhoud Po Box 33299 Dubai Tel: 00.971.4.28282.000 Fax: 00.971.4.28282.011

About AAA

Since its inception, Ali Al Aidarous International Legal Practice (“AAA”) has developed into a leading independent boutique law firm in the UAE, offering unique expertise in selected practice areas such as banking and finance, corporate law, contracts, construction and real estate, complex litigation and arbitration, logistics, transport, and insurance.

Matters undertaken by our firm benefit from the direct personal attention and continued hands-on involvement of a small team of highly trained legal professionals with complementary skills. We pride ourselves in building long-term and close relationships with our clients and acting for our clients as true counsel assisting them in their business decisions.