General Business Regulatory System
The UAE is a federation of seven Emirates comprising Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain. The UAE federal constitution provides for an allocation of powers between the federal government and the government of each Emirate.
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 foreign policy, defense and security. Legislation passed at a federal level has primacy over the local laws of each Emirate. The local government of each Emirate is, however, permitted under Article 113 of the constitution to regulate all local matters which are 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, defense and health). As such, the governments of each individual Emirate retain 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 under federal legislation.
The UAE judicial system varies significantly across the Emirates and the free zones. Only five Emirates submit to a federal court system — Dubai and Ras Al Khaimah have their own independent court systems. All of the Emirates (except in respect of some of the 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 procedure and evidence.
UAE Free Zones
The UAE federal constitution, the federal laws relating to free zones and the powers reserved by the individual Emirates under the federal structure, permit each Emirate to 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 required to have any UAE nationals as owners.
This contrasts with most companies incorporated in the UAE outside of the free zones, where UAE nationals are typically required to own at least 51 percent of the company’s capital. Various free zones have been set up in the UAE. UAE Free zones are authorised to enact their own laws and regulations in specific areas, which in some cases override federal and Emirate law on the subject matter.
Establishing a Business in UAE
In order to conduct business in the UAE, a foreign investor is required to establish a formal legal presence (directly or through an agent) within the UAE through any of the following means:
- Incorporating a local entity;
- Registering a branch or representative office of a foreign company;
- Establishing a free zone entity; or
- Entering into a commercial agency relationship
Incorporating A Local Entity
A local entity can be formed under either the UAE Civil Code or the Company Law
Entities formed under the UAE Civil Code
Entities formed under the UAE Civil Code are restricted to carrying out “non-commercial” or civil activities — these are activities which 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 literature, and the sale of agricultural products by farmers are examples of activities that may be conducted by a UAE Civil Code entity.
UAE Civil Code entities may take one of the following forms:
- The professional services company;
- The speculative venture partnership; or
- An Islamic Shari’a-compliant arrangement known as a mudaraba.
Although these three entities are generally referred to as companies, legally they are not companies as the only companies which may be formed in the UAE are those set up under the Companies Law.
The most common form of civil entity used by foreign investors is the professional services company. Such entities are only appropriate for carrying on service businesses, such as engineering, medical and consultancy services. The primary benefit of establishing a professional services company is that such an entity may be 100 percent foreign owned, although a national agent must be engaged by all such companies. The national agent generally receives a fixed fee, is not liable for the debts and liabilities of the company and has no management authority. The national agent is required to sponsor the professional services company for its licence application and interact with government bodies to obtain any entry permits and employment visas necessary to carry on business in the UAE. A key disadvantage of a professional services company is that it is not a separate legal entity from its foreign owner(s).
Entities incorporated under the Companies Law
All locally incorporated companies (other than those formed under the UAE Civil Code) must be set up in accordance with the Companies Law. The Companies Law requires companies to adopt one of the following forms:
- Limited Liability Companies;
- Private Joint Stock Companies;
- Public Joint Stock Companies;
- Joint Participation Ventures (or Private Unlimited Companies);
- Limited Partnerships (or Simple Commandite Companies);
- Partnership Limited with Shares (or Share Commandite Companies); and
- General Partnerships (or Joint Liability Companies).
Of the entities listed above, most foreign businesses choose the limited liability as foreigners can exert significant control over them and it requires a relatively small amount of minimum capital to start up.
Such an entity may, however, be inappropriate to achieve certain business goals. For example, businesses involving banking, insurance or investment activity on behalf of third parties may only be conducted by a public joint stock company, and limited liability companies may not offer their shares for public subscription, which is a central feature of the public joint-stock company.
The key limitation on entities incorporated under the Companies Law is that 51 percent of the capital of a company must be owned by a UAE national. However, it is possible for the constitutional documents of a limited liability company to contain the following provisions designed to protect the interests of a foreign minority shareholder:
- The foreign shareholder may appoint all of the directors;
- The foreign shareholder may appoint the general manager;
- The foreign shareholder may veto major decisions of the company;
- The foreign shareholder may be entitled to all of the assets of the company on winding up
- The foreign shareholder may be entitled to more than 49 percent of the company’s profits
Opening A Branch Or Representative Office
Articles 313 to 316 of the Companies Law, permit foreign companies to open branches or representative offices within the UAE. A branch or a representative office of a foreign company may be wholly owned by foreigners. However, Article 23(1) of the UAE Commercial Code requires non-UAE nationals engaging in “commercial business” in the UAE to partner with a UAE national who owns 51 percent of the capital of the company.
Accordingly, branch and representative offices which are wholly owned by foreigners may typically only engage in non-commercial business.
Further, a branch office must only engage in those activities that are carried out by its parent company. A representative office is more limited than a branch office in the scope of activities that it is permitted to undertake. A representative office may only conduct marketing and administrative functions on behalf of its foreign parent.
Commercial Agency Relationship
If a foreigner wishes to carry out business in the UAE but does not wish to maintain a physical presence in the UAE it may enter into a commercial agency relationship with a wholly local owned entity or UAE national. Commercial agents are generally used by foreign manufacturers and traders who are engaged in the large-scale importation of goods into the UAE on a regular basis. Under a commercial agency, the foreign business and the commercial agent agree to the terms of the sales commission, the territory of the distributorship (at a minimum, this would be one Emirate) and the duration of the relationship. If the commercial agent 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.
These protections include:
- Exclusivity — registered commercial agents have the exclusive right to import the goods which are the subject matter of the agency;
- Commissions — registered commercial agents are entitled to receive commissions on the sales they make as well as commissions on sales made in the UAE by the principal or any other party; and
- Termination — the principal may only terminate a registered commercial agency arrangement unilaterally for “material reasons”. Such reasons must be acceptable to the Commercial Agencies Committee.15 Further, a principal may not refuse to renew a registered commercial agency agreement after its expiry date without the payment of compensation to the registered commercial agent.
Setting Up A Free Zone Entity
The main benefit of a free zone entity is that it can be wholly owned by a foreigner. Free zone entities are also granted certain ancillary financial benefits.
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 establishment.
The key limitation of a free zone entity is that it is generally permitted to conduct business solely within its relevant free zone and is limited to performing solely those activities specified in its licence.
A UAE free zone entity must typically hold one of the following licences issued by the relevant UAE free zone authority: (i) trading licence; (ii) service licence; (iii) manufacturing/industrial licence. In order for a free zone entity to engage legally in sales within the UAE (and outside of the relevant free zone), the entity will generally have to retain a commercial agent or distributor. However, UAE free zone entities with service licences have been known to provide services outside of their free zone.