Doing Business in the UAE Part 2
In Category: Thoughts
Doing Business in the United Arab Emirates
Part 2 - Legal Structures & Processes
In Part 1 of this article we discussed the general matters to consider before doing business in the United Arab Emirates. If you’ve made the decision to proceed in the UAE, how do you go about it?
Your legal framework for doing business, whether purely contractual or involving forming a new legal entity, or both, should always follow your business plan and objectives.
Doing business from your home market or outside the UAE
It is possible to do business in the UAE without setting up a new legal entity in the following scenarios:
Consultants completing advisory or non-complex services work, subject to obtaining the necessary visas, may be able to fly in and out of the UAE to complete their assignments without the need for a formal local presence.
This option can be problematic, however, depending on the nature of the local entity being dealt with and the type of work involved. It can be a low cost first step prior to establishing a fulltime presence, but may limit growth and your ability to build relationships.
Overseas companies, both manufacturers and suppliers, can export directly through local UAE importers and businesses. This option is not optimal for developing a long-term business and growing sales, and may not be appropriate for more complex products requiring skilled sales teams and after sales servicing.
Local Commercial Agents:
Further to pursuing the export option above, overseas companies also have the option of appointing a local commercial agent to distribute its goods in the UAE and supply related services.
Such agents can either be appointed as a registered commercial agent (only UAE nationals or UAE national majority owned companies) pursuant to the Commercial Agencies Law and carrying the privileges of exclusivity, entitlement to commission and agent termination rights; or as an unregistered agent. Choosing a registered commercial agent (UAE national) potentially provides greater ability to grow the business, but could make it much more difficult and costly if the company later changes its strategy and wishes to establish a direct business presence to operate in the UAE.
Establishing a UAE corporate presence
Companies setting up in the UAE have two options: choosing an ‘offshore’ entity, based in various free zones throughout the UAE; or an ‘onshore’ UAE entity.
Most overseas businesses set up a limited liability company or establishment either offshore, in a free zone, or onshore. Offshore entities, though still subject to UAE federal law, are subject to the particular rules and regulations of their free zone authority regarding business set up and operation, rather than federal and local emirate rules and regulations.
Free zone companies or establishments
There are over 20 free zones in the UAE. Most free zones offer benefits that include limited liability, 100% ownership, no income tax and low or no customs duty, 100% repatriation of profits and capital, no personal income tax and streamlined recruitment processes. Free zone entities are also generally easier and cheaper to set up.
Free zones offer the opportunity for global manufacturers and suppliers to reduce their tax bills substantially in the markets where they sell their products. They can do this by performing full production, or adding value to products and materials sourced from other markets before ‘re-export’ to foreign markets. Such companies can also sell in the UAE mainland subject to customs duty and the usual UAE restrictions and formalities on doing business. Service companies may establish in free zones to provide goods or services to the larger industrial and other companies operating in the free zone.
Most free zones focus on niche sectors, including heavy industry, research and technology, creative media, maritime, education and professional services. The bigger and more important industrial free zones are Jebel Ali Free Zone, Dubai and Khalifa Port and Industrial Zone (free zone and non-free zone companies) and Zonescorp in Abu Dhabi. Other major free zones include TwoFour54, Abu Dhabi; Sharjah Airport International Free Zone; Dubai Airport Free Zone; Dubai Media City; Dubai Internet City; RAK Free Trade Zone; and Ajman Free Zone.
The Dubai International Financial Centre is a highly successful financial free zone, with the Abu Dhabi Global Marketplace, situated on the futuristic Al Reem Island, being the new kid on the block.
UAE ‘mainland’ companies
There are a number of structural options available for foreign businesses to set up in mainland UAE, including partnerships, true joint ventures, limited liability companies (LLCs and public and private joint stock companies (PJSCs)) and civil companies (for specialist professional services). The three main forms usually adopted by foreign businesses are as follows:
Branch office of a foreign company
A branch office of an overseas limited liability company enjoys 100% foreign ownership. It must demonstrate requisite experience in its activities, which must be the same activities as its parent and can perform contracts and carry out its licenced activities including product servicing. It must appoint a national representative to act on its behalf for local administrative interactions. It also maintains the same legal identity as its parent and given this, does not enjoy the advantage of limited liability at the UAE level, nor the ability to treat income separately from parent income for tax purposes.
Representative Office of a foreign company
A representative office of an overseas limited liability company is similar to a branch office but with more restrictions; its activities are limited to marketing and it cannot make sales or invoice.
Limited Liability Company (LLC)
This is the option usually chosen by businesses wishing to establish a permanent UAE presence. The LLC offers limited liability and generally the ability to segregate income from the overseas parent for tax purposes. An LLC cannot participate in businesses involving investment of third party funds, banking or insurance, which are reserved for PJSCs.
An LLC must be formed with an Emirati national shareholder (individual or UAE national majority owned company) of not less than 51%, although typically contractual arrangements are entered into whereby decision-making and profit allocation are agreed differently, reflecting the respective investment of the parties and otherwise protecting the foreign investor. Companies in certain sectors, e.g. oil and gas, electricity and gas generation and water, are exempt from the 51% requirement, given they will be subject to specific concession or other contractual restrictions. With an LLC, depending on the anticipated involvement of the national shareholder in the business, and the size and nature of activity and investment- from active to passive- the shareholder can be remunerated by annual fee and/or profit share.
The position on the legality of side arrangements which seek to split profit and assign rights to the Emirati shareholder less than those mandated by UAE law is not unequivocal. The standard commercial position is that such side arrangements work and an accepted way of doing business and mitigating risk. Further the UAE authorities choose not to take a position or action against such arrangements. However, in any particular situation where there is a dispute between shareholders, they remain to be tested in court.
‘Sufficient capital’ must be invested into an LLC at start up, but it can be accessed immediately for the purposes of the business.
The onshore establishment process involves obtaining a trade licence from the authorities for the activities the business will undertake. However, certain activities are reserved for nationals, such as real estate, primary industries, human resource services, security services, tours and travel services and, road transportation.
Emiritisation and reserved positions
Under the UAE Constitution and Law, UAE nationals are granted certain preferential employment rights. These include preferential recruitment over non-nationals for positions and reservation of certain positions for nationals, in addition to enhanced employment pre-termination rights. The list of reserved positions is being constantly expanded as well as desired minimum % of nationals employed in every organisation. In terms of recruitment processes these typically take longer than usual, given the need to check if there are suitable nationals available for any particular position, before confirming appointment.
Security vetting processes
If a company is working in a critical national infrastructure or high security area, vetting processes will take longer for potential new staff and renewal of visas, also adding to recruitment lead-time.
The appropriate visas will need to be obtained for staff to visit the UAE, and work and reside in the UAE and the relevant Emirate, as appropriate.
As with all processes, from business set up through to recruitment and visas, understanding of the law, regulations, systems, steps and timing and relevant government bodies and interrelationship between them, requires local knowledge, language and contacts (for face to face visits) to get things done efficiently and cost effectively. Accordingly, it is essential to select appropriate advisers, personal representative officer (PRO) and staff.
As with any country where you do business, for future profit and reputation, it is important to undertake appropriate diligence on potential business partners, particularly if you anticipate building a long-term relationship with them, such as a joint venture partner/ shareholder in your company or appointing them as your registered commercial agent. Local advisers may be in a good position to refer appropriate trusted persons to you and advise on typical remuneration structures.
Finally, the UAE is a potentially lucrative and interesting place to visit, live and do business in. Good diligence and luck.
This article is intended to touch on some of the key and more interesting aspects of setting up business in the UAE. If you have any particular questions or require more detailed advice about starting up in the UAE please feel free to contact the writer.
© John Dennett / GeneralCounsel.AE http://www.generalcounsel.ae.
Mobile: +44 (0)7491 323 555
John Dennett is the former and founding General Counsel of Abu Dhabi Terminals, the operator of Khalifa Port Container Terminal. Prior to ADT John worked in the Corporate Commercial department of Al Tamimi & Co. in Abu Dhabi, UAE.
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