Doing Business in Dubai

There are many ways in which individuals or entities can seek to establish a business presence in Dubai.

Alison Hubbard, Partner at Pinsent Masons LLP, and also chair for the BBG Focus Group - Legal, shares a brief introduction to some of the main considerations for investors into the United Arab Emirates.

This is very much a ‘general guide’, and no substitute for a thorough analysis of your own particular objectives.

The BBG does not endorse one member company over another and if you would like to discuss your business plans in more detail, we advocate contacting any one of the BBG member companies involved in setting up businesses in the UAE.

Investment

Foreign investors are free to invest in the UAE and profits can be repatriated, together with the proceeds of sale and capital on liquidation.

With some exceptions, which are explained below, to carry on business in the UAE, a foreign entity will be required to establish an entity in the UAE. In this regard, investors generally have two options; establishment in mainland UAE or establishment in one of the many economic Free Zones;

Investment is possible in all parts of the economy, except for:

  • Real estate agency
  • Brokerage activities
  • Manpower

Foreigners can own residential property in certain designated areas, including Free Zones.

Business Ownership

There are several vehicles through which a foreign investor may operate in the UAE.

Foreign businesses wishing to operate in mainland UAE through a limited liability company (LLC) will currently be required to have a local shareholder holding at least 51% of the shares. There have been various indications over the years that the requirement of a locally held majority shareholding may be relaxed. However to date no definitive steps have been taken towards such relaxation, and this issue remains a key concern for foreign investors despite various practices developed to minimise the potential risk associated with the requirement.

A popular alternative to a mainland LLC is establishment in one of the many Free Zones established in the UAE, which permit 100% foreign ownership. However, businesses established in a Free Zone are theoretically prohibited from carrying out activities in mainland UAE.

Companies located in a Free Zone will be subject to the specific laws of that Free Zone along with the Federal laws of the UAE, and the local laws of the relevant Emirate where the relevant Free Zone’s laws are silent. The exception to this is Dubai International Financial Centre which has its own set of laws and is not governed by the laws of the UAE, other than the criminal laws.

Legal and Regulatory Framework

The legal system in the UAE is based both on civil code principles and on the Islamic Shari’ah. The sources of law for civil matters in the UAE are:

  • The Constitution
  • Federal laws and regulations
  • Emirate laws and regulations
  • Islamic Shari’ah
  • Custom and practice.

The Separation Of Power Between The Federation And Emirates

The main sources of law governing day to day commercial matters in the UAE are the Federal and local Emirates laws and regulations.

Certain legislative and executive authority is reserved exclusively to the Federal Government. These include matters of substantive legislation related to civil, commercial, corporate and penal matters.

The Constitution reserves to the individual Emirates sovereignty over matters within their respective territorial borders, which are not exclusively reserved to the jurisdiction of the Federal Government. One such example relates to the issuance of rules and regulations governing the real estate sector.

The Civil Code Framework

The UAE is governed by a civil law system that relies on codified laws rather than precedent created by past legal decisions, as is the case with common law jurisdictions.

The Significance Of The Islamic Shari’ah

Although the main sources of law governing day to day commercial matters in the UAE will arise from the Federal and individual emirate laws, Shari’ah Law plays an important role in the lives of UAE citizens and residents alike.

The Islamic Shari’ah is the divine set of rules and regulations regarding life as conveyed to man through the holy Prophet Mohammed (peace be upon him). It is a collection of legal tenets, laws and regulations that are intended as a way of life for Muslims.

The Shari’ah is extremely important in relation to matters of a personal nature, such as marriage, domestic relations, inheritance and lineage, but in relation to day-to-day commercial matters it is less so.

Business Vehicles

Economic activity in the UAE is regulated by the individual Emirates and at a Federal level. The availability of business vehicles will depend upon the activity proposed to be conducted. Below is a summary of the most commonly used business vehicles in the UAE.

Mainland UAE

Commercial Agency

Purpose UAE

Where: a foreign company wants to supply goods into the UAE without establishing a permanent presence

Restrictions

A commercial agency registered under the Commercial Agency Law gives rise to significant protection to the local agent

It is possible to appoint an unregistered agent, but a local agent may insist that the agreement be registered

Some local agents accept that registration is likely to deter foreign principals and so are willing to contract on an unregistered basis



Limited liability company (LLC) in mainland UAE

Where: A foreign investor wants to establish a permanent presence in mainland UAE Limited liability is required

Foreign ownership in an LLC established in mainland UAE is limited to 49%, with 51% required to be held by a UAE national, or a locally registered company wholly owned by UAE nationals.



Establishing a Representative Office in mainland UAE

Where:A foreign investor wants to establish a permanent presence in mainland UAE

The business will only carry out promotional activity

A representative office must be sponsored by a UAE national pursuant to a formal agreement



Establishing a Representative Office in mainland UAE

Where:A foreign investor wants to establish a permanent presence in mainland UAE

The business will only carry out promotional activity

A representative office must be sponsored by a UAE national pursuant to a formal agreement


Free Zone

Establishing a free zone company

Where: A foreign investor wants to establish a permanent presence in the UAE

The business will not operate in mainland UAE

100% foreign ownership is required

Limited liability is required

A free zone company is, strictly speaking, prohibited from conducting business in mainland UAE

Recent legislative developments in Dubai suggest that in due course, and with the requisite consent, a free zone company will be able to obtain a license to operate in mainland Dubai



Establishing a free zone branch

Where: A foreign investor wants to establish a permanent presence in the UAE

The business will not operate in mainland UAE

Limited liability is not required

For structuring purposes a separate entity is not desirable

A free zone branch is, strictly speaking, prohibited from conducting business in mainland UAE

Recent legislative developments in Dubai suggest that in due course, and with the requisite consent, a free zone branch will be able to obtain a license to operate in mainland Dubai

Other Considerations

Islamic culture and traditions

Although the local business environment has become very westernised, researching the Islamic culture and customs is a must for any

business seeking to operate in the UAE. A few key points to note:

  • Face time is very important
  • Westerners should try to dress conservatively, although within hotels and restaurants a more relaxed approach can be taken
  • Working hours are different (and limited) during Ramadan and public festivals (Eid)
  • Alcohol is widely available in hotels in the UAE, but purchasing alcohol for consumption at home generally requires a license
  • Handshakes are a common form of greeting in the Middle East and shaking hands at the beginning and end of a meeting is usual. However, some Arab men and women will have reservations about shaking hands with people of the opposite gender, as contact between men and women who are not married or related is forbidden by Islam. Non-Muslims should not be offended by this, and should simply wait until a handshake is offered by a member of the opposite gender
  • Hospitality is very important in Islamic culture and it can be considered impolite to decline offers of refreshments when they are made. It is also customary to treat strangers with the same level of respect as one would treat a friend, as kindness is considered a virtue in Islam.

Payment terms and timing

Approach to payment terms and timing are likely to be different to the approach of the foreign investor. A business will need to be aware of lock-up periods to manage cash flow.

Changes to the regulatory regime

The UAE is growing and developing at a fast pace. This often involves change – rapid change – in the regulatory regime that underpins business.

For more detailed information regarding setting up a business in the UAE, please refer to http://www.pinsentmasons.com/PDF/Doing-business-in-UAE.pdf