Think globally, act locally.
As you expand beyond borders there are often different regulations, risks and cultural differences to consider. Our guides will help you figure out the best way of conducting business abroad.
The Middle East is a fast-growing region, and the UAE is strategically located in the Arabian Peninsula, sharing borders with Saudi Arabia and Oman. Historically reliant on oil and gas, the UAE has spent the past decade diversifying its economy into other sectors, including tourism, institutional investments, technology and real estate. The UAE is quickly becoming a global commercial hub with increasingly liberal economic policies. The UAE is a federation of seven Emirates Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Quwain, Fujairah and Ras Al Khaimah.
We see a large number of international businesses seeking to set up operations in the UAE, with multinational retailers and food and beverage companies particularly keen to expand their brands and concepts into this market. There is also a lot of encouragement from the government for the technology sector, with a growing number of government linked and family-backed incubators in support of startups, and innovation taking place in the healthcare sector too.
For any overseas business seeking to establish itself in the UAE, the first decision that must be made is how to establish such presence whether it be by setting up a local entity or by appointing an agent or distributor to market and sell your products in the region. 100% foreign ownership is now generally permitted (with limited exceptions relating to protected sectors, including oil & gas exploration) in both free zones and onshore, but the form and location of such entity will be dependent on the nature of the business and whether the foreign investor intends to trade onshore, in which case a free zone entity would not be appropriate.
The UAE has gone through some recent tax reform. The introduction of tax (particularly corporate income tax) is a significant departure for the region, which has historically generally been tax-free, and will have profound effects on businesses as they encounter new reporting requirements, accounting rules and compliance regimes. Many foreign companies that are incorporated in free zones, and should not therefore be trading onshore, may find themselves exposed as a result of more increased monitoring of where business is actually taking place.
Free zones remain popular for foreign investors and the largest and most well-known of these free zones is the Dubai International Financial Centre (DIFC). The DIFC has its own independent regulators and judiciary, a common law framework and a distinct business community. Another, the Abu Dhabi Global Market (ADGM) was established in 2013 in the heart of the UAE’s capital city, Abu Dhabi and similarly applies a common law framework.
The UAE government is generally welcoming of foreign investment, and has put it at the heart of its long-term growth plans. In its UAE Vision 2031, it aims to achieve a GDP of AED 3 trillion (double the current GDP), position UAE cities as the best 10 cities globally in terms of quality of life and among the top 10 countries in attracting global talent. Technology & innovation.
As connectivity becomes increasingly ubiquitous throughout the region, the key areas of interest and investment to watch are:
From a legal and regulatory perspective the laws of the UAE (in most respects) facilitate technology innovation, development and deployment, with minimal restrictions. Regulation in emerging and disruptive technologies such as blockchain, cryptocurrencies, artificial intelligence; all evolving at a fast pace.
The legal framework The UAE is a civil law jurisdiction with codified laws rather than reliance on precedent legal decisions.
The civil code principles and principles of Islamic Shari’a law form the foundation of the legal system. The main sources of law are the constitution, the laws and regulations of each Emirates federal laws and regulations, and in certain cases Islamic Shari’a law. Certain free zones such as the Dubai International Financial Centre will have their own laws and regulations which will regulate those entities incorporated in such free zones.
The UAE is a federation of seven Emirates. It is important to note that there is a separation of power between the Federation and the Emirates, such that certain legislative and executive authority is reserved exclusively for the Federal Union, including matters of defence, public health and foreign policy. Legislation passed at the Federal level has primacy over the local laws of each Emirate, including in matters of substantive legislation related to civil, commercial, corporate and penal matters. The Constitution provides for the individual Emirate’s sovereignty over matters in their respective territories, where authority is not already reserved exclusively for the Federal Union.
While most law governing day-to-day matters in the UAE originates at Federal or individual Emirate level, Shari’a law plays an important part in the personal lives of UAE citizens and residents. From a commercial perspective, Shari’a application is usually reserved for religious, personal or moral matters, transactions expressly intended to be Shari’a compliant, and for use by the courts where there is a lack of relevant express legislation.
Over the last 10 years or so, the UAE has taken significant steps to increase awareness of intellectual property rights and to improve the legislative framework. With the Government’s stated aim to become a knowledge-based economy, there are a great number of initiatives in place to help foster a culture of innovation, and to help protect important commercial rights.
In recent years, UAE officials have moved towards automation of intellectual property protection, both in terms of registering and enforcing rights. Historically, UAE patent examinations were outsourced to other countries. The key to enforcing rights in the UAE, and in the wider MENA region, is to ensure that registered rights exist upon which to base an action. Relying on unregistered rights can mean the only option for taking action is through the civil courts, whereas registered rights provide the option for quicker and more cost-effective administrative or criminal enforcement actions. The UAE’s intellectual property regime now provides protections for trademarks, patents, industrial designs, copyright, customs recordals, administrative recordals and knowhow.
Whilst there are no specific IP courts, a number of Federal judges have received full IP training in the US and Europe. The good news for rights holders is that the UAE provides the opportunity and framework to obtain intellectual property rights, but also the mechanisms to safeguard and enforce those rights should the need arise.
The UAE is generally open to foreign investors and sees foreign direct investment as a key element of its long-term development plans. Investment laws and regulations have been swiftly adopted to support these goals, with the most pertinent change being the removal (in most sectors/industries) of the requirement for 51% UAE ownership of companies and for branches to appoint a national agent.
The Commercial Agencies Law has also been updated to remove the restriction on foreign persons acting as commercial agents in relation to the sale of their own products in the UAE, although such foreign persons will still be subject to Cabinet approval. It remains to be seen what companies the Cabinet approves in this regard, but it is a positive step for foreign principals.
The vehicle most favoured by foreign investors wishing to establish a presence onshore is a limited liability company. An LLC and can be formed by a minimum of two, and a maximum of fifty, shareholders (individuals or corporate entities), commonly known as partners. Capital requirements are prescribed by the local law of the Emirate in which it is to be incorporated. Under current law, there is no minimum capital requirement, although capital is generally required to be suitable for the proposed activity of the company. The management of the LLC is entrusted to directors, known as managers, who each have authority to operate independently within their designated areas. The managers may, if desired, be formed into a board, which takes management decisions collectively, but certain matters are reserved, as a matter of law, to the shareholders. The powers of the directors (or the board) are delegated by the shareholders. A general manager is required to be appointed, who usually manages the day-to-day affairs of the LLC, with such powers delegated by the shareholders (separately from that of the directors or board). A director or general manager can be liable to the LLC, the shareholders and third parties for all acts of fraud, abuse of authority, any violation of the Companies Law, any violation of the LLC’s Memorandum of Association, and mismanagement. Economic rights (rights to profits/losses and to receive distributions) can be divided separately from legal rights (on voting, management etc.). An LLC can sue and be sued in its own name, and its liability is limited to the value of its assets. Each shareholder’s liability is limited to his or her respective share capital subscription.
A foreign company can set up a branch office in the UAE. A branch office is not a separate legal entity, but rather an extension of the company that is establishing it. As such, a branch office will, when conducting business in the UAE, be acting on behalf of the foreign parent and bind it to all contracts entered into in the UAE. The previous requirement to appoint a local service or national agent (who acted as a paid representative of the branch locally) has been removed under the revised Companies Law. In principle, a branch office can be licensed to undertake one, several, or all activities already undertaken by its parent company, provided those activities are not restricted by Law to be undertaken by UAE nationals only. In Dubai, the competent authority for registration and licensing of a branch office is the Department of Economy and Tourism. In Abu Dhabi, the competent authority is the Abu Dhabi Department of Economic Development. To determine if a proposed activity is acceptable, the relevant authority will scrutinise the foreign company’s articles of association to ensure that what it intends to do in the UAE is consistent with its activities elsewhere, and that it is competent to carry out those activities in the UAE. There is no capital requirement for a branch of a foreign company. It is possible, and quite common, for foreign investors who have already established an LLC in one Emirate to use that company as the parent of branches in one or more other Emirates. Companies Law also permits a representative office to be established by a foreign company. A representative office can only conduct representative, marketing and other promotional activities and cannot trade. It must be sponsored by a UAE natural pursuant to a formal agreement.
Free zones are specially-designated areas within the UAE, established to attract foreign investment by encouraging overseas companies to set up businesses and locate their operations in the UAE. Each free zone has its own administration and licensing authority. There are currently in excess of 40 free zones in the UAE, many of them established to target specific sectors or industries, such as the Dubai Technology and Media Free Zone (tech, media and internet sectors) or D3, Dubai Design District (fashion, design and art sectors). Other free zones do not focus on a specific sector, but target companies from various industries. Some of the largest free zones include:
Although there are minor variations between the type of corporate entities allowed in free zones, generally the options available are a Free Zone Limited Liability Company (FZ LLC), Free Zone Establishment (FZE), or a branch office (FZ Branch). There is very little difference between the options, other than the number of shareholders and share capital that they must have. Both FZEs and FZCs provide limited liability to their shareholders, and can be wholly owned by foreign investors.
Capital requirements differ from one free zone to another, but usually a FZE can only have one shareholder and a FZC at least two shareholders, with a minimum share capital prescribed by that Free Zone Authority. As is the case for mainland branches, an FZ Branch office is an extension of the overseas parent company and is not a separate legal entity. As a result, an FZ Branch does not have its own share capital and its parent company will be liable for its actions and liabilities.
An FZ Branch is permitted to trade, but may only be engaged in activities similar to those of its parent company. In principle, FZ LLCs, FZEs and FZ Branches can only trade within the relevant free zone’s designated area. This basic restriction has different implications depending on the type of company, activity and free zone in question. As far as distribution or trade is concerned, the restriction means, for example, that a company established in a free zone cannot retail its products, or have a showroom, onshore or in any other freezone without a legal presence there. Generally, the free zone entity will be permitted to import, stock and re-export goods to entities located in the UAE with a suitable licence.
The DIFC has been established for around two decades and provides foreign companies with a well-established and internationally-recognised platform for operations in the UAE and wider region. The DIFC offers a range of legal entities including:
With over 30 years’ experience in the region, Gowling WLG understands the Middle East and how to do business in the UAE. Our team consists of, individuals who have been in the region for more than eight years and who are recognised experts in their fields, we in addition have a sizeable number of multilingual lawyers who combine international expertise with local knowledge and influence.
