COVID-19 and global lockdown scenarios have inevitably changed the way we look at retail experiences generally and, more specifically, the way we shop. In fact, it has changed the consumer experience and expectations entirely. Whilst we have seen a portion of the population return to the physical shops as restrictions on movement have eased, it is anticipated that the pre-COVID numbers may never return. This is especially the case in the UAE, where the retail sector relies heavily on the presence of tourists. Due to various restrictions, including social distancing and other health and safety measures, combined with the increase of retailers and service providers moving their offering online (to some degree at least, if not in its entirety) means that the stage is firmly set for e-commerce to grow over the coming months and years.
Our Dubai team of lawyers, across the technology, intellectual property, corporate and commercial sectors, have written a series of articles focused on e-commerce in the UAE to share their experiences and thoughts on the region's e-commerce landscape; now and moving forward.
In this article, Suhail Mirza and Simon Elliott discuss establishing an e-commerce business in the UAE.
Establishing an e-commerce business in the UAE
Even prior to the impact of the COVID-19, the volume of e-commerce activity in the UAE was on an upward trajectory. Research published by Dubai Economy and VISA estimated e-commerce transactions in the UAE to hit $16 billion in 2019 and a projected 22% annual growth to 2022. COVID-19 and related lockdowns have (as is the case across the world) proved further catalysts to the growth of e-commerce in the UAE, with online sales activity becoming increasingly part of everyday life.
The 'e-economy' is actively promoted by the UAE Government and the UAE is positioned as the key regional hub for the set-up and growth of online businesses. For example, on the landmark acquisition of Souq.com by Amazon, Dubai's Crown Prince His Highness Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum commented that:
"The acquisition reiterates Dubai's position as a regional and global hub for the world's leading corporations […]We are happy that souq.com is a success story born in Dubai".
Residents of the UAE are very familiar with local brands that have a successful online presence, for example Dubizzle.com, Bayut.com and, prior to its merger with Amazon, Souq.com. These brands operate in the UAE as companies licensed to undertake e-commerce and, in some cases, other commercial activities.
Government authorities, including in certain freezones such as the Dubai International Financial Centre (the "DIFC"), have provided a business-friendly climate in which such companies can operate. For example, the 'FinTech Hive' in the DIFC successfully creates an eco-system in which fintech companies can be established, have access to venture capital and know-how to support them and utilise shared working spaces to reduce the cost of operation. The Dubai Financial Services Authority, as regulator and licensing authority for financial services in the DIFC, provides a framework in which to develop regulated activities, including those that provide essential support services to e-commerce business (such as e-payment services). Such initiatives will continue to help attract established and start-up companies to the UAE across all sectors, particularly in the e-commerce industry.
The UAE has a wider legislative framework that further supports e-commerce transactions (such as data protection and specific electronic transactions and e-commerce laws). This wider legislation will be further covered in our e-commerce series.
How to set up an e-commerce business
The following are the key points to consider when setting up an e-commerce business:
1. Consider the form of legal entity
The key issue to keep in mind when structuring a business in the UAE is to ensure the form of business entity has all requisite licences to enable it to perform its desired commercial activities. In addition, particular attention also needs to be paid to restrictions on foreign ownership that are set out in the UAE Commercial Companies Law 2015 (as amended) (the "CCL") that requires a UAE national (being an Emirati national or company wholly owned by Emirati nationals) to own 51% of the share capital. This foreign ownership restriction applies to companies registered as limited liability companies under the CCL and licensed by the Department of Economic Development.
Many foreign investors wish to avoid a local shareholding in the structure, despite structuring options to confer full management control and beneficial ownership to the foreign investor. There are other options however - these involve establishment in a free-zone jurisdiction (where 100% foreign ownership is permitted) or, in relation to the onshore/mainland UAE jurisdictions (such as Dubai or Abu Dhabi), making an application under the UAE's Foreign Direct Investment Law which allows foreign ownership of up to 100% of the share capital in a limited liability company within certain sectors of the economy (where the above-mentioned foreign ownership restrictions under the CCL would otherwise apply). We are aware that certain foreign brands have successfully met the criteria for exemption under the Foreign Direct Investment Law and are trading with no Emirati involvement in their business structure.
2. Identify the correct business activity and check that it is permitted in the UAE
'e-commerce' is a general term that is used to cover all aspects of commercial activities and services which are conducted online. The Department of Economic Development and the Free-Zone Authorities (as the main regulators of commerce in the UAE's various jurisdictions) have developed licensing categories that cover e-commerce in addition to traditional trading activities. Any company planning to undertake e-commerce business in the UAE must identify the most appropriate activity and obtain the correct licence.
For example, the Dubai Multi-Commodities Centre Free-Zone Authority (the "DMCC Authority") has introduced an activity code that licences an 'E-Marketplace Service Provider'. This is defined as a company that is engaged in providing an 'online platform, which promotes third parties' products and services and facilitates commercial transactions between buyers and sellers'. This is a new category of activity specifically introduced by the DMCC Authority to allow a company to provide an online market place. The products sold on the market place may be manufactured and sold by third parties. This sort of activity involves the online business acting as an "aggregator". The business can be solely web or application based. A great example would be an application that connects passengers with taxi drivers.
It is also important to consider additional licences/approvals that may be necessary in order to promote and sell certain goods or services in the UAE. For example, a ride hailing app would need to apply to the relevant Road and Transport Authority to provide passenger transport services in the Emirate it offers its services. Similarly, an online travel agency offering package holidays in the UAE should consider obtaining approval of the relevant tourism authorities.
3. Do I need to establish a limited liability company registered with the Department of Economic Development?
This depends on the business plan and the commercial activities to be undertaken by the company.
As a general rule the licensing regulations of the UAE require that in order to do business in any Emirate (and this means the jurisdiction that is located outside of the free-zones), a licence issued by the Department of Economic Development is necessary. For example, a company planning to supply goods or services to customers resident in Dubai (and the jurisdiction outside of the various free-zones) must have a licence from the Dubai Department of Economic Development. This would involve establishing a limited liability company and a UAE national as a shareholder (owning 51% of the capital unless exemption under the Foreign Direct Investment Law is available) being involved in the corporate structure.
4. An e-commerce business requires logistics, warehousing and 'last mile' delivery. How can this be structured?
The logistics, warehousing and delivery activities of operating an e-commerce business is critical. Customer experience is very important a competitive market place and all consumers expect a seamless service commencing from the online purchasing decision, integration of payment channels and delivery to the doorstep. An e-commerce business has the option of outsourcing logistics and delivery to a third party logistics providers ("3PL"). This is often more convenient for a number of reasons:
- The 3PL can obtain customs clearance for the goods to be sold in the UAE if they are being sourced from overseas. The e-commerce provider may not, unless it has a trading licence and operates as a limited liability company registered with the Department of Economic Development, be able to obtain am import code in order to import goods into the UAE.
- The 3PL may have warehouse facilities, and accordingly any inventory or goods in transit can be stored by the 3PL in its warehouse facility.
- The 3PL can also provide the 'last mile' delivery to the customer's location.
Of course, the logistics and warehousing aspects of the e-commerce business can be undertaken in-house. This will bring into play further licensing/structuring options as it may require establishing an affiliated entity with all required licences to provide these services across the UAE.
5. What are the other key legal issues?
As with the establishment of any corporate entity in the UAE, other key UAE legal matters need to be addressed. These include:
- Employment law considerations - obtaining a visa quota to hire expatriate employees. Approval of the UAE's Ministry of Human Resources & Emiratization will be necessary.
- Property considerations - all corporate entities must have a place of business (office or warehouse/industrial premises) in the UAE and therefore as part of the establishment process, a lease of office or warehouse premises should be considered.
- VAT registration - the corporate entity must register with the Federal Tax Authority if it anticipates taxable supplies to exceed AED 375,000 in the financial year. Registration is voluntary if taxable supplies will be above AED 187,500 and no greater than AED 375,000.
- Payment Gateway - consideration needs to be given to an online payment gateway to allow for consumers to make payments online. This can include credit card payments and pre-paid card payments. Whilst there is a push towards a "cashless economy", the option for cash payment on delivery is also prevalent in the UAE.
These considerations just give a snap-shot of the key points. There are, of course, other legal issues to consider. These include financing issues and more general tax and shareholder arrangements.
We are well placed to advise on these matters and would be delighted to speak to you to find out more about your business and its operations and how we can support that in the UAE.
Read our other instalments of e-commerce in the UAE:
E-commerce in the UAE: Is it the new normal?
E-commerce in the UAE: Intellectual Property considerations