Doing Business in Dubai

1. Introduction

There are many ways in which foreign entities (i.e. individuals or companies who are not nationals of the United Arab Emirates) can seek to establish a business presence in Dubai. In this article, Jerry Parks of Key & Dixon, legal consultants in Dubai, provides a useful guide to the options available.

2. Methods of doing business

The principal ways by which a foreign entity might consider establishing a business presence in the UAE are by means of:-

a branch or representative office of a foreign company;
a commercial company (ie one of the seven types of companies referred to in the UAE Commercial Companies Law);
a professional partnership; or
a Free Zone entity (branch office or company).

Except in relation to Free Zone entities, it is generally necessary to enter into some form of agreement with a UAE national or a company wholly owned by UAE nationals. This may be by way of an appointed service agent (in the case of branch or representative offices and some professional partnerships), majority shareholding (in the case of limited liability companies) or sponsorship arrangements (in the case of unincorporated joint ventures).

2.1 Branch or representative office

It is possible for a foreign company to establish:-

a federally registered branch;
a federally registered representative office; or
a locally registered representative office (except, in this last case, in Abu Dhabi).

Federal registrations fall within the jurisdiction of the UAE Commercial Companies Law whereas local registrations fall within the jurisdiction of the relevant Local Order applicable in each Emirate. The distinction lies in the fact that under the federal jurisdiction either a trading branch office or non-trading representative office licence may be obtained whereas under the local jurisdiction only a non-trading representative office licence may be obtained. I deal with the two categories of registration below.

Federal - In order to establish a federally registered branch or representative office, application must be made to the Ministry of Economy & Commerce supported by various documents including the applicant's constitutive documentation (Certificate of Incorporation and Memorandum and Articles of Association), appropriately worded Board Resolutions, audited accounts, a Power of Attorney in favour of the General Manager to be appointed and a completed National Agency Agreement. The foreign company must also provide a bank guarantee (which must be renewed every year) in the amount of Dirhams 50,000 issued in favour of the Minister of Economy & Planning along with its application for registration in the Register of Foreign Companies. The National Agency Agreement must be entered into between the applicant company and a UAE national (or company wholly owned by UAE nationals). The premises proposed to be used by the branch or representative office must be approved and certain licence fees paid before the licence can be issued. In the case of a representative office application, the trade licence will contain a "no trade" restriction, effectively limiting operations to those of marketing and liaison.

Local - In the case of a local registration, application is made to the competent local authority (in Dubai the relevant authority is the Department of Economic Development). The application should be supported by the same documentation as detailed above, save that the applicant must submit a Local Service Agency Agreement (as opposed to a National Agency Agreement), appointing a UAE national as the local service agent. The local registration procedure is similar to the federal procedure, but usually simpler, quicker and cheaper, but does not permit trading operations.

Whilst the appointment of a national agent or local service agent is required by law, the scope of the agent's role is essentially a matter for agreement between the parties. At the very least, the agent should facilitate visa applications and other administrative issues, which require the agent's signature as a matter of law. The agent may also agree to promote the foreign company's operations in other ways using whatever influence the agent may have as appropriate. The agent is usually paid a fee for his services, expressed to be either a fixed annual sum or a sum calculable by reference to the level of business conducted or generated by the branch or representative office.

2.2 Company formation

There are seven types of company referred to in the UAE Commercial Companies Law (Federal Law No. 8 of 1984 (as amended)) - general partnership, simple limited partnership, joint participation, public joint stock company, private joint stock company, limited liability company and partnership limited with shares.

The most common form adopted by foreign companies is the limited liability company and set out below are certain of the key issues to be considered in relation to such entities.

Company name - The name of the company should be derived from its objects or the name of one or more of its partners, although this is not mandatory. It is possible to obtain the approval of the relevant authorities to a particular name prior to proceeding with an application for registration.

Local shareholding - The law provides that at least 51% of the total shareholding in a limited liability company must be held by a UAE national (or a company wholly owned by UAE nationals).

Minimum share capital - The current minimum share capital required for limited liability companies is Dhs. 300,000 (if registered in Dubai) or Dhs. 150,000 (if registered in any other emirate). Share capital must be fully paid up and deposited with a locally registered bank. Contributions in kind are permitted under certain conditions.

Profit and Loss - The profits and losses of a limited liability company can be distributed between the shareholders in, subject as mentioned below, whatever proportions they agree in the Memorandum of Association. The ratio does not need to reflect the shareholding and indeed often differs in order to dilute the mandatory 51% UAE national shareholding. It is not however permissible for the parties to express a profit share in the Memorandum of Association which purports to entitle the local shareholder to less than 20% of the profits.

Transfer of shares - In the event that any of the shareholders wishes to sell its shares, notification must first be given to the other shareholders who have an automatic right of preemption in relation to those shares. Only if those preemption rights are not exercised is the seller permitted to transfer the shares to a third party. Where federal approval is required for the establishment of the company, such federal approval is also required for the transfer of shares in that company. Note that a transfer must not result in the 51% UAE ownership being reduced.

Management - Limited liability companies should be managed by at least one but not more than five managers. The manager(s) may be an individual or a company. The role of the manager(s) may be compared to that of directors in other jurisdictions. The powers of the manager(s) and manner of appointment and dismissal should be specified in the Memorandum of Association (and possibly additional documentation, such as a separate management agreement). If the number of shareholders exceeds seven, it is also necessary for the shareholders to establish a "Board of Supervisors" comprising at least 3 of the shareholders. This Board is responsible for supervision of the managers/management of the company and has powers of inspection of financial and other documentation, supervision of the budget, preparation of the annual report and the distribution of profits. The Board or Supervisors reports to the shareholders.

General Meetings - A limited liability company must convene at least one general meeting of the shareholders during the four months following the end of the company's financial year. In addition, the manager(s) must call a general meeting if so requested by the Board of Supervisors or by a number of shareholders holding not less than 25% of the share capital. Detailed notice provisions apply in each case. All shareholders are entitled to attend general meetings in person or by proxy with the number of votes held being represented by the number of shares owned.

Shareholders Resolutions - Any amendment to the company's Memorandum of Association or change in its share capital must be approved by shareholders representing at least 75% of the share capital. The company's Memorandum of Association may however provide for a greater majority. Except for the foregoing, resolutions in general meetings are validly passed if approved by shareholders representing at least 50% of the share capital although again a greater majority may be specified in the Memorandum of Association.

Statutory reserve - It is obligatory for all companies to allocate 10% of their annual net profits to create a statutory reserve. Contributions to this reserve may be suspended in the event that the value of the reserve reaches half that of the company's share capital.

Application for a trade licence for a limited liability company should be made to the competent local authority supported by documentation including the proposed Memorandum of Association of the new company, a letter from the Manager of the new company setting out the proposed amount of the company's share capital and number of shares held by each shareholder, confirmation of whether the share capital has been paid up in cash or in kind, copies of each shareholder's passport or, in the case of corporate shareholders, their Memorandum and Articles of Association and Certificate of Incorporation, a Board Resolution of each corporate shareholder approving the taking up of shares in the new company, a Power of Attorney in favour of the Manager, details of the company's auditors together with a letter from them confirming their appointment, a certificate from a locally registered Bank confirming the deposit of the minimum share capital and, in the case of share capital paid in kind, a certificate from the new company's auditors certifying the value of any contribution in kind. The incorporation process usually takes in the region of 8 weeks although the competent local authority has discretion to request additional information or documentation as it sees fit which often affects the timing of the registration process.

The licence fee comprises several elements including a fee of 10% of the annual rent of the commercial premises and 5% of the annual rent of the Manager's residential premises. There are in addition administrative fees payable to the competent local authority, the Chamber of Commerce & Industry and the Ministry of Economy & Commerce.

In circumstances where one or more of the shareholders does not in fact contribute to the share capital (his contribution being made by one or more of the other shareholders), it is usual to execute separate documents evidencing the agreement of the parties in relation to the management of the company, the division of profits and losses and the beneficial ownership of the shares. The validity of such agreements as regards management and division of profits has been widely accepted both by the competent local authorities and the local courts in principle. The position with regard to agreements in which a party that is not the registered owner of shares purports to hold the beneficial ownership of those shares is less certain. It is thought that in most cases the validity of such agreements would be upheld by the local courts inter se the parties, although in the absence of judicial authority on the point no assurances can be given in relation to their true legal status.

2.3 Professional businesses

Professional business is defined as "work based on investing mental talents and acquired information". The conduct of professional business is governed by Local Orders in each Emirate.

If a non-national natural person or corporate body wishes to conduct professional business a UAE-national local service agent must usually be appointed. In the case of a group of non-national natural persons, they are required to establish a "business company" (akin to a partnership) in accordance with the provisions of the federal Civil Transactions Law, and usually to appoint a UAE-national local service agent in the event that none of the participants are UAE-nationals.

Any individual or corporate body intending to conduct professional business pursuant to the relevant Local Order must also comply with the federal and local regulations governing the conduct of the intended business.

2.4 Free Zones

The UAE now boasts several Free Zones including the Jebel Ali Free Zone, the Dubai Technology, Electronic Commerce and Media Free Zone (including Dubai Internet City and Dubai Media City), the Dubai Airport Free Zone, the Dubai Health Care City, the Ras Al Khaimah Free Zone, the Sharjah International Airport Free Zone, the Hamriya Free Zone, the Ajman Free Zone and the Fujairah Free Zone. At the time of writing this article many more are either under discussion or in the process of development, including the Dubai Textile Free Zone, the Dubai Auto Parts City Free Zone, the Dubai Carpet Free Zone and the Dubai International Financial Centre.

The main attraction of establishing an entity in one of the Free Zones is that there is no UAE national shareholding requirement. The Free Zone authorities also generally guarantee investors that they will not be liable for corporation tax for a specific period of time. In the case of the Jebel Ali Free Zone for example this guarantee is for a period of 50 years and is renewable upon the expiration of the initial period. This guarantee applies regardless of changes which may be introduced in relation to national tax regulations. In addition, Free Zone entities are not liable for import or export duties for goods imported into and exported out of the Free Zone and may repatriate 100% of their capital and profits without penalty.

A Free Zone entity can usually take one of three forms:

a branch office of a foreign principal company;
a Free Zone Establishment (a separate corporate legal entity with the foreign principal company or individual being the sole shareholder); or
a Free Zone Company (similar to a Free Zone Establishment but with multiple shareholding).

Branch office - In order to form a branch office in a Free Zone, the foreign company's application must be supported by copies of its constitutive documentation, appropriately worded board resolutions and a statement regarding the amount of capital set aside for the promotion and support of the branch office operation.

Free Zone Establishment or Company - In order to form a Free Zone Establishment the foreign entity's application must be supported by copies of its constitutive documentation and appropriately worded board resolutions. As the Free Zone Establishment will be a separate corporate legal entity, further information is also required concerning the proposed share capital, the number of shares, the identity of local bankers and auditors and the appointment of directors and secretaries. In the case of a Free Zone Company the required documentation will depend upon the nature of the shareholders.

2.5 Special Categories

In relation to certain activities the prior consent of a Federal Ministry or competent local authority is required before the trade licence will be issued. These activities include those relating to oil and gas, banking and investment, financial services, insurance, media, transport, construction contracting, telecommunications, real estate management, architectural and engineering consulting, tourism, shipping, civil aviation, legal services, medical services and education.

3. Intellectual Property

Considerable progress has been made in the protection of intellectual property rights in the UAE. In early 1993 three federal intellectual property laws were implemented, namely the Trade Marks Law, the Patents Law and the Copyright Law. The UAE has become a party to the Paris Convention for the Protection of Industrial Property (1996), the TRIPS Convention (1997) and the Patent Cooperation Treaty (1998). These laws afford protection to owners of marks and works by the imposition of criminal sanctions on persons who seek to counterfeit, imitate or use without consent the marks or works of others. Furthermore, penalties such as fines, imprisonment or, in certain cases, the closing down of establishments or companies in breach or the confiscation or destruction of goods are prescribed by these laws.

The Ministry of Economy & Commerce is responsible for the registration of trade marks, the Ministry of Finance & Industry is responsible for the registering of patents, designs and models and the Ministry of Information and Culture is responsible for the registration of copyright works.

The periods of initial protection vary - 10 years for trade marks, 20 years for patents, 10 years for designs and models and the life of the author (50 years plus) plus 50 yrs for copyright works.

Assignments and licences of intellectual property are recognized under the law provided that any such assignment or licence is registered with the concerned authority. Furthermore, the Patents Law expressly allows for pledges of patents and for such pledges to be noted on the register. It has also become possible to mortgage copyrights.

With the rapid growth of e-commerce, many countries have created a separate register for the registration of domain names. In the UAE the United Arab Emirates Network Information Centre is the local registry of top and second level domain names. In addition, the Ministry of Economy & Commerce has intimated that it will accept applications to register domain names in the same manner as for trademarks.

4. Employment Law

Employment contracts and relations in the UAE are subject to and governed by Federal Law No. 8 of 1980 (as amended by Federal Law No. 12 of 1986). This law applies to all employers and employees in the private sector and relates to all companies formed under the UAE Commercial Companies Law, branch and representative offices of foreign companies and owners of sole proprietorships operating in the UAE.

Contract - The basic information to be included in a labour contract is as follows:

date of commencement;
nature of the work to be performed;
location in which the work is to be performed;
duration of the contract (fixed term or open ended);
amount of salary; and
date of execution of the contract.

Probation - A probation period may be agreed not exceeding 6 months during which the contract may be terminated without notice and without end of service benefits becoming payable to the employee.

Termination - The situation regarding the termination of labour contracts differs according to whether it is fixed term or open-ended:

In the case of fixed term contracts termination may be effected by the employer prior to the expiry of that term on one month's notice. In those circumstances compensation is payable to the employee in the amount of that employee's salary for a period of 3 months or the remainder of the term of the contract, whichever is the lower. The employee is also entitled to gratuity.

In the case of open-ended contracts termination may be effected by the employer on giving one month's notice with no compensation payable to the employee. However, the employee is still entitled to gratuity.

Gratuity - The calculation of gratuity differs according to whether the contract is for a fixed term or is open-ended:

In the case of fixed term contracts, employees who complete at least one year's service are entitled to gratuity at the end of their contractual service period or upon earlier termination by the employer calculated as follows:

21 days salary for each of the first 5 years; and
30 days salary for each additional year.

An employee who resigns before the expiry of his contractual service period is not entitled to gratuity unless he has completed 5 years continuous service in which case he is entitled to full gratuity for the whole employment period.

In the case of open-ended contracts where the employee has completed at least one year's service, if that employment is terminated by the employer the employee is entitled to gratuity calculated as follows:

21 days salary for each of the first 5 years; and
30 days salary for each additional year.

An employee who resigns after completing one year's continuous service under an open-ended contract is entitled to a proportion of the gratuity set out above calculated as follows:

continuous service in excess of 1 year but not more than 3 years - 1/3 gratuity;
continuous service in excess of 3 years but not more than 5 years - 2/3 gratuity;
continuous service more than 5 years - full gratuity.

Summary dismissal - The law sets out certain circumstances in which an employer may summarily dismiss an employee without payment of compensation or gratuity. These include failure to carry out basic duties notwithstanding warnings, disclosure of trade secrets, committing of criminal offences and being drunk or otherwise intoxicated during working hours.

It is not uncommon for expatriate employees working in the UAE to have parallel labour contracts - ie. their existing UK contract subject to a UK governing law and a separate short form of UAE contract subject to UAE law entered into for the purposes of filing with the Ministry of Labour. The UAE courts will however regard as null and void any agreement, which purports to deny the employee, the minimum protection set out in the UAE Labour Law. Whilst in some circumstances the entering into of parallel employment contracts cannot be avoided, we would advise that in relation to employees hired specifically to work in the UAE, they be employed locally on UAE contracts tailored to suit the employee's position.

5. Work permits and residence visas

6. Taxation

7. Property

We hope that this brief summary is helpful to those considering establishing a business presence in Dubai. Needless to say, this article can only serve as a guide, and specific legal advice must be taken in relation to any proposed venture.

March 2005