Combining the experience, resources and international reach of McGrigors and Pinsent Masons. Doing business in the UAE

Transcription

1 Combining the experience, resources and international reach of McGrigors and Pinsent Masons Doing business in the UAE

2 Contents 01 Introduction The UAE Key Facts Legal and Regulatory Framework Business Vehicles Mainland Business Vehicles Free Zone business vehicles Dispute Resolution Employment issues Intellectual Property Real Estate Taxation Anti-corruption Other Considerations Pinsent Masons and the Gulf 28 02

3 1. Introduction From our offices in Dubai and Doha, Pinsent Masons LLP advises businesses operating across the Gulf and wider MENA region. We have produced this guide to give you a brief introduction to some of the main considerations for foreign investors into the United Arab Emirates (the UAE). Inevitably, it is a general guide, and no substitute for a thorough analysis of your own particular objectives. Pinsent Masons LLP can help you with the entire process of setting up in the UAE, whether through commercial agency, a branch office, or a joint venture with a local sponsor. We can also help you navigate the immigration process and the logistics and considerations for relocating management and staff. Once you are established, we can provide comprehensive advice as your business grows and expands. If you would like to discuss your plans in more detail please contact us. Key contacts: Dubai Alan Wood Partner T: D: M: E: alan.wood@pinsentmasons.com Alison Hubbard Partner T: D: M: E: alison.hubbard@pinsentmasons.com Doha James Elwen Partner T: D: M: E: james.elwen@pinsentmasons.com Roger Phillips Director T: D: M: E: roger.phillips@pinsentmasons.com Dubai PO Box Level 8 The H Dubai One Sheikh Zayed Road Dubai United Arab Emirates Doha PO Box Tornado Tower, 35th Floor Doha State of Qatar 03

4 2. The UAE General With its prime geographical location at the crossroads of the major Western and Eastern economies, its established and efficient air and sea connections and developed infrastructure, the UAE is an exciting prospect for any business looking to establish a foothold, or expand, in the MENA region. The UAE is a federation of seven Emirates; Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al-Khaimah, Sharjah and Umm Al- Quwain. Having celebrated its 40th year of union in 2011, the UAE is one of the youngest nations in the region, with an estimated population of 8.26 million, of which approximately 90% are expatriates employed in a wide range of industries. Although an oil-rich state producing around 2.81 million barrels per day the UAE has diversified its economy, becoming a regional and global centre for business, trade and finance. The UAE's economy is steadily expanding; real GDP growth for 2012 is estimated at 2.3% by the IMF. Such growth is driven by high oil prices and strong economies in Asia, as well as well developed tourism, logistics and transport sectors. The UAE has also arguably benefitted from regional instability by providing a 'safe haven' for investors. Although the UAE comprises seven Emirates, it is the Emirates of Abu Dhabi, and arguably to an even greater extent, Dubai, that are likely to be of most interest to foreign investors due to their established infrastructure and business environment, but that is not to say that the other Emirates do not offer opportunities too. 04

5 Abu Dhabi Abu Dhabi, the capital of the UAE, has approximately 8% of the world's proven oil reserves and 5% of the natural gas. The Emirate has put the oil revenues to good use and has an impressive investment portfolio. As the world looks ever more urgently to renewable energy, the Abu Dhabi government is actively seeking ways to diversify its economy, with the development of new industrial cities, real estate developments and other major projects including ports, airport expansion and new hotels. Dubai With stellar growth between 2000 and 2008, Dubai established itself as the Gulf region's exhibition, financial, trade and tourism hub. The global economic crisis hit Dubai's real estate sector particularly hard, however, the Dubai economy is slowly recovering, having benefitted from the years of investment in infrastructure prior to the crisis, and latterly its 'safe-haven' status during regional instability. Dubai, which hosts the vast majority of the UAE's economic Free Zones, can boast excellent connectivity to the wider region through Dubai International Airport and state airline, Emirates, as well as Jebel Ali Port, currently the largest in the Middle East. The Northern Emirates Collectively referred to as the Northern Emirates, Sharjah, Fujairah, Ajman, Umm Al Quwain and Ras Al Khaimah are less developed than Abu Dhabi and Dubai, and so attract less foreign investment. However, to varying degrees, each of the Northern Emirates is taking steps to develop their economies. Each of the Northern Emirates has a port and some have an international airport. Sharjah Sharjah, the third largest of the Emirates, hosts a significant portion of the UAE's manufacturing base. Sharjah has established two economic Free Zones; Sharjah Airport Free Zone and Hamriyah Free Zone and has two active ports. Sharjah is more conservative than Dubai; the sale and consumption of alcohol is not permitted at all in the Emirate, and Sharjah s decency law requires that people dress modestly. Ajman Ajman lies to the Northwest of Sharjah and is home to one economic Free Zone Ajman Free Zone. Industry in Ajman is focussed on manufacturing, with a variety of factories producing goods including foodstuffs, beverages, tobacco, textiles, leather goods, paper products and ready made garments. Ajman also has an active boat building industry, manufacturing boats ranging from traditional wooden dhows to more sophisticated luxury yachts. Fujairah Fujairah is situated on the Gulf of Oman. Fujairah port plays a key role in the Emirate's economy having been deepened and extended in 1985 in order to accommodate larger shipping lines. The port gives access to the UAE without the need to enter the Gulf through the Straits of Hormuz. The government of Fujairah has established one economic Free Zone Fujairah Free Zone providing an alternative to the Free Zone offerings of the other Emirates. Umm Al Quwain Umm Al Quwain hosts a variety of industrial developments, such as a cement factory and manufacturing units producing pipes and corrugated sheets. Agriculture and fishing are another important part of the local economy. With less development than Dubai and Abu Dhabi, steps have been taken by the Umm Al Quwain government to encourage tourism in the Emirate, which is home to a number of natural attractions. 05

6 Ras Al Khaimah Ras Al Khaimah (RAK) is the northern most of the Emirates and is the main farming area of the Northern Emirates. Mining is also an important industry in RAK, with two quarries and four cement plants. Factories also produce tiles and ceramics, glass, tableware and pharmaceuticals. The RAK Government has established RAK Free Zone, which is proving to be a viable alternative to the Dubai Free Zones. Geographically, RAK is strategically located at the entrance to the Strait of Hormuz and hosts a deepwater port. 3. Key Facts 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; Educational activities; Recruitment; Manpower. Foreigners can own residential and commercial property in certain designated areas, including Free Zones. Business ownership There are several available vehicles through which a foreign investor may operate in the UAE. We discuss these in detail on page 8. Foreign businesses wishing to operate in mainland UAE through a limited liability company will 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 is establishment in one of the many Free Zones, which permit 100% foreign ownership, although businesses established in a Free Zone are ostensibly 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. 06

7 4. Legal and Regulatory Framework The sources of law within the UAE 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; and 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 Union. 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 (see page 20). 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. 07

8 5. 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. Purpose Restrictions Mainland UAE Commercial Agency Limited liability company (LLC) in mainland UAE Establishing a Branch in mainland UAE Establishing a Representative Office in mainland UAE Free Zone Establishing a Free Zone company Establishing a Free Zone branch Where a foreign company wants to supply goods into the UAE without establishing a permanent presence Where: a foreign investor wants to establish a permanent presence in mainland UAE limited liability is required Where: a foreign investor wants to establish a permanent presence in mainland UAE Limited liability is not required the business activities are not permitted to be carried on by an LLC for structuring purposes a separate entity is not desirable Where: a foreign investor wants to establish a permanent presence in mainland UAE the business will only carry out promotional activity Where: a foreign investor wants to establish a permenent presence in the UAE the business will not operate in mainland UAE 100% foreign ownership is required limited liability is required 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 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 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 A branch office must be sponsored by a UAE national pursuant to a formal agreement A representative office must be sponsored by a UAE national pursuant to a formal agreement 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 licence to operate in mainland Dubai 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 licence to operate in mainland Dubai 08

9 6. Mainland Business Vehicles Commercial Agency Distribution or Agency? A distributor is, by definition, a person who buys goods from a principal and sells them to his own customers, at his own risk and expense. Conversely, a commercial agent represents and acts on behalf of his principal. A commercial agent solicits orders for the principal s goods, and enters into contracts on behalf of the principal. Although the terms agent and distributor denote distinct commercial relationships, in practical terms UAE law tends to treat both types of arrangement in the same way. Franchises In recent years, franchising has become an increasingly popular business model in the UAE, particularly for large international companies wanting to enter the market, but maintain a high degree of control over the brand. The concept suits the appetite of UAE distributors to represent, and be associated, with high value brands and the fast moving consumer goods (FMCG) Market. Perhaps surprisingly, given its popularity, there is no specific franchise law in the UAE, and the concept of franchising is often treated in the same way as a commercial agency. In practical terms this means that foreign companies wanting to appoint a franchisee often use the commercial agency structure. Registered and unregistered arrangements For the purposes of this guide, reference to an agency, shall also include distribution and franchise arrangements. There are two types of agency arrangements in the UAE; registered and unregistered. Registered agency arrangements are regulated by Federal Law No. 18 of 1981 promulgating the Commercial Agency Law (as amended by the Federal Law 14 of 1988, the Federal Law 13 of 2006 and the Federal Law 2 of 2010) (the Agency Law). The Agency Law gives certain legal protections to local agents. Consequently, many foreign companies in the UAE may attempt to avoid the registration of agency arrangements. In practice, local agents are likely to want to register an agency arrangement. However, as the appetite for western brands increases, local agents are increasingly accepting that in order to win these brands, they may have to compromise on this issue. Abu Dhabi Skyline, Abu Dhabi Sheikh Zayed Road, Dubai 09

10 Registered agency arrangements key points to note Registered agents must be a UAE national or a company 100% owned by a UAE national; Dispute under a registered agency will be subject to a specialist Commercial Agencies Committee in the UAE, irrespective of whether the parties agree otherwise; An agent is entitled to territorial exclusivity in at least one of the seven Emirates that make up the UAE; An agent shall be entitled to commission on any sales carried out by the principal itself, or other third parties, in the Emirate(s) assigned for the agents' activities, regardless of whether the agent had any input into those sales; A principal will only be entitled to exit from a registered agency arrangement in the following cases: Termination is by mutual consent (the agent will often ask for a fee to be paid to it in return for it agreeing to terminate the agency arrangement); the principal obtains a court order or the approval of the Commercial Agencies Committee to exit the agency or distribution arrangement; If an agency agreement is terminated, and such termination causes one party loss or damage, then that party may claim compensation from the other party for such loss. In practice, a foreign principal can expect to make a compensation payment to a local agent on termination of a registered agency. Unregistered agency/distribution arrangements Where an arrangement is not registered, the UAE Federal Law No. 5 of 1985 promulgating the Civil Transactions Law (the Civil Code), and the UAE Federal Law No. 18 of 1993 promulgating the Commercial Transaction Law (the Commercial Code), provide the basic principles of law that apply to agency agreements. Registered agency/distribution arrangements key points to note Unlike the Agency Law, the Commercial Code does not provide any specific requirement for agency agreements to be exclusive; The Commercial Code provides both parties with the ability to terminate the agency contract at any time; Termination may give rise to compensation if termination occurs without notice, or at an inappropriate time or, where the agency contract is for a fixed period, the termination is not justified by a genuine and acceptable cause. Grand Mosque, Abu Dhabi Sharjah Skyline, Sharjah 10

11 Limited liability company in mainland UAE (LLC) General Established pursuant to Federal Law No. 8 of 1984 (the Companies Law), an LLC is a separate legal entity and can be formed by a minimum of two, and a maximum of fifty, shareholders (individuals or corporate entities), commonly known as "partners". The Companies Law requires that an LLC must have a UAE national, or a UAE owned company, as at least one of its partners. The law requires that the minimum equity participation by UAE nationals, or UAE company, must be 51%, although: a different ratio can be established in the Memorandum of Association for the distribution of profits and losses; the foreign shareholder will usually have the right to appoint the manager of the LLC, who will be granted a broad power of attorney to manage the LLC on a day-to-day basis; it is common practice for foreign companies establishing an LLC to enter into side agreements with the local shareholder providing that, amongst other matters, the foreign shareholder will be responsible for the management of the LLC. Scope of business An LLC is not permitted to carry out certain consultancy or professional activities, such as medical services, accountancy, and audit services and engineering. It is therefore important to check with your local adviser to determine if your proposed activity may be conducted by an LLC. Capital Subscriptions The capital requirements for an LLC 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. The share capital should be divided into equal shares of a minimum value of AED 1,000 each. Management The management of the LLC is entrusted to up to five directors (called 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. However, certain matters are reserved, as a matter of law, to the shareholders. Alternatively, a General Manager may be appointed (who will also be a director) to manage the day-today affairs of the LLC. The director is 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. Constitutional Documents The constitution of the LLC is contained in the Memorandum of Association (notarised and attested in the UAE). 11

12 Liability An LLC has a separate legal identity, can sue and be sued, in its own name. Its liability is limited to the value of its assets, and each shareholder s liability is limited to their respective share capital subscription. Mainland branch of a foreign company General 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. In order to establish a branch office, a local services agent will need to be appointed. The local services agent must be a UAE national (or a 100% UAE owned company). The agent is normally in charge of dealing with local, and Federal authorities for the purposes of obtaining necessary documentation for the branch office and its staff; such as approvals, licences (including their renewal), labour cards and visas. The local services agent is not a shareholder and does not have any rights in the company. The agent will enter into a service agreement with the branch office, under which the agent will provide services in consideration of the payment of a fixed annual fee, or percentage of the profits or transactions undertaken by the branch office. This is a matter for negotiation. Scope of the business In principle, a branch office can be licensed to undertake one, several, or all activities that are already undertaken by the foreign company, provided those activities are not restricted by the Companies Law to UAE nationals only, as, for example, is the case with Real Estate Brokerage activities. In Dubai, the competent authority for registration and licensing of a branch office is the Department of Economic Development. In Abu Dhabi, the competent authority is the Department of Planning and Economy. To determine if a proposed activity is acceptable, the relevant authority will scrutinise the foreign company s articles of association (or other constitutional documents) to ensure that the business activities that the foreign company is intending to carry out fall within its main objects and scope of business, and that it is competent to carry out the activity in the UAE. Financial investment There is no capital requirement for a branch of a foreign company. However, the Ministry of Economy requires that the foreign company places a bank guarantee in its favour with a value of AED 50,000. This must be valid for the period the branch remains registered, and will be called upon if the foreign company leaves the country without undertaking the formalities required before public authorities for the de-registration of a branch office. 12

13 Management A branch is managed by a manager who will operate the branch pursuant to a power of attorney. Liability A branch is an extension of the parent company s corporate entity and will be 100% owned by the parent company. A branch does not have limited liability. Branches of a mainland LLC 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. Mainland representative office of a foreign company The Companies Law permits a representative office to be established by a foreign company. A representative office may only conduct representative, marketing and other promotional activities and may not trade. A representative office must be sponsored by a UAE natural pursuant to a formal agreement. Due Diligence For companies setting up for the first time in mainland UAE the right sponsor will be critical to the success of the venture. Due diligence should therefore be a key part of the process and should cover: The corporate affairs of the partner; Market reputation what do people who have done business with your potential partner say about them? Anti-corruption what policies and procures are in place to prevent corrupt practices? Burj Khalifa, Dubai 13

14 7. Free Zone business vehicles General Free Zones are specially designated areas within the UAE established to attract foreign investment by encouraging companies to set up businesses, and locate their operations in the UAE. Each Free Zone has its own administration and licensing authority responsible for issuing Free Zone licences and registering companies. There are currently in excess of 15 Free Zones in Dubai alone. Many of the Free Zones have been established to target specific sectors or industries, for example: Dubai Technology and Media Free Zone comprising a number of Clusters such as: Dubai Internet City (technology sector); Dubai Media City (media sector); Dubai Knowledge Village (education sector); Dubai Outsource Zone (outsourcing); Dubai Biotechnology & Research Park (biotechnology); Enpark (energy); Dubai Health Care City (healthcare); Dubai Maritime City (marine sector); Dubai International Financial Centre (financial sector). Notwithstanding the targeting of specific sectors, in practice, these Free Zones host a diverse range of businesses, including businesses operating in the service sector. Other Free Zones do not focus on a specific sector of the economy, but target companies from various industries. These include: Jebel Ali Free Zone; Dubai Airport Free Zone; Sharjah Airport Free Zone; Fujairah Free Zone; Hamriyah Free Zone; Ras Al Khaimah Free Zone. Corporate entities Although there are minor variations between the type of corporate entity offered by the Free Zones, generally speaking, the options available are: a Free Zone limited liability company (FZ LLC); a branch office (FZ Branch). 14

15 Free Zone Companies There are two types of FZ LLC: A Free Zone Establishment (FZE); A Free Zone Company (FZC). There is very little difference between FZEs and FZCs other than the number of shareholders and share capital that they must have. Both FZEs and FZCs: provide limited liability to their shareholders, whereby liability in respect of the entity's debts and liabilities is limited to the contribution to the FZ LLC s share capital; can be wholly owned by foreign investors (i.e. shareholders who are not UAE nationals or companies owned by UAE nationals). Capital requirements differ from one Free Zone to another. Broadly an FZE can only have one shareholder and must have a minimum share capital of AED 1,000,000 (approximately US$274,000). An FZC must have at least two shareholders and must have a minimum share capital as prescribed by the relevant Free Zone Authority (Typically between AED 50,000 and AED 500,000 approximately US$ 14,000 US$137,000, depending on the Free Zone). In each case the share capital must be deposited at the newly formed FZE/FZCs bank account. However, the minimum share capital can then be withdrawn at any time after the FZE/FZC has been incorporated and the trade licence has been granted to operate in the specific Free Zone. Free Zone Branch 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 the actions and liabilities of it. An FZ Branch is permitted to trade, but may only be engaged in activities similar to those of its parent company. Unlike mainland branches, an FZ Branch will not have to appoint a local services agent. Restrictions In principle, FZ LLCs and FZ Branches can only "do business" within the Free Zone designated area. This basic restriction has different implications depending on the type of company, activity and Free Zone in question, and therefore should be discussed with the relevant Free Zone Authority on a case-by-case basis. 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, in the 'mainland' UAE. Generally, the Free Zone entity will be permitted to import, stock and re-export (or sell) goods to entities located in the UAE having a suitable licence (for example a distributor or agent with a licence that allows them to import that particular type of goods). 15

16 8. Dispute Resolution General Investing in any emerging economy carries with it a degree of risk, especially when considering how best to ensure that contracts are honoured and disputes resolved. The IFC/World Bank has ranked the UAE as 134th in the world in its Doing Business Index for 2012 for enforcing contracts, citing the slow process of enforcement (537 days on average, involving 49 procedural steps), the cost of pursuing a claim (approximately 26.2% of the claim's value), and the complexities of Arabic language civil code trials. Court Proceedings As with elsewhere in the World, the default mechanism for resolving disputes is the local Court. Local Court proceedings in the UAE are conducted in Arabic, and there are generally limitations upon the rights of audience before Arabic Courts. For example, only UAE nationals and a small number of senior Arab advocates with special licences can appear before the Courts. This means, therefore, that if a party wishes to be represented in Court, they must appoint a qualified local advocate to represent them. The length of a case will depend on the complexity of the claim. However, litigants can usually expect their case to take between six and twelve months to reach first judgement stage. That timescale will increase substantially if the losing party chooses to appeal the judgment through the higher Courts. Furthermore, in complex technical disputes, the Court is likely to appoint a technical expert to consider certain issues and report back prior to judgement. This can also increase the length of time it takes to reach first judgment. Once a final judgement has been issued by the Court, it may then be necessary for that judgement to be enforced against assets of the losing party. The enforcement process can also take considerable time, especially if the losing party opposes the process. The DIFC Courts Since inception, the Courts of the DIFC have presided over civil and commercial disputes involving entities registered, and disputes arising out of transactions carried out, in the DIFC. The DIFC Courts employ English common law principles, are administered by internationally recognised judges and proceedings are held in English. The Courts also recognise the ability of the parties to choose their own governing law, and permit the recovery of the winner's costs against the losing side. Until recently, the jurisdiction of DIFC Courts was limited to disputes with a link to the DIFC. Since the end of 2011, the potential jurisdictional scope of the DIFC Courts has been extended, to allow parties with no connection to the DIFC to explicitly agree to submit to the jurisdiction, either before or after a dispute arises, if they wish to do so. In addition, recent case law from the DIFC appeals Court has clarified the position regarding foreign companies which operate in both the DIFC, and 'mainland' Dubai, stipulating that its jurisdiction can be invoked even if the dispute relates to a situation occurring outside of the DIFC. This represents a significant improvement in the legal infrastructure available to foreign companies, potentially providing a greater degree of clarity and certainty to business and commercial transactions. Companies can now select DIFC Law and DIFC Courts, and the internationally recognised practices and standards they adhere to, as the governing law and venue for resolving disputes. 16

17 Arbitration Foreign investors generally prefer to have their disputes resolved through arbitration instead of the local Courts. Arbitration is not new to the region having been a recognised concept in the Arab World since at least 1876 when the "Medjella" was published by the Ottomans as the first attempt at codifying the Shari ah law, which provided for disputes to be resolved by legally appointed arbitrators. The arbitration legislation in the UAE is contained within the Civil Procedure Law However, a draft Arbitration Law, which is broadly based on the Uncitral Model Law, was circulated on 16 February Continued efforts towards the enactment of this Federal piece of legislation are a positive indication of the UAE's recognition of the importance of a clear framework for alternative dispute resolution. Arbitration Centres The UAE hosts three established arbitration centres; the Dubai International Arbitration Centre (DIAC), the Abu Dhabi Commercial Arbitration Centre and the DIFC Arbitration Centre (in conjunction with the London Court of International Arbitration "LCIA"). The UAE has signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, which means that awards issued elsewhere in the World should be relatively straightforward to enforce in the UAE. The UAE was a latecomer to the New York Convention as it did not sign up until November 2006, however, the very act of signature in itself assisted in increasing international confidence in the region's approach and attitude towards arbitration. Gate Building, Dubai International Financial Centre Dubai Metro 17

18 9. Employment issues General Employers in the UAE face not only the common challenges of all employers including the increasing pressure to keep overheads at realistic levels but also some more unique challenges arising from a transient and multi-cultured work force. Immigration & Labour Cards New businesses established in mainland UAE will need to register with: The Department of Naturalization and Residency (DNR); and The Ministry of Labour (MOL). These steps will allow the business to source and employ any necessary labour and professional staff from overseas (if required). For businesses established in a Free Zone, the procedure is slightly different. Upon registration of the Free Zone entity, the managers must liaise with the Free Zone Authority to initiate the process of obtaining residence visas and work permits. Usually, the relevant department of the Free Zone Authority will liaise with the Ministry of Labour and Immigration Department on behalf of the Free Zone entity. Employment Visa & Residence Permit For a person to enter, and work over the long term in, the UAE, both an Employment Visa and Residence Permit are required. These documents will be processed by the LLC or branch office, if the employer is based in mainland UAE, or the relevant Free Zone Authority, if the employer is based in a Free Zone. Employment contracts The relevant legislation relating to labour relationships in the UAE is contained in Federal Labour Law No. 8 of 1980 (the Labour Law). The Labour Law will generally apply to employers established within a Free Zone. However, a notable exception to this general approach is DIFC, which has its own comprehensive Employment Law (DIFC Law No. 4 of 2005). Dubai Chamber of Commerce, Dubai Abu Dhabi Investment Authority, Abu Dhabi 18

19 Key points to note: The Labour Law governs most aspects of employer/employee relations, such as hours of work, leave, termination rights, medical benefits and repatriation; All foreign employees (with the exception of those employed by a Free Zone entity) are required to execute an employment contract in the form, or substantially in the form, required by the Federal Ministry of Labour. This employment contract is registered with the Federal Ministry and constitutes the governing contract between the parties in any dispute in the UAE; The Arabic language is the official language to be used in all employment contracts (with the exception of contracts for employees employed in DIFC). Where a foreign language is used by the employer in addition to the Arabic, the Arabic version shall prevail; Employment contracts in the UAE may either be for a limited period (a fixed term not to exceed four years) or unlimited period. An employment contract is considered unlimited if it is not made in writing; Upon the termination of employment, an employee is entitled to an end of service gratuity, calculated by reference to length of service. Dispute Resolution Where there is a dispute between an employee and mainland employer, an application must be made to the MOL in the Emirate in which the employer is located. The complaint must be submitted in writing to the complaints department at the MOL, setting out a summary of the facts, calculation of the amount due to the employee, and enclosing copies of the labour contract and labour card. The employer and the employee will be summoned to state their respective cases before the labour office at the MOL, which will make a recommendation as to the resolution of the matter within two weeks from the date in which the application is filed. Should a party fail to settle the dispute as recommended by the MOL, the matter will be referred to the Courts. In the case of a dispute relating to a Free Zone entity, the employee must submit a complaint to the relevant Free Zone Authority, which will attempt to mediate between the parties. If the parties are unable to agree a resolution, the Free Zone Authority will refer the matter to the Ministry of Labour, and the procedure outlined above will apply. In the case of dispute relating to a DIFC entity, the matter would ultimately be referred to the DIFC Courts. Etisalat Building, Abu Dhabi Rolex Towers, Dubai 19

20 Movement of workers between jobs The rules relating to workers changing jobs from one company to another are restrictive, complex and subject to change. One of the key features of the labour rules is the concept of the "ban". A ban is where an employee working in mainland UAE is not allowed to work for another company in the UAE (outside of the Free Zones) upon termination of his employment contract (as per the rules stipulated by Ministerial Decree No. 360 of 1997). The conditions are as follows: If the employment contract is a limited contract, and the employee's contract is terminated prior to the term of the contract having expired, the employee is restricted from working for another company in the UAE for a period of one year following termination; If the employment contract is an unlimited contract, and the employee's contract is terminated before he has completed a year of employment, the employee is restricted from working for another company in the UAE for a period of six months following termination. Engineers, doctors, pharmacists and hospital attendants are exempt from the ban and are permitted to transfer their residence visas to a new sponsor. There are some limited exceptions to this position and the DNR, may, at its own discretion, grant exceptions. The Palm Jumeirah, Dubai 20

21 10. Intellectual Property General The UAE has been quick to recognise the importance of the protection of intellectual property to its continued development as a dominant trading hub in the Middle East. To this end, the UAE has developed an intellectual property regime that offers international standards of protection to intellectual property right owners through an extensive set of intellectual property laws, and its accession to a number of key international treaties. Moreover, local authorities and customs officials are aware of the importance of brand protection and actively take enforcement actions against counterfeiters, and other types of intellectual property infringement, in the region. Private enforcement in the Courts is also possible, but can be challenging as the Courts continue to develop their familiarity with a relatively new set of laws. Generally speaking, companies operating (or looking to establish themselves) in the UAE can do so with confidence that the UAE is a territory in which international intellectual property rights are understood and will be protected. Registration Regimes The UAE has established registration regimes to recognise and protect various forms of intellectual property. These are: Trade marks registered with the Trade Mark Section of the Ministry of Economy; Patents and Utility Certificates registered with the Administration of Industrial Property at the Ministry of Finance and Industry. It is also possible to register a patent across the GCC by lodging an application with the GCC Patent Office in Riyadh, Saudi Arabia; Industrial designs and models registered with the Administration of Industrial Property at the Ministry of Finance and Industry; Copyright arises automatically, but can be registered with the Ministry of Information and Culture to assist in proving ownership; Domain names.ae domain names can be registered with a registrar authorised by the administrative body, AEDA ( Domain name registration does not give rise to any proprietary rights and domain names should therefore also be registered as trade marks to strengthen the right of the owner to prevent cybersquatting. Unregistered intellectual property rights and related rights UAE law also recognises the following rights, which subsist without the need for registration: copyright; moral rights; performer's rights; rights in industrial secrets and know-how. 21

22 Treaties The UAE is a signatory to a range of key international treaties on the recognition and enforcement of intellectual property rights, including: The WIPO Convention (General); The Gulf Cooperation Council (Trade Marks) Law; The Paris Convention (Patents and Trade Marks); The Patent Cooperation Treaty (Patents); The Berne Convention (Copyrights); The WIPO Copyright Treaty (Copyrights); The WIPO Performances and Phonograms Treaty (Copyrights); The Rome Convention (Copyrights); and TRIPs under WTO. Enforcement The UAE's location at the crossroads between East and West means counterfeiting and infringement can be a problem due to the vast amount of goods and trade passing through the region. Several avenues are available for enforcing intellectual property rights against violators, including administrative and judicial actions. Administrative Actions Federal government authorities, as well as local government authorities in several of the Emirates, have jurisdiction to enforce intellectual property laws and have trained personnel ready to carry out raids of shops and warehouses, seize goods and levy fines on offending parties. Customs authorities also have the right to seize and destroy illegal goods. Litigation Owners of intellectual property may wish to file a claim in Court to demand compensation for damages suffered. The Courts can also order: the seizure or destruction of counterfeit goods and the machinery used to create them; the offending parties to cease their production of counterfeit goods; the suspension of the offending parties' trade licences; and that any judgement made be published in the local press. Enforcement in the Courts can be difficult. There are no specialist intellectual property Courts in the UAE, and judges, especially in the lower Courts, may not have the expertise to deal adequately with particularly technical issues. Despite these reservations, however, there are examples of international companies enforcing their rights in the UAE Courts. 22

23 Criminal Prosecution Criminal sanctions can include imprisonment for up to five years and/or fines for certain infringing activities. Police departments in each Emirate have Commercial Crimes Departments who will carry out raids, and are equipped with laboratories to examine counterfeit goods and provide reports on the similarities and differences between genuine and counterfeit products. 11. Real Estate Overview Real Estate has played a very significant part in the growth of the UAE generally, and Dubai and Abu Dhabi in particular. There is no express provision in Federal Law permitting ownership of property by non-uae/gcc Nationals or foreign owned corporations ("Foreign Investors"). The Constitution provides that real estate falls within Federal jurisdiction, however, where the Federation does not legislate, the individual Emirates may do so. On that basis, a number of the Emirates have issued local laws in relation to real estate in their particular Emirate. UAE Federal Law does contain basic provisions dealing with land ownership, leasing, co-ownership of floors and apartments and the creation and operation of owners' associations. To keep pace with the development of the UAE, and in view of the significance of the real estate sector to the economy, the laws governing property have had to, and are continuing to, evolve rapidly. Real Estate & commercial operations The importance of real estate in the UAE is underlined by the fact that a commercial licence will not be issued until a property is acquired, or a lease is executed, and the applicant can prove that it will carry on its business activities from suitable premises (from commercial premises and not from residential premises, for example). In principle it is not possible to use the office space of an existing company unless there is a link in the ownership between the existing company and the new company being set up (for example, having the same local sponsor). Designated Areas From 2002 onwards, Foreign Investors in Dubai began to purchase property and acquire long-term lease interests within areas designated as allowing property ownership by Foreign Investors ("Designated Areas"). At this time there were no property laws in place to give these purchasers title to their properties. These purchasers relied on contractual commitments from developers and an assurance from the Dubai Government that property laws, allowing Foreign Investors ownership rights in the Designated Areas (including certain Free Zones), would be introduced. Since 2006 a number of significant laws which regulate property ownership, registration and property related transactions in the various Emirates have been introduced. Initially these laws were introduced in Dubai, but Abu Dhabi and the other Emirates quickly followed suit with their own property laws and regulations. 23

24 12. Tax Corporation & income tax The UAE is a generally tax-free jurisdiction, with no corporate tax except for the following: Branches of Foreign Banks; Hotels; Courier companies; and Oil, Gas and Petrochemical producers. However, the UAE government is currently conducting an impact study into the imposition of a corporate income tax. Subject to these exceptions, companies exclusively formed and operating in the UAE are not subject to any corporate or income taxes in the UAE. However, when forming a corporate vehicle for a foreign company, potential taxation in the country of origin of repatriated profits or dividends should be considered, and taxation advice in those countries of origin should be sought. There is similarly no withholding tax regime. Value added tax There is currently no value added tax. However, at the GCC level, discussions are taking place in connection with the imposition of value added tax across the GCC. Indirect taxes & fees Although individuals living, and companies carrying on business, in the UAE are not directly taxed on their earnings and profits, they nevertheless pay hidden or indirect taxes and fees. The main indirect taxes are as follows: Services charges: These are charges levied by the Municipalities on services, food and alcoholic drinks purchased in hotels. The rate is between 10% and 15% of the goods and accommodation purchased. There is a tax of 30% on alcohol purchased at liquor stores. Licence issue fees: The registration of a company and the issue of the required Commercial Licence to undertake any business activities are subject to payment of fees to the relevant government departments involved each year. In Dubai, in addition to the fixed fees payable to various different government departments, there is also a fee payable every year calculated as 5% of the value of the rent paid for the offices or facilities from which the company is to carry out its activities. This fee is collected by the Department of Economic Development when issuing or renewing Commercial Licences, but is actually levied by the Dubai Municipality. 24

25 In Abu Dhabi the fees payable by companies are calculated on a different basis, mainly depending on the type and number of economic activities to be undertaken. Employment & Immigration fees: Fees are payable to the Ministry of Labour and Social Affairs for the processing and approval of employment permits and employment visas for a company s staff. In addition, bank guarantees are required to be provided for each employee to the competent authorities. Housing fee: In Dubai, since January 2005, tenants have had to pay a yearly tax calculated as 5% of the rent paid, and owners of real estate are required to pay a fee of 5% of the rental revenue attributed to that type and size of property, which is determined by reference to the Annual Rent Index issued by RERA. The housing fee is collected by DEWA (Dubai Electricity and Water Authority) in its water & electricity bills, but it is actually levied by the Dubai Municipality. It is possible that the other Emirates will implement a similar system in the future. Local sponsor/sleeping partner fees: The UAE Companies Law requirement for a UAE majority shareholder or UAE local agent has the result that fees are payable by foreign investors (either a fixed fee or percentage of profits) to their UAE partner or agent. DEWA / ADWEA bills: DEWA and ADWEA are the local authorities that provide connection & supply services of water, electricity and sewerage to all Dubai and Abu Dhabi property owners and tenants respectively. UAE Nationals have special conditions in this regard and pay lower rates for water & electricity consumption. However, rates applied to expatriates are high compared to other GCC countries. Customs Duties On 1 st January 2003, the UAE, along with 5 other Gulf countries, formed the Gulf Cooperation Council Customs Union (Saudi Arabia, Kuwait, Bahrain, Qatar, Oman and UAE) with the intention of unifying applicable customs duties. The GCC Customs Union established a standard duty at the rate of 5% (CIF) on almost all products. As an exception to this 5% customs duty, some products, such as alcohol, tobacco and pork, pay higher customs duties. There is also provision for customs duty exemptions. Given the status of the Custom Union, once a product has entered any of the Union countries, it will in principle be capable of moving freely to the other countries. This freedom is, however, subject to possible protective duties or taxes, which may be levied by other GCC countries from time to time to protect local production of specific goods. Likewise, there are special regimes applying to products from other Arab Countries in consideration of multilateral or bilateral treaties existing prior to the signature of the Customs Union Agreement. Finally, it should be noted that products imported and stored within the UAE Free Zones are exempt from customs duties. Products imported and stored in the UAE Free Zones will, however, pay customs duties when they exit the Free Zone to enter the UAE market (through an importer in the UAE) or any other country. 25