LW.com Doing Business in the United Arab Emirates Second Edition
Contents A. Introduction...2 I II III Country Background Free Zones Status of Shari ah Law in the UAE B. establishing a legal presence in the uae...3 I II III IV V Incorporating a Local Entity Opening a Branch or Representative Office (Outside a Free Zone) Setting up a Free Zone Entity Holding Companies Commercial Agency Relationship C. General Legal Considerations...7 I Doing Business with the Public Sector II Import & Export Regulations III Foreign Exchange Controls & Anti-Money Laundering IV Bribery and Anti-Corruption V Taxation VI Employment Law VII Immigration VIII Real Property IX Intellectual Property X Data Protection and Privacy XI Governing Law XII Dispute Resolution XIII New Competition Law Appendices...15 1 Pros and Cons of Means to Set Up a Legal Presence in the UAE 2 Companies Law and Free Zone Entities Endnotes...19
This guide provides an overview of the principal legal issues for foreign investors considering doing business in the United Arab Emirates (the UAE). A. INTRODUCTION (i) Country Background The UAE is a federation of seven emirates comprising Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain and was formed on 2 December 1971. The UAE federal constitution was permanently accepted in 1996 1 and provides for an allocation of powers between the federal government and the government of each emirate. The constitution provides the legal framework for the federation and is the basis of all legislation promulgated at a federal and emirate level. Pursuant to the constitution, the federal government has exclusive jurisdiction in various substantive matters, including foreign policy, defence and security. Legislation passed at a federal level has primacy over the local laws of each emirate. The local government of each emirate is, however, permitted under Article 113 of the constitution to regulate all local matters which are not subject to federal legislation or matters which are not expressly reserved in the constitution to the federal union (examples of such federal matters being foreign affairs, defence and health). As such, the governments of each individual emirate retain substantial powers to regulate commercial activities, issue trade licences and effect the incorporation of corporate entities to the extent that such activity is not already regulated under federal legislation. The UAE judicial system varies significantly across the UAE and the free zones. Only five emirates submit to a federal court system Dubai and Ras Al Khaimah have their own independent court systems. All of the emirates (except in respect of some of the free zones) follow uniformly similar rules of civil procedure and evidence, and trials are decided by a single judge or a panel of three judges, and not by a jury. In addition, some of the free zones have their own judicial systems, as well as their own rules of civil procedure and evidence. (ii) Free Zones The UAE federal constitution, the federal laws relating to free zones and the powers reserved by the individual emirates under the federal structure, permit each emirate to set up free zones for general or industry-specific activities. The purpose of free zones is to encourage foreign direct investment into the UAE. Free zone entities are not generally required to have any UAE nationals as owners. This contrasts with most companies incorporated in the UAE outside of the free zones, where UAE nationals are typically required to own at least 51 percent of the company s capital. Various free zones have been set up in the UAE, most of which are in Dubai. Free zones are authorised to enact their own laws and regulations in specific areas, which in some cases override federal and emirate law on the subject matter. For example, the Dubai International Financial Centre (the DIFC), which is a financial free zone within Dubai, has its own body of law, including corporate law, contracts law and employment law, as well as its own court system. Unless otherwise stated, references in this guide to matters of law or practice applicable in the UAE generally refer to the wider UAE outside of the free zones. (iii) Status of Shari ah Law in the UAE Foreign parties contemplating doing business in the UAE often assume that all aspects of law in the country are governed by Islamic Shari ah. While the UAE federal constitution provides that Shari ah is a main source of law, it is not the only source of law and its application is generally limited to (i) being used by the courts as an interpretative aid where there is no express provision of legislation governing a particular question; (ii) religious, morality and personal law matters, particularly involving Muslims (such as inheritance, divorce, etc.); and (iii) transactions which are intentionally expressed to be Shari ah-compliant, such as Islamic banking transactions. Outside of these rather limited areas, contractual terms that would be forbidden under Shari ah are generally fully enforceable under the laws of the UAE, including under the UAE Civil Code. For example, a contractual term in a conventional commercial transaction requiring the payment of interest (which is a concept that is forbidden in Islam and is contrary to Shari ah) is, in general, valid in the UAE and would normally be enforceable in the UAE courts. B. ESTABLISHING A LEGAL PRESENCE IN THE UAE In order to conduct business in the UAE, a foreign investor is required to establish a formal legal presence (directly or through an agent) within the UAE through any of the following means: Incorporating a local entity; Registering a branch or representative office of a foreign company; Establishing a free zone entity; and Entering into a commercial agency relationship. Further details of each of these means is set out below. A matrix summarising the pros and cons of the means likely to be most relevant to foreign investors is set out in Appendix 1. (i) Incorporating A Local Entity Unlike in many other jurisdictions throughout the world, it is not possible to buy shelfcompanies in the UAE and there is no central companies house where information on the companies incorporated in the UAE is available. Only the company itself can provide such information that is filed at the Department of Economic Development (or other similar agency) of the emirate(s) where the company s offices are located. As a general requirement, locally incorporated entities must obtain the following licenses: A trade license from the Department of Economic Development (or other similar agency) of the emirate(s) where office(s) will be located; and If applicable, authorisation from the relevant Ministry or government entity with jurisdiction over the type of business activities to be conducted. 2 Locally incorporated entities may be formed under the UAE Civil Code or incorporated under Federal Law No. 8 of 1984 Concerning Commercial Companies (as amended by Federal Law No. 15 of 1998)(the Companies Law). 3 (a) Entities Formed Under the UAE Civil Code/Establishments Entities formed under the UAE Civil Code are restricted to carrying out non-commercial or civil activities these are activities that involve the promotion of the skills and expertise of the individual(s) conducting the business. Most consultancy services (including the practice of law, medicine, and research activities), the production of works of art or 2 Latham & Watkins Doing Business in the United Arab Emirates Latham & Watkins Doing Business in the United Arab Emirates 3
literature, and the sale of agricultural products by farmers are examples of activities that may be conducted by a UAE Civil Code entity. The most common form of civil entity used by foreign investors is the professional services company. Such entities are only appropriate for carrying on service businesses, such as engineering, medical and consultancy services. The primary benefit of establishing a professional services company is that such an entity may be 100 percent foreign owned, 4 although a national agent must be engaged by all such companies. The provisions of the Companies Law do not apply to entities formed under the UAE Civil Code. (b) Entities Incorporated Under the Companies Law All locally incorporated companies (other than those formed under the UAE Civil Code) must be set up in accordance with the Companies Law. The Companies Law requires companies to adopt one of the following forms: Limited Liability Companies; Private Joint Stock Companies; Public Joint Stock Companies; Joint Participation Ventures (or Private Unlimited Companies); Limited Partnerships (or Simple Commandite Companies); Partnership Limited with Shares (or Share Commandite Companies); and General Partnerships (or Joint Liability Companies). Appendix 2 summarises the key differences between the entities set out above. Of the entities listed above, most foreign businesses choose the limited liability company as foreigners can exert significant control over them and it requires a relatively small amount of minimum capital to start up. Previously limited liability companies in Dubai were required to have a minimum share capital of AED 300,000 and those in other emirates required a minimum of AED 150,000. However, following an amendment to Article 227 of the Companies Law, 5 shareholders now have the right to determine the share capital of their limited liability companies, provided that such company will have sufficient capital to achieve its objects. Such an entity may, however, be inappropriate to achieve certain business goals. For example, businesses involving banking, insurance or investment activity on behalf of third parties may only be conducted by a public joint stock company, and limited liability companies may not offer their shares for public subscription, which is a central feature of the public joint stock company. The key limitation on entities incorporated under the Companies Law is that 51 percent of the capital of a company must be owned by a UAE national. However, certain services and investment activities are reserved for UAE nationals. For example, only UAE nationals and companies wholly owned by UAE nationals may supply real estate services, rental/leasing services relating to cars, services incidental to agriculture, forestry, farming and fishing, placement and supply of personnel, investigation and security services, travel agencies and tour operator services, passenger and freight road transportation and the ownership of pharmacies and medical warehouses. It is possible for the constitutional documents of a limited liability company to allocate up to 80 percent of the profits of the company to the foreign shareholder in Dubai and up to 85 percent in Abu Dhabi. The constitutional documents may also incorporate the following provisions designed to protect the interests of a foreign minority shareholder: The foreign shareholder may appoint all of the directors; The foreign shareholder may appoint the general manager; The foreign shareholder may veto major decisions of the company; The foreign shareholder may be entitled to all of the assets of the company on winding up; and The foreign shareholder may be entitled to more than 49 percent of the company s profits. In relation to the remaining percentage of profits of the company, it is possible for additional commercial agreements to be put in place to give a foreign minority shareholder access to almost 100 percent of the profits. However, there is much commentary and debate in the UAE about the enforceability of any contractual side arrangements that may be put in place that purport to confer the full economic ownership and profits to a foreign minority shareholder, when the constitutional documents set out a 49 percent to 51 percent split. It is generally difficult to know how a UAE court would treat side arrangements if asked to consider them, as the UAE courts are not bound by precedent and do not report on discussions. Likewise, consideration should be given to the Anti-Fronting Law. 7 The Anti-Fronting Law was enacted in the UAE in 2004 and was supposed to come into force in November 2007. However, a UAE Ministerial Cabinet Resolution deferred such enforcement until 21 December 2009. Although the UAE Ministry of Economy does not appear to have provided further clarification on the implementation date or any scheduled further deferral of this law since the resolution, there are differing and conflicting views on its current enforceability. As such, enforcement of the law remains unclear. In summary, the Anti-Fronting Law is designed to prevent fronting, being where a foreigner is able to undertake any economic or professional activity, which such foreigner would not be able to carry out under the other effective laws of the UAE, whether undertaken on the foreigner s own account or in a venture with others and enabling such foreigner to evade applicable obligations. As such, it could be argued that the Anti-Fronting Law is aiming to prevent the use of nominee and side arrangements with UAE nationals. Due to the uncertainty over the Anti-Fronting Law, side arrangements remain common in the UAE but their legality and enforceability remains questionable. (ii) Opening a Branch or Representative Office (Outside of a Free Zone) Articles 313 to 316 of the Companies Law permit foreign companies to open branches or representative offices within the UAE. A branch or a representative office of a foreign company may be wholly owned by foreigners. A branch of a non-uae company may only be registered in the UAE with the sponsorship of a local service agent who must be a UAE national or a company wholly owned by UAE nationals. The arrangement between the company wishing to set up the branch and the local service agent will be set out in an agency agreement in English/Arabic which has to be signed before a local notary public (the Sponsorship Agreement). The service agent has neither power nor responsibility in respect of the branch and the foreign company would retain full control and benefit over the branch. A local service agent is usually paid an annual fee in the range of US$20,000 to US$25,000. 8 There are no minimum capitalisation requirements for a branch although the foreign company is required to provide a standard form Arabic bank guarantee from a local bank (which includes an international bank with a branch in Dubai) in the amount of AED 50,000 (approximately US$14,000) and to show details of its own capitalisation and good standing, together with its two most recent sets of annual audited accounts. 4 Latham & Watkins Doing Business in the United Arab Emirates Latham & Watkins Doing Business in the United Arab Emirates 5
Generally, the parent company of the branch must have been in existence for more than two years in order to open a branch in the UAE. The branch must have a certain specified business activity, which must be approved in advance by the relevant local authorities. The activity of the branch must be the same activity as the company establishing the branch (or its group). If the foreign entity is a Gulf Cooperation Council (GCC) entity then no local service agent needs to be appointed. With regard to trading activities, branches are not permitted to physically deal in or trade in goods within the UAE other than goods manufactured by its parent or its parent s group. It is, however, permitted to render maintenance and repair services to customers of its parent company. It is important to note that approval for the issuance of a licence for a branch depends on the type of activity the proposed branch intends to carry on in the emirate. It is prudent therefore to obtain initial approval from the relevant local authorities for the proposed activities of the branch prior to commencing the incorporation process. A representative office is more limited than a branch office in the scope of activities that it is permitted to undertake. A representative office may only conduct marketing and administrative functions on behalf of its foreign parent. A representative office typically gathers information on the local market, establishes relationships and solicits orders to be performed by the parent company. The parent company will generally be required to engage a commercial agent if it wishes to conduct sales activities within the UAE. (iii) Setting Up a Free Zone Entity A key feature of a free zone entity is that it is not subject to the foreign ownership restrictions imposed by the Companies Law in the wider UAE (although issues of foreign ownership may still be relevant if the free zone entity is used as a holding company for assets situated outside the relevant free zone). Free zone entities are also granted certain ancillary financial benefits (described further in Part C). A free zone entity will generally take one of the following three forms: a branch or representative office of a foreign company, a free zone company or a free zone establishment. There is no minimum capital requirement for a branch or representative office, while in most free zones, a free zone establishment and a free zone company are typically required to have a minimum capital of around AED 500,000, but the precise requirements vary from free zone to free zone. A free zone establishment may be owned by a single individual or company, whereas a free zone company typically requires two or more owners. The key limitation of a free zone entity is that it is generally permitted to conduct business within its relevant free zone or internationally and is limited to performing solely those activities specified in its license. 9 A free zone entity must typically hold one of the following licenses issued by the relevant free zone authority: (i) trading license, (ii) service license, (iii) manufacturing/industrial license. In order for a free zone entity to engage legally in sales within the UAE (and outside of the relevant free zone), the entity will generally have to retain a commercial agent or distributor or establish a branch onshore. (iv) Holding Companies In certain circumstances, entities incorporated in the free zones may be used as offshore holding companies, meaning that they are used in transactions that do not involve operations physically situated in the relevant free zone. Examples of this practice include the use of companies incorporated under the offshore companies regime of the Jebel Ali Free Zone for use as a regional holding, or as a holding company for the ownership of real estate assets in Dubai. Additionally, special purpose companies (SPCs) can be incorporated in the DIFC in regional structured finance transactions, availing of the more international-standard regulatory environment and court system offered by the DIFC. While exceptions such as these do exist, free zone entities generally have physical operations within the free zone in which they are incorporated. Most free zones have a focus on attracting and catering for a particular industrial or economic sector, as evident in the names of free zones such as Dubai Internet City, Dubai Healthcare City or Dubai Media City. While the majority of the UAE s free zones are situated in Dubai, free zones outside of Dubai include the Khalifa Industrial Zone in Abu Dhabi, the Hamriyah Free Zone in Sharjah and the RAK Free Trade Zone in Ras Al Khaimah. (v) Commercial Agency Relationship If a foreigner wishes to import goods into the UAE but does not wish to maintain a physical presence in the UAE it will generally enter into a commercial agency relationship with a wholly local owned entity or UAE national. Commercial agents are generally used by foreign manufacturers and traders who are engaged in the large-scale importation of goods into the UAE on a regular basis. Under a commercial agency, the foreign business and the commercial agent agree to the terms of the sales commission, the territory of the distributorship (at a minimum, this would be one emirate) and the duration of the relationship. If the commercial agent registers the contract with the Ministry of Economy and Commerce the agent can obtain the various protections afforded to agents under the UAE Commercial Agencies Law (Federal Law No. 18 of 1981, as amended by Federal Law No. 14 of 1988 and Federal Law No. 2 of 2010 10 ). These protections include: Exclusivity registered commercial agents have the exclusive right to import the goods which are the subject matter of the agency; Commissions registered commercial agents are entitled to receive commissions on the sales they make as well as commissions on sales made in the UAE by the principal or any other party; and Termination the principal may only terminate a registered commercial agency arrangement unilaterally for material reasons. Such reasons must be acceptable to the Commercial Agencies Committee. In practice, it is very hard to terminate a registered agency arrangement. Further, a principal may not refuse to renew a registered commercial agency agreement after its expiry date without the payment of compensation to the registered commercial agent. Unregistered commercial agencies on the other hand are not subject to the above restrictions. There is no formal procedure required for an unregistered commercial agency to be valid other than parties negotiating and agreeing the terms of their arrangement. Generally limited liability companies in the UAE can import and distribute goods in their own right, but do still need to register to obtain the protections described above. C. GENERAL LEGAL CONSIDERATIONS (i) Doing Business With the Public Sector Foreign businesses that do business with the federal government or the government of any emirate or any other governmental body must comply with public sector procurement rules as set forth in Financial Order No. 16 of 1975, the Federal Regulation of Conditions of Purchases, Tenders and Contracts as well as any local procurement rules. 6 Latham & Watkins Doing Business in the United Arab Emirates Latham & Watkins Doing Business in the United Arab Emirates 7
(ii) Import & Export Regulations As a member of the World Trade Organization (the WTO) and as a party to various regional free trade agreements throughout the GCC, the UAE has low rates of tariffs. Import duties are normally charged on products imported into the UAE (outside of the free zones), at rates that can vary according to the nature of the import (e.g., higher duties apply to alcohol and tobacco products). The duty may be alleviated by exemptions based on the importer s status (e.g., free zone entity, majority owned by a GCC national, etc.) or exemptions based on the type of product. Generally, foreign parties cannot import goods into the UAE for the purpose of resale, other than a free zone entity directly for sale within the relevant free zone or for its own use. Note that there is a 5 percent export duty for all goods leaving the Jebel Ali Free Zone for Dubai. There are no duties or tariffs on exports. The UAE imposes a boycott of trade with Israel. (iii) Foreign Exchange Controls & Anti-Money Laundering The UAE does not generally have any currency exchange controls and restrictions on the remittance of funds. Further, free zone entities are generally expressly permitted to repatriate 100 percent of their profits from the UAE in accordance with regulations in place in their respective free zones. The UAE has recently strengthened its laws relating to the use of criminal proceeds and terrorist financing activities. As the GCC is a member of the global Financial Action Task Force (the FATF), the UAE has implemented anti-money laundering procedures to meet the standards of the FATF. The various free zones also generally have rules on preventing money laundering. For example, the DIFC requires companies incorporated in the DIFC to appoint a senior manager as a money laundering reporting officer and to submit an annual report detailing steps that such company has taken to implement its anti-money laundering rules. (iv) Bribery and Anti-Corruption The UAE has ratified the United Nations Convention against Corruption and has enacted federal and emirate level legislation to target bribery and corruption. Bribery of a UAE public official (such term includes all customary government and ministerial positions and also covers employees of state-owned companies or partially state-owned private companies) is an offence in the UAE. This applies equally to the public official and those who offer, accept and facilitate bribes, whether or not they actually benefit from the bribe. Private sector bribery within the UAE is similarly prohibited, however the legislation only applies to the person accepting the bribe, not the person offering or facilitating the bribe. Penalties for bribery can include forfeiture of the bribe, up to 10 years in prison and fines commensurate with the amount of the bribe. (v) Taxation There is no federal corporate or income tax levied in the UAE (except on oil companies and banks). Certain emirates, including Dubai under the Dubai Income Tax Ordinance of 1969, have introduced a local income tax; however, these taxes have not been implemented as of the date of this memorandum. In addition, free zone entities may be able to benefit from formal tax holidays for periods of up to 50 years (renewable 15 year holidays are common). The UAE has tax treaties (concluded with a number of jurisdictions (including GCC countries) which UAE nationals and locally incorporated entities can benefit from. Currently, there is ambiguity regarding whether, under the laws of other GCC states whether free zone entities should qualify for the favourable tax treatment usually afforded to other GCC nationals/gcc-incorporated entities, particularly where such entities are not majority or wholly-owned by UAE nationals. There is currently no value added tax or sales tax in the UAE, although the imposition of a GCC-wide value added tax has been widely discussed for the last several years. There are also currently no federal personal taxes of any kind in the UAE i.e. no federal income tax, capital gains tax or inheritance tax. Certain municipality taxes are levied at the emirate level on designated services. It should be noted that, while there are generally no direct taxes in the UAE, there are a number of indirect taxes in the form of government fees. These include land transfer fees and fees payable to the notary public (since most corporate transactions, including share transfers generally require the involvement of the public notary or other official body to grant registration). In addition, certain transfer fees are applicable in the free zones. For example, the transfer of shares in a free zone establishment (FZE) in the Jebel Ali Free Zone is subject to a transfer fee of a minimum of AED 20,000 subject to a maximum of AED 50,000. (vi) Employment Law Employment in the UAE is governed by the UAE Labour Law, Federal Law No. 8 of 1980, as amended, which imposes certain minimum standards on employing juveniles, working hours, vacation and public holidays, sick leave, maternity leave, employee records, safety standards, termination of employment and end of service gratuity payments. In January 2011, the Ministry of Labour and Social Affairs introduced, for the first time, a minimum wage limit for different categories of workers. Employee grievances are handled by a special programme run by the Ministry, and the Ministry must also be informed if an employee is subject to the disciplinary code. Pensions and social security schemes in the UAE are governed by the Pensions & Social Securities Law, Federal Law No. 7 of 1999, as amended. Some free zones have their own employment laws and employee grievance procedures although, generally speaking, these mirror the provisions of the UAE Labour Law. In some free zones, for example the DIFC, the free zone s laws will take precedence over the federal employment laws. Most employees working in the UAE, including in the free zones, have written contracts of employment. The Ministry of Labour requires a standard form contract of employment to be entered into and filed with the Ministry of Labour. Many employers also enter into further, more comprehensive employment contracts with their employees. Written contracts of employment are certainly advisable for any business in the UAE. There is no employment at will in the UAE (the UAE Labour specifies minimum notice periods for termination of employees). Since September 2009, all institutions registered under the Ministry have been required to make all payments of their workers wages and salaries through the Wages Protection System. This involves the transfer of monies through a few selected financial institutions that are authorised and regulated by the government. The Wages Protection System does not apply to some free zones, for example the DIFC. UAE federal law also sets out preferences for hiring UAE nationals and, for some administrative positions, requires that only UAE nationals be employed (e.g., public relations officers who liaise with the government at large companies, attorneys appearing in the courts, etc.). If a non-free-zone company has more than 50 employees, it must 8 Latham & Watkins Doing Business in the United Arab Emirates Latham & Watkins Doing Business in the United Arab Emirates 9
employ a minimum percentage of UAE nationals in accordance with the Emiratization policy of the UAE Federal Government as originally expressed in Council of Ministers Order No. 259/1 of 2004 entitled Resolutions on Training and Employment of UAE Citizens in the Private Sector (the Resolution). The Emiratization policy applies to both the public and the private sector, and both local and international companies operating in the UAE are subject to the Emiratization policy in the sectors for which such guidelines have been formulated. The Emiratization policy quotas are higher in the public sector, and have recently been amended for the private sector to require a blanket 15 percent quota of UAE national workers, across all private sector industries. The Resolution principally tasks the National Human Resources Developing and Employing Authority and the Ministry of Labour with developing further Emiritization guidelines. A key provision of UAE federal employment law is a requirement to pay a statutory end of service gratuity (ESG) to employees upon termination of their employment. The ESG regime in the UAE takes the place of a formal pension regime. ESG is calculated at a rate of 21 days salary per year for the first five years service and 30 days for each year thereafter, up to a maximum amount of ESG equal to two years salary. ESG is payable as a lump sum on termination of employment. The DIFC has its own ESG regime, which is broadly similar to that applied in the wider UAE. Share incentive schemes are not common in the UAE. (vii) Immigration As a country with a very high percentage of expatriates (85 percent to 90 percent of the total population) and visiting tourists, the UAE is generally accommodating to legal immigrants and visitors. Visas are available for business and tourists visits, transit and residency, and in the majority of cases, an attorney is not required to handle processing of visas. Visitors from approximately 33 countries (including the US and UK) can obtain visit visas upon arrival at an airport in the UAE for no cost. Visitors from other countries can typically obtain tourist visas from certain hotels or tour operators. Business visitors can be sponsored by an employer with a business license (e.g., a branch or representative office, free zone entity, entity under the Companies Law, etc.). Nationals of the other GCC states do not require a visa. Employers can obtain residency visas, which last for three years, for a certain number of employees, as determined by the federal government in relation to particular industries. For entities located outside of the free zones, employers must register the employment contract with the Ministry of Labour and Social Affairs before a residency visa can be issued. In most free zones, the sponsor of each employee is the free zone itself and the free zone interacts with the federal government directly, which makes the process more efficient. Once a residency visa is obtained and the employee earns a certain salary, the employee may sponsor his or her family for immigration, provided that he or she earns a minimum of AED 4,000 per month. (viii) Real Property Except in certain designated freehold areas or certain free zones, real property may only be owned by UAE (or GCC in certain emirates) nationals or entities that are wholly owned by such persons. Most foreign residents and foreign businesses lease their homes and office spaces. However, JAFZA offshore companies are the only offshore structures permitted to own properties within Dubai and be delivered a title deed. However, if the JAFZA offshore company is owned by a foreigner then it may still only own property in certain designated areas. Entities operating outside free zones are permitted to lease space in the UAE upon registration as a locally incorporated entity or as a branch or representative office. For entities operating within free zones, registration within free zones entitles and in most cases requires one to apply for a lease or freehold from the free zone s real estate authority. (ix) Intellectual Property UAE law recognises a broad range of national intellectual property rights, which are similar in form to those under the UK, European and US systems. By virtue of the UAE s membership of certain worldwide conventions on intellectual property (e.g. the Madrid Convention, the WTO, TRIPS, Patent Cooperation Treaty 1970 (the PCT), etc.), there is also recognition within the UAE of worldwide intellectual property rights. Registration of intellectual property is handled by the federal Ministry of Economy. (a) Patents (or Industrial Property) Patents are protected under the UAE s Industrial Property Law (Federal Law No. 17 of 2002), as amended by Federal Law No. 31 of 2006. The UAE operates under two systems, the Patent Cooperation Treaty system for domestic patents and the UAE is also part of the GCC Patent system which provides a mechanism for regional filings of patent applications within the GCC countries. The GCC is not part of the PCT system, so patent applications of local interest only should be filed through the GCC system. The number of patents registered in the UAE annually is very small, and as the UAE is an importing country, infringement issues are usually dealt with in the US or Europe. However, it is possible to register patents in the UAE to maximise protection. Obtaining a grant is expensive and takes a long time, because the examination for patentability is outsourced. Infringers of patents registered in the UAE are subject to limited damages, fines and possible imprisonment. (b) Copyrights Federal Law No. 7 of 2002 Concerning Author s Rights and Neighboring Rights gives copyright protection to a wide range of works. Copyrights are protected in the UAE in accordance with widely accepted international conventions, though there are some areas (notably in the area of ownership of employee works and the assignment of future copyright) where UAE law diverges from international norms. For employers it is important to ensure that copyright works such as software are written by more than one author so as to avoid the worst consequences of the law limiting the assignment of future copyright. Before suing under copyright it must be registered. This is largely to establish title. In the court system, enforcement is based on criminal law principles, which means that fines are levied, which are often inadequate, but injunctions against future conduct are not awarded. Damages are per consignment before the court and not generally for all infringement, and therefore are inadequate. (c) Trademarks and Trade Names Federal Law No. 37 of 1992 (as amended by Federal Law No. 19 of 2000 and Federal Law No. 8 of 2002) gives protection to both trademarks and trade names. Trademarks and the applications procedures are slow and expensive and not computerised, so searching is difficult. Registered trademarks are a federal right but business names are dealt with locally by each emirate, which makes for multilayer protection and enforcement. The UAE trademark office does not allow filing of multi-class applications for trademarks. Dubai customs seems to have efficient means of border control, but the other emirates are less well equipped. In the court system, enforcement is based on criminal law principles, which means that fines are levied, which are often inadequate, 10 Latham & Watkins Doing Business in the United Arab Emirates Latham & Watkins Doing Business in the United Arab Emirates 11
but injunctions against future conduct are not awarded. Damages are per consignment before the court and not generally for all infringement, and therefore are inadequate. There is some discussion about reforming civil procedures. (d) Confidential Information UAE s Industrial Property Law (Federal Law No. 31 of 2006), which deals also with patents and industrial designs, specifically protects trade secrets. The UAE s general contract law, unfair competition law and various confidentiality provisions in specific areas of law (e.g. employment law) also protect know how and confidential information. The absence of a uniform trade secrets law means that there is a degree of uncertainty as to protection of these rights under UAE law. A particular problem is that the statute for protecting confidential information is also the statute that protects patents, which results in conflicts in attempting to resolve competing rights. Consequently the best protection is through contracts with employees and third parties, and this does seem to be enforceable. In recent years, both the DIFC and the Ministry of Economy have looked at issuing a separate draft law on trade secrets, but at the time of writing, neither law has been enacted. UAE Courts will generally act to prevent the confidential information of one party being used or disclosed by another party, especially where there are contractual relations, including contracts of employment. (x) Data Protection and Privacy While the UAE constitution and certain federal laws recognise an individual right to privacy in specific circumstances, the UAE has not established a federal data protection regime of the type found in jurisdictions such as Australia, the European Union or Hong Kong. Notwithstanding the absence of federal laws, the DIFC and Dubai Healthcare City free zones have both enacted data protection laws and regulations that regulate the processing, storage and transfer of personal data. In addition, certain other federal and local laws apply to the security and processing of personal data in certain circumstances, including in relation to employee records, financial information, electronic commerce, communications, healthcare and cybercrime. (xi) Governing Law Jurisdictions which have, and rely upon, large bodies of case law (particularly common law jurisdictions such as the US and England) tend to have more developed bodes of commercial and corporate law than the UAE. The same is true, to an extent, of other civil law jurisdictions as well. Laws and cases in the UAE tend not to be as readily available, or available with reliable English translations, as in these other jurisdictions. Accordingly, where a foreigner is entering into contracts with a party located in the UAE (other than an entity connected to federal or emirate governments), it is quite common to see non-uae law selected and there is a notable tendency to select English law (or, in some instances, New York law or the laws of another US state) as an alternative. Care should always be taken to ensure that the selection of a governing law is made expressly, that the selection of a governing law extends to non-contractual obligations arising out of or connected to the relevant contract (where appropriate) and that the selection and/or the law itself will be recognised in any enforcement action in the UAE. Parties should also be aware that the selection of a non-uae law will not prevent mandatory rules of UAE law impacting on contractual obligations in some circumstances (especially where contractual obligations are performed in the UAE or where enforcement is sought in the UAE). While it may be helpful as a matter of practice to include such provisions, there can be no assurance that a foreign jurisdiction or arbitration clause would be recognised by the UAE courts in practice. The Civil Code and general law in the UAE gives the UAE courts broad powers to hear and adjudicate matters involving a UAE party, and there is therefore inevitably a risk that a UAE court could purport to take jurisdiction over a matter despite an express provision providing for an alternative jurisdiction. UAE legislation provides that the UAE courts have jurisdiction to hear actions brought against UAE nationals, UAE corporate entities and foreign citizens having an address or place of residence in the UAE, irrespective of any agreement between the parties in respect of jurisdiction and applicable laws. (xii) Dispute Resolution (a) Arbitration International arbitration is the preferred method of dispute resolution for cross-border transactions relating to the UAE. The primary reason for that, and one of the key features of international arbitration, is the relative ease with which arbitral awards can be enforced in countries around the world. That is thanks to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which well over 140 countries are a party. The UAE acceded to the New York Convention in 2006, which means that foreign arbitral awards should be as easily enforced within the UAE as UAE arbitral awards. As a result, many parties doing business in the UAE (both foreign and locally based) tend to refer any disputes arising out of or in connection with their contracts to final and binding arbitration. (b) Dispute Resolution Options in the DIFC Recently, the DIFC Courts jurisdiction has been significantly expanded to include jurisdiction over matters which are referred to the DIFC Courts by private parties on a consensual basis, whether or not such parties are DIFC-domiciled entities, in addition to jurisdiction over all matters pertaining to the parent companies of DIFC registered branches. 12 The practical effect of these changes is to enable non-difc persons to opt in to the jurisdiction of the DIFC courts, including through the inclusion of forum selection clauses in ordinary commercial contracts and finance documents, irrespective of a nexus to the DIFC. A common concern that remains with respect to DIFC court judgments is the procedure for enforcement of those judgments. At least within Dubai and the UAE, however, there are established procedures and codified guidelines which ensure DIFC court judgments will be adequately enforced by the courts of Dubai or the other emirates of the UAE. Pursuant to the Protocol of Enforcement between the Dubai Courts and the DIFC Courts (the Protocol of Enforcement), all judgments, orders and awards issued or certified by the DIFC courts (for example, in the instance of the certification of a DIFC- LCIA arbitration award 13 ) will be enforced by the Dubai Courts provided that the relevant judgment or order has been translated into Arabic and constitutes a final judgment. Crucially, the judge recognizing and executing the judgment at the Dubai Courts has no authority to review the merits of an order or judgment during any enforcement proceeding. The procedure established by the Protocol of Enforcement essentially facilitates the conversion of a DIFC court judgment into an order of the Dubai Courts. Thereafter, automatic enforcement can be achieved not only onshore in Dubai, but in the other Emirates of the UAE, who as a constitutional matter are required to enforce the orders of the courts of other Emirates within the union. 12 Latham & Watkins Doing Business in the United Arab Emirates Latham & Watkins Doing Business in the United Arab Emirates 13
APPENDIX 1 Nevertheless, it remains an open question as to whether the courts of other GCC states will similarly enforce an order of the DIFC Courts that has been converted into a Dubai Court judgment by virtue of the Protocol of Enforcement. In theory, there is a treaty based instrument which should support pan-gcc enforcement the GCC Convention for the Enforcement of Judgments and Judicial Notices and Delegations (the GCC Convention). This provides that all member states shall ensure that their domestic courts enforce the final judgments of the courts of other member states. However, the GCC Convention authorizes the courts of member states to reject enforcement if the judgment in question is deemed to be contrary to the provisions of Islamic Shari a, the provisions of a member state s constitution or public order. (xiii) New Competition Law On 23 February 2013, the new Competition Law 14 came into force in the UAE, although there is a six-month transitional period expiring on 23 August 2013. The Competition Law applies to enterprises (any natural or legal person or consortium) engaging in economic activity or holding intellectual property rights in the UAE. Where economic activity occurs outside the UAE but has the ability to affect competition in the UAE, these practices and agreements will also be subject to the Competition Law. A number of entities and sectors are excluded from the legislation, including federal and local governments, state-owned enterprises and small and medium sized enterprises. The following sectors have also been carved out of the legislation: telecommunications, financial services, cultural activities, pharmaceutical, utilities, waste disposal, transportation, oil and gas, and postal services. The structure of the Competition Law is similar to the regime in the European Union, broadly covering: (i) restrictive agreements (including those that price fix and limit the free flow of goods), (ii) abuse of dominance, and (iii) merger control. 15 Fines will be imposed where the Competition Law is not followed or breached, and where companies repeatedly breach the law, such penalties may be doubled. In addition to the imposition of fines, the courts have the discretion to shut down establishments found in breach of the law for a period of between three to six months. Pros and Cons of Means to Set Up a Legal Presence in the UAE Means Pros Cons Incorporating a Limited Liability Company (under the Companies Law) Opening a Branch Office Allows entity to conduct a broad range of activities in all of the UAE (other than in the free zones). Allows entity to conduct business with federal and local governmental bodies (without the involvement of a commercial agent or national agent). Separate legal entity from its foreign owner. Quicker than incorporating a local entity. More activities permitted than for a representative office. At least 51 percent of the company s capital has to be owned by UAE nationals. However, the foreign owner may seek the following protections in the constitutional documents: The right to appoint all of the directors The right to appoint the general manager The right to veto major decisions The right to all of the assets of the company on a winding up The right to more than 49 percent of the profits 16 Can take up to several months to set up. Certain licenses, e.g. for industrial activities, will take longer. Must employ a specified number of UAE nationals if employ more than 50 people and fall within the scope of the Emiritization guidelines. No general minimum capital requirement. A branch office may only engage in activities that do not constitute commercial business, which typically means that branch offices are limited to professional activities (although an exception has developed in practice for branches engaged in the sale of products manufactured by its parent company). Not a separate legal entity from the foreign owner. Must engage a UAE national agent to act as a service agent who will handle sponsorship and government paperwork. Limited to employing the number of foreigners permitted under its business license. Opening a Representative Office Quicker than incorporating a local entity. May only handle marketing and administrative functions on behalf of a foreign parent. Not a separate legal entity from the foreign owner. Must engage a UAE national agent to act as a service agent who will handle sponsorship and government paperwork. May only employ up to three or four foreigners. 14 Latham & Watkins Doing Business in the United Arab Emirates Latham & Watkins Doing Business in the United Arab Emirates 15
APPENDIX 1 APPENDIX 2 Pros and Cons of Means to Set Up a Legal Presence in the UAE Companies Law and Free Zone Entities Means Pros Cons Setting up a Free Zone Entity 17 100 percent foreign ownership permitted. Geographical proximity to entities carrying out similar activities. Commitment to zero taxes for a period of at least 15 years (renewable for an additional 15 years). Full repatriation of profits and capital expressly permitted. Sponsorship process for employees is streamlined through the free zone authority. Generally, a free zone entity is permitted to conduct business solely within its relevant free zone and limited to performing solely those activities specified in its license. 18 Each free zone authority is limited in the scope of activities it may authorise (e.g., only licenses for media and IT services in the Dubai Media City, etc.) Many free zones require an actual physical presence in the free zone (e.g., leasing office space and at least one employee). It is difficult and expensive to obtain space in the popular free zones (e.g., DIFC, Sharjah Airport International Free Zone). Type of Entity Minimum Ownership percent for UAE Nationals 24 Limited Liability Companies 19 Private Joint Stock Company 20 Public Joint Stock Company 21 51 percent. 51 percent. 51 percent of shares 26 (pre and post-public issuance). Joint Participation Ventures 22 51 percent of capital must be contributed by the local partner Commercial Agency Relationship Does not require establishment of a physical presence in the UAE. Third party handles all aspects of the foreign business in the UAE. Once a commercial agency contract is registered with the Ministry of Economy and Commerce: Exclusivity registered commercial agents have the exclusive right to import the goods which are the subject matter of the agency. Commissions registered commercial agents are entitled to receive commissions on the sales they make as well on sales made in the UAE by the principal or any other party. Termination the principal may only terminate a registered commercial agent for material reasons. Further, a principal may not refuse to renew a commercial agency agreement after its expiry date without the payment of compensation to the registered commercial agent. Liability Limited Limited Limited Joint Minimum Capital Requirement No requirement AED 2,000,000 AED 10,000,000 No requirement Number of Founding Members/Partners Management or Director Restrictions (by Nationality) Two to 50 At least three Three to 15 At least two No restrictions Chairman must be a UAE national Majority of directors must be UAE nationals Chairman must be a UAE national Majority of directors must be UAE nationals No restrictions. 16 Latham & Watkins Doing Business in the United Arab Emirates Latham & Watkins Doing Business in the United Arab Emirates 17