Investment friendly: The emirate’s legal framework offers a range of incentives

The UAE came into being as an independent sovereign state on December 2, 1971. Dubai is one of the seven emirates comprising the UAE. The constitution established the Supreme Council of the Rulers of all the emirates as the main authority in the federation and a Council of Ministers as the executive branch of the federation. The ruler of each emirate governs with a local governmental authority. Absent federal legislation on areas specifically reserved to federal authority, the ruler/local government will apply his/its own rules local laws, regulations and practices. As well as the Supreme Council, the federal government includes the Council of Ministers, which is responsible to the Supreme Council for the federation’s general internal and external policy. There is also a Federal National Council, which is responsible under the constitution for examining and amending proposed federal legislation.

In Dubai, various local government bodies regulate and manage local law and policy, including the Dubai Department of Justice, the Department of Economic Development (DED), the Roads and Transport Authority, the Dubai Municipality and the Dubai Chamber of Commerce & Industry (DCCI). Therefore, when doing business in Dubai, it is necessary to consider federal laws and decrees, as well as local laws, orders and decrees passed by the ruler of Dubai.

In contrast with all other emirates (other than Ras Al Khaimah) Dubai has a court structure independent of the Federal Courts. The Dubai Courts include a court of first instance, a court of appeal and a court of cassation, each with a civil, criminal and sharia (Islamic) panel. The Sharia Courts act alongside the civil courts and have exclusive jurisdiction in matters relating to personal status, divorce, inheritance and some criminal cases. There are also administrative channels for settling disputes. For instance, Dubai has a rent committee within the Dubai Municipality, which deals with tenancy disputes, and a labour disputes committee at the Ministry of Labour hears employment disputes before they go to court. In 2008 a new property court was set up in Dubai, which has jurisdiction over all properties in Dubai except those located in the Dubai International Financial Centre (DIFC).

SETTING UP A PRESENCE IN DUBAI: Although the business environment in Dubai is one of the most liberal and foreign-investment-friendly in the Middle East, there are foreign investment restrictions to consider. In the UAE, it is not possible to set up a wholly owned foreign limited liability company (LLC) or a wholly owned foreign public or private joint stock company.

There are several ways of setting up a business presence in Dubai, and all require local participation. The Commercial Companies Law requires that companies operating in the UAE conform to one of seven forms of business entity, the most widely used being the LLC. Below we have concentrated on the main form of vehicle used by foreign shareholders in Dubai.

Local participation ranges from the service of company agent or “sponsor” for a branch of a foreign company to a mandatory minimum 51% shareholding held by a UAE national in an LLC. Proposed changes to the Commercial Companies Law are expected to relax these restrictions on foreign ownership.

LIMITED LIABILITY COMPANY: The most practical way for a foreign shareholder to set up a trading or manufacturing presence in Dubai is by incorporating an LLC. As a matter of policy, LLCs intended solely to perform service activities are discouraged. Service activities may be performed by a separate branch of a trading LLC. Acquiring an “off-the-shelf” company is not possible in Dubai because most LLCs have to be specifically incorporated for their objects, which takes some time and expense. An LLC must have at least two but not more than 50 shareholders. The day-to-day management may be vested in up to five managers.

As a general rule, LLCs may not carry on insurance or banking activities, nor may they invest funds on the account of third parties. In addition, if the LLC is established to conduct manufacturing activities, the majority of its board of managers need to be UAE nationals.

Generally, the liability of the shareholders is limited to the extent of their shareholding in the LLC. There is no minimum share capital. However, the share capital must be approved by the shareholders of an LLC and must be enough to achieve the objectives of the LLC. An LLC cannot resort to public subscription for raising capital. It is possible to provide in the memorandum of association that profits and losses be shared between the shareholders in ratios different to those of their shareholdings. However, as a rule of thumb, the DED does not now permit foreign shareholders to be entitled to more than 80% of the profits and losses of an LLC, even where the UAE national partner plays no part in the operations of the LLC.

Branches of Dubai LLCs can register in Dubai or other emirates, including free zones. Branches are often used to perform service-related activities.

Overall, the LLC affords a flexible and practical vehicle for the conduct of business. It is relatively easy to run with flexible management arrangements. There are specific guidelines and procedures to be followed in establishing an LLC, in relation to which professional legal advice should be obtained. A BRANCH/REPRESENTATIVE OFFICE:Foreign firms wishing to do business in Dubai often opt for registering a branch office, including a representative office. Branch/representative offices have the advantage of allowing 100% foreign ownership but they do not have a separate legal entity from that of the parent company, which means the branch’s liability extends to its parent company. Branch offices are allowed to carry on service activities, and may exercise only the activities for which each emirate licenses them. Representative offices are restricted to marketing, promotions and liaison activities. Both branch and representative offices are subject to federal and local approvals.

A foreign company may establish a branch or a representative office in the emirate, provided it has been registered at the Foreign Companies Register of the Federal Ministry of Economy, has been granted a licence from the DED and has been registered as a member of the DCCI. Further approvals may be required depending on the nature of the intended business activity. For example, some construction, engineering or building design activities require Dubai Municipality consent and all branches of foreign banks and financial institutions must obtain the approval of the UAE Central Bank before they can commence operations.

As mentioned above, a local agent must also be appointed. Appointing a local agent will involve the foreign company entering into a service agency agreement with a UAE national (or a company wholly owned by UAE nationals) to act as the branch’s or representative office’s local agent.

The local agent will not be liable for any of the obligations or liabilities of the foreign company’s branch operations and his activities will usually be administrative only, for example obtaining the necessary licences required to enable the entity to carry on its business.

The service agency agreement will usually provide for the payment of an annual fixed fee. Although the fee payable is negotiable, the amount will often vary depending on the value of the business being carried on through the branch and the nature of the business.

Registration of a branch or representative office will enable a foreign company to register a local presence in Dubai and to gain a service-related licence. A representative office would not be allowed to carry out any independent commercial activities in the UAE and is not permitted to generate income or invoices, although a budget for marketing, wages and administrative costs is permitted. In practice, a representative office is generally permitted to act as a “cost centre” or “sales” office (provided all sales are booked through the parent or other group companies, offshore) or to act as a management, marketing or administrative office for other companies within the group.

SELLING INTO DUBAI FROM ABROAD: Where an overseas manufacturer or trader wishes to import goods into Dubai in high volumes and regularly, but does not want to set up a business presence, it is common to appoint a local commercial agent/ distributor. The commercial agent is responsible for local distribution, sale and promotion in consideration of a commission or profit. The Commercial Agencies Law in the UAE provides extensive protection for UAE nationals, or UAE companies wholly owned by UAE nationals, when acting as commercial agents. These protections provide, in summary, the registered commercial agent with exclusivity over at least one emirate in the UAE, compensation on termination of the relationship without “substantial justification” and the ability to block appointment of a subsequent commercial agent.

Although many UAE commercial agents operate pursuant to unregistered agency agreements, the Commercial Agencies Law provides that a commercial agent may not act unless an agency agreement is registered on the Commercial Agencies Register.

Nevertheless, rather than allow a commercial agent to benefit from the protection granted by registration, many principals prefer to be party to an unregistered agreement despite the risks of fines and potential unenforceability in the UAE Courts. These unregistered arrangements are regulated, like any other contract, by the provisions of the Civil Transactions Code and the Commercial Code. Unlike registered agencies, unregistered agencies can be terminated at the end of a fixed term (without the requirement for any substantial justification) or during the term pursuant to the terms of the relevant agreement.

In contrast to registered agency agreements, damages awarded to an unregistered commercial agent due to early termination by the principal will be based on general principles of contractual damages.

UAE FREE ZONES: Free zones are defined geographical areas set up in the UAE to allow foreign shareholders to perform their business activities free from federal and local licensing restrictions (especially concerning foreign ownership restrictions). In Dubai, the most popular free zones include Jebel Ali Free Zone (shipping port and industry based) and the DIFC ( banking, capital markets, insurance, asset management and other financial services). Entities established in a free trade zone are subject to that particular free zone’s jurisdiction. They are not allowed to conduct business in the UAE outside the free zone, unless they apply for a licence under the relevant local and federal laws.

DUBAI INTERNATIONAL FINANCIAL CENTRE: The DIFC was created in 2004 as part of a larger Dubai initiative to increase its profile as a leading regional financial centre and is focused on banking services, capital markets, asset management and fund registration, insurance and reinsurance, Islamic finance, business processing operations and ancillary services.

The DIFC is one of the fastest growing global financial centres and many internationally recognised firms and institutions have set up operations in the DIFC. The DIFC is a free zone and also an independent common law jurisdiction largely governed by its own laws and regulations with its own courts and the DIFC-LCIA Arbitration Centre (a joint venture with the London Court of International Arbitration). Financial services provided in and from the DIFC are regulated to international standards by the Dubai Financial Services Authority. Unlike “offshore” tax havens, the DIFC is a fully fledged “onshore” capital market, which may be considered comparable to Hong Kong, London and New York.

The DIFC offers many incentives for investors, including 100% foreign ownership, zero tax rate on income and profits, no restrictions on foreign exchange or the repatriation of capital or profits, a dollar-denominated environment, flexible corporate structures, high standards of rules and regulations, and modern operational and business facilities.

EMPLOYMENT: The Labour Law governs all employment-related matters and is administered by the Federal Ministry of Labour and Social Affairs. The law is protective of employees in general and any contractual term which is contrary to the Labour Law is void unless it is favourable to the employee. The Labour Law provides for certain basic employee benefits which cannot be contracted out of. Therefore, an employment contract can vary the Labour Law only in favour of the employee and may not reduce the employee’s rights. The Labour Law establishes a preference for employing UAE nationals. This preference has been emphasised lately with the adoption of “Emiratisation” policies, which require employment quotas in some sectors such as banking and insurance.

Employees have a right to a minimum of 30 calendar days’ paid leave in each year of completed service, as well as public holidays. There are also provisions for sick leave and maternity leave. As provided in the Labour Law, employees are entitled to take 15 days’ fully paid sick leave and 45 days’ fully paid maternity leave.

Employment contracts may be ended in a number of ways: by agreement (in writing), at the end of a fixedterm contract or, for an unlimited-term contract, on not less than 30 days’ notice. Employment contracts may also be terminated without notice for “gross misconduct” including intoxication during working hours and conviction of criminal offences concerning honesty or public morals. Summary termination of employment contracts without due cause could result in the employer being liable to pay compensation subject to a maximum of three months’ salary. As a general rule, at the end of an employment contract the employer is responsible for the repatriation of the employee.

The Labour Law provides that an employee is entitled to an end-of-service gratuity (ESG) from his/her employer on completion of one year of service calculated on the basic component of his/her gross salary. Broadly, ESG payment is based on 21 days’ pay for each of the first five years served and 30 days’ pay for each subsequent year (subject to a maximum of two years’ salary). For long-serving employees, the ESG payment can amount to a considerable sum and this should be borne in mind by employers and prospective purchasers of businesses as going concerns. It has become common practice for employers negotiating remuneration packages to reduce the basic component and increase allowances to pay minimal ESG on termination. However, the Ministry of Labour has recently insisted that the basic component must be at least equal to if not higher than the allowances. Employers may provide pension schemes to expatriate staff but must ensure that staff elect, in writing, between the pension plan and ESG at the outset to avoid the employer being liable to pay gratuity as well as pension payments. The Pensions and Social Security Law was issued in early 1999 and applies only to UAE and GCC nationals in both the public and private sectors. It is designed to make retirement conditions in the private sector as attractive to UAE and GCC nationals as those in the public sector. All contributions by the employers and employees are made monthly to the Pensions Authority.

The Ministry of Labour has introduced the Wage Protection System (WPS). This is a central electronic system that requires employers to register with a registered agent of the WPS. The employer pays salaries into a designated account in advance and then the agent distributes the salaries electronically. The Ministry of Labour can easily monitor the compliance of employers with their obligations to pay the correct salaries to their employees on time. If employers breach their obligations to their employees, the Ministry of Labour can penalise them by not issuing them any new work permits until the situation is rectified.

If the purpose of entering Dubai is to take up employment, as a general rule foreign nationals must be sponsored by a Dubai company or individual and obtain an entry visa and work permit in advance. The employee may also enter the UAE with a visit visa and then convert it to an employment or residency visa, provided certain conditions are obeyed. Residence and work permits are generally valid for two years and may be renewed. A work and residence permit holder may sponsor his/her spouse and children for residence. The DIFC has its own employment law for staff operating within the DIFC, broadly similar to the UAE Labour Law.

LAND OWNERSHIP: Due to the global downturn in 2009 and 2010, the previous real estate boom in Dubai came to an end and rents, although still high, have declined significantly. The boom had its roots in 2002 when Sheikh Mohammed bin Rashid Al Maktoum declared that non-UAE nationals could own residential and commercial property on a freehold basis in specific developments. This became law when Law No. 7 of 2006 was issued. This law confirmed that GCC nationals and companies owned entirely by GCC nationals can own real estate anywhere in Dubai. Non-GCC nationals are permitted to own real estate on a freehold and leasehold basis in certain areas designated by the ruler of Dubai. A list of areas designated for foreign ownership was published in a regulation and includes most of the major developments in Dubai.

The law also provides for the establishment of a real property register held by the Dubai Land Department (register). The register records the ownership of all real property rights and any change in ownership must be recorded on the register. If a change in ownership is not recorded on the register it will not be enforceable against third parties. Law No. 7 of 2006 also provides that any conditions, undertakings or restrictions concerning rights over land will be registered. This will include mortgages of property. The Dubai Land Department will only register mortgages of real estate in favour of a bank which is licensed and registered, by the UAE Central Bank, to operate in the UAE.

The register provides conclusive evidence of ownership and can only be challenged on the grounds of fraud or forgery. Units sold off-plan are to be registered on the Dubai Land Department’s interim real estate register (interim register). Law No. 13 of 2008 came into force in August 2008 and units sold off-plan prior to that date also had to be registered within a specified time period. Once such units are so registered, they can be sold, mortgaged or otherwise legally disposed of. Following completion of a project the units are to be transferred from the interim register to the register.

There is also legislative protection for purchasers of off-plan units under Law No. 8 of 2007, which introduced project-specific guarantee accounts into which all moneys received from off-plan sales are to be placed. This law also introduced a framework for registration, licensing and regulation of developers.

Law No. 27 of 2007 deals with common hold or strata title. This was necessary as many apartments and office suites had been sold in Dubai on a freehold basis without sufficient attention to the relationship between the owners of the apartments or office suites and the owners of the underlying land and the common areas. The law provides for the establishment of co-owners’ associations, which will own the land and the common areas, with each apartment or suite owner being a member of the co-owners’ association. Since 2006 real estate brokers have had to be licensed by the Dubai Land Department’s Real Estate Regulatory Agency.

LEASES: Along with the exponential growth of the real estate market in Dubai, tenancy contracts have been growing in both number and complexity. Leases of commercial office space tend to be relatively short-term, but this is changing as more international companies are coming to the market demanding long- term security. Disputes arising from tenancy contracts have also been increasing in number. A tribunal appointed by the Dubai Municipality – the rent committee – has jurisdiction to settle disputes related to tenancy contracts and its decisions are final and binding.

The legal framework for most tenancy contracts is contained in Law No. 26 of 2007 (as amended). Furthermore, over the past few years annual legislation has been introduced to restrict rent increases.

Dubai has become a regional leader and hub in many sectors, including finance, banking, real estate, leisure, infrastructure and transport. The emirate is one of the most liberal and foreign-investment-friendly markets in the region, offering many incentives for those wishing to invest. Although the UAE legal framework still distinguishes between local and foreign investment, liberalisation and privatisation policies have been put in place which, together with other factors (such as geographical position, good infrastructure, and political stability), represent exciting opportunities for investors.