Country focus: Investment options in the UAE

Richards Butler LLP looks at the legal framework for inward investment in the United Arab Emirates.

By Peter Michelmore, senior partner in the Middle East for Richards Butler LLP

The United Arab Emirates (UAE) is not only a domestic market in its own right, but the commercial hub of a part of the world where globalisation continues to grow in size and importance. It is arguably the single principal commercial center between Western Europe and South East Asia, with a magnetic effect on the rest of the Middle East, the CIS countries of Central Asia, the Indian subcontinent and East and South Africa. Indeed, its requirements for labour in support of growth, particularly in the construction sector, extend the UAE’s influence wider still.

The casual reader in Europe or the US does not need a detailed knowledge of the laws of the UAE, but should be able to share their clients’ enthusiasm for this, the UK’s ninth largest export market, and to know there is a body of laws designed to promote inward investment and protect the investor. It also has to be borne in mind that there continue to be a number of differences between local legal and commercial concepts and those underlying the legal and commercial environment with which the reader will be more familiar. Therefore, foreign investors are well advised to take detailed advice from lawyers and others with expertise in this jurisdiction from the outset. Hence this is simply a high-level look at the main options for business activity open to foreign investors.

For the inward investing corporate wanting to take advantage of this marketplace there are a range of options. Most of the UAE’s constituent Emirates have free zones, those of Dubai and its Jebel Ali Free Zone perhaps being the best known. In Abu Dhabi the concept of free zones is a relative newcomer, with the Industrial City of Abu Dhabi (ICAD) now in Phase III and that, together with Abu Dhabi’s proposed Khalifa Port and Industrial Zone, situated half way between the City of Abu Dhabi and Jebel Ali, targeting industry-specific services and industrial investment.

Each free zone is established by law and has its own set of rules and regulations. Detailed regulations for Abu Dhabi’s free zones are yet to be published. The general principle is that entities may be established in a free zone with up to 100 per cent foreign ownership and guaranteed freedom from corporate and income taxes for a specified period. Generally speaking, the relevant free zone authority will act as a ‘one stop shop’ for licensing and other regulatory purposes, including the sponsorship of employees, which is a necessary prerequisite for the issue of work and residence permits to expatriate personnel.

Free zones, as the term suggests, offer a duty free environment for the fabrication, storage and distribution of goods in the wider region described above. Others offer similar facilities for the provision of, for example, telecoms, technology, media and financial services. However, they are not necessarily the complete answer for those wishing to do business, particularly in the sale of products ‘onshore’ the UAE itself. For the most part, free zone companies and enterprises are regarded as foreign entities for the purpose of onshore business, with the attendant need to comply with the domestic legal regime described below.

Broadly speaking, for foreign companies looking to do business in the UAE outside a free zone, there are three practical options. These are participation in a locally incorporated limited liability company (LLC), the establishment of a branch presence, and in Dubai, that of a representative office, or the appointment of a commercial agent. The choice of arrangement depends on a number of factors, some of which will be driven by the inward investor’s own commercial and structural requirements – and some by the marketplace and counter-party requirements in the UAE.

Each structure involves an appropriate relationship between the foreign company and a UAE national or a company wholly-owned by UAE nationals. Shares in an LLC must be owned no less than 51 per cent by UAE nationals. However, day-to-day management may be delegated to the overseas shareholder, and, if the company’s constitution so provides, profits may be distributed other than in proportion to shareholdings to reflect, for example, the overseas shareholder’s contribution to management.

Being a part of the ‘mother entity’, a branch office or representative office is established in agreement with a national service agent, colloquially known as a sponsor, to whom a fee is paid. That fee is payable by law, regardless of whether or not the sponsor is ‘active’ in terms of providing support to the local office. Although a branch office gives the inward investor the maximum autonomy locally, it is not necessarily the answer for those whose prospective clients or customers may include local institutions that are only prepared to deal with a locally incorporated company.

Under the UAE’s Trade Agency Law, a commercial agent or distributor must also be a UAE national or a company wholly-owned by nationals. An agreement must generally be registered with the Ministry of Economy to be enforceable. Different considerations can apply to commission agencies established in compliance with the UAE’s Commercial Code. As with all the options outlined, detailed advice is required on a case-by-case basis.

There are changes in the wings. A recent amendment to the Agency Law has relaxed the circumstances, previously limited, in which a carefully drafted agency agreement can be terminated without compensation. It is understood that prospective changes in the Companies Law will increase the level of permitted foreign ownership, either across the board or on an industry-by-industry basis. Finally, in terms of dispute resolution, the UAE recently acceded to the New York Convention on the Recognition and Enforcement of Arbitral Awards. How the UAE courts will respond to the convention remains to be seen, but this is a new dynamic for those negotiating agreements with UAE counterparties.

More relaxations are likely in the wake of WTO commitments and the negotiation of Free Trade Agreements, further enhancing the UAE as an attractive destination for foreign direct investment in an increasingly competitive world.