Doing Business in the United Arab Emirates 2009
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Doing Business in the United Arab Emirates 2009
Doing Business in the United Arab Emirates
Table of Contents
I.
143BU U Introduction ................................................................................... 1
U U
A. The U.A.E. at a Glance ........................................................... 1
148BU U U U
B. Liberalization and the Establishment of Economic Free
149BU U U
Zones ...................................................................................... 3
U
II. Corporate Entity Formation .......................................................... 8
14BU U U U
A. Establishing a Presence Outside Free Zones .......................... 8
150BU U U U
B. Establishing A Presence Inside A Free Zone ....................... 16
15BU U U U
III. Legal Issues in the DIFC............................................................. 19
145BU U U U
A. Labor & Employment ........................................................... 19
152BU U U U
B. Immigration .......................................................................... 24
153BU U U U
C. Commercial and Regulatory Matters.................................... 25
154BU U U U
IV. Tax .............................................................................................. 29
146BU U U U
V. Contact Information .................................................................... 30
147BU U U UDoing Business in the United Arab Emirates
I. Introduction
0B
A. The U.A.E. at a Glance
5B
The United Arab Emirates (the “U.A.E.” or the “Emirates”) is a
47B
federation formed on December 2, 1971 between the seven Emirates
of Abu Dhabi, Dubai, Sharjah, Ajman, Fujairah, Umm Al Quwain and
Ras Al Khaima. Formerly a part of the British protectorate called the
“Trucial States” or “Trucial Oman”, the Emirates gained their
autonomy once the English withdrew from the Gulf region in mid-
1971.
The U.A.E. is located in the Arabian Peninsula and is slightly smaller
48B
than the state of Maine (approx. 32,278 sq. mi.). It shares borders
with Saudi Arabia, lying to the southwest of the country, and Oman,
situated to the north and southeast of the Emirates. The country lies
between the Persian Gulf and the Gulf of Oman. Geographically, the
U.A.E.’s strategic location near the Strait of Hormuz makes it a
critical waypoint in the export of the world’s crude oil.
Baker & McKenzie 1The population of the U.A.E. (4,621,399 – 2008 est.), a large
49B
percentage of which resides in Dubai, is composed of a high number
of expatriates; estimates place the foreigners at more than 80% of the
nation’s population. The majority of these migrants hail from South
Asia, Southeast Asia, Europe, Iran, North America and other parts of
the Middle East. Arabic is the country’s official language. However,
English is the de facto language of business and everyday life. Hindu,
Urdu and Persian are also widely spoken. The majority of the
population are followers of Islam. Adherents of Christianity and
Hinduism also form a significant minority 1 .
F F
Arabic culture is a part of everyday life in the U.A.E. and influences
50B
the country’s business norms. However, the Emirates’ business
practices are modeled after western examples and, as a result,
transactions occur relatively smoothly despite whatever cultural
differences there may be between the parties involved. In addition,
the country is largely open to foreigners and strives to create an
environment favorable to foreign investment and economic growth.
One indication of said efforts is the Trade and Investment Framework
Agreement the U.A.E. signed with the United States in April 2004,
which is an important step in the realization of a Free Trade
Agreement with the U.S.A. In 2006, the U.A.E. was the largest export
market for US goods in the Middle East and North Africa.
The U.A.E. has experienced significant growth in recent years. In the
51B
year 2007, the IMF reports that the Emirates had a GDP of 190.744
Billion US Dollars, a GDP per capita of 42,500.846 US Dollars and
an estimated growth of 7.4% in GDP over 2006. Inflation was a high
11.1%. In 2008, the IMF projects that the U.A.E. had a GDP of
269.965 Billion US Dollars, a GDP per capita of 56,666.704 US
Dollars and a growth of 7.0% in GDP over 2007. Inflation is
projected to rise to 12.9% 2 .
F F
1
Source: CIA World Factbook
2
Source: IMF. Link:
http://www.imf.org/external/pubs/ft/weo/2008/02/weodata/weorept.aspx?sy=
HU
2006&ey=2013&scsm=1&ssd=1&sort=country&ds=.&br=1&c=466&s=NG
2 Baker & McKenzieDoing Business in the United Arab Emirates
The U.A.E. has a petroleum-reliant economy; roughly 25% of the
52B
country’s GDP is derived from its output of oil and gas 3 . The oil
F F
wealth the country has accrued over the past 25 years has helped fund
and spur much of its current social and economic development.
However, in recent years, the Emirates have embarked on a largely
successful effort to diversify into other economic sectors. Tourism
has been one of their main focuses. The U.A.E. attracts millions of
tourists every year with a variety of attractions such as the Dubai
Desert Classic golf tournament and the Dubai Shopping Festival.
Such events, combined with the attraction of world renowned hotels
and resorts such as the Burj Al Arab, have made the country a hotspot
for tourism. The Emirates are also quickly becoming a worldwide
commercial hub as indicated by the relocation of Halliburton’s
headquarters to Dubai and the presence of such companies as
Citibank, Honeywell, Ford, ExxonMobil and Lockheed Martin in the
U.A.E. A movement towards more liberal economic policies,
particularly through the creation of financial free zones exempted
from federal laws for commercial and tax matters, has been the
primary driving factor behind this economic and commercial
expansion.
B. Liberalization and the Establishment of Economic
6B
Free Zones
In order to promote a more diverse and attractive economic
53B
environment, the U.A.E. government created a legal framework in
which economic free zones could be established in each of the
Emirates. The Dubai International Financial Center (the “DIFC”) and
the Jebel Ali Free Zone (the “JAFZ”) are the two most prominent
economic free zones in the U.A.E. Such economic free zones foster
an attractive environment for business by offering companies, among
DP_R%2CNGDP_RPCH%2CNGDP%2CNGDPD%2CNGDPRPC%2CNG
DPPC%2CNGDPDPC%2CPCPI%2CPCPIPCH&grp=0&a=&pr1.x=23&pr1.
y=12#cs9 U
3
Source: CIA World Factbook
Baker & McKenzie 3other things, zero tax rates on their income, no foreign exchange
controls and freedom from excessive regulation. In addition, such
economic free zones also provide a means for interested investors to
bypass the Emiratization policies of the Companies Law (which
mandates that corporate entities must be at least 51% owned by a
U.A.E. national) by allowing 100% foreign ownership of companies
within their jurisdiction. The U.A.E. commercial, administrative and
anti-money laundering laws do not apply within free zones.
1. Dubai International Financial Centre
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The DIFC was established in 2004 as a financial services center with
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the goal of becoming the focal point for international investment in
the Middle East, North Africa and South Asia. It aims to attract
liquidity to the region by providing investors an investment platform
with qualities comparable to international business hubs such as New
York, London and Hong Kong. The DIFC focuses on several sectors
of financial activity: Banking Services (Investment Banking,
Corporate Banking & Private Banking); Capital Markets (Equity,
Debt Instruments, Derivatives and Commodity Trading); Asset
Management and Fund Registration; Insurance and Reinsurance;
Islamic Finance; Business Processing Operations and Ancillary
Services. The DIFC’s brief history has also seen the establishment of
the Dubai International Financial Exchange (the “DIFX”), which aims
to provide investors access to regional and global capital through the
Middle East’s first truly international stock market.
The DIFC grew out of a desire to add to Dubai’s already diverse
5B
economic base by bridging a regional gap in the world’s major
financial markets. To this end, the government of Dubai created the
DIFC as an “onshore” financial center, with extensive autonomy and
independence in commercial and financial matters. The DIFC has
been able to carefully tailor its laws and regulations to the particular
needs of its financial services mission due to its freedom from the
commercial and civil laws of the U.A.E. and Dubai. As a result, laws
and regulations have been passed which not only make the DIFC
attractive to businesses interested in establishing a presence in the
4 Baker & McKenzieDoing Business in the United Arab Emirates
DIFC, but also which instill confidence in the DIFC as a reliable base
for international investment. Businesses operating within the DIFC
benefit from a zero tax rate on profits, no restrictions on repatriation
of capital and foreign exchange and the possibility of 100% foreign
ownership. At the same time, the DIFC provides world-class
regulation and transparency in the center’s actions and business
environment. Such rules and regulations, fostering the maturation of
this liberal financial environment, are established and enforced by the
DIFC’s controlling bodies.
In 2004, the government of Dubai passed Dubai Law No. 9 and Dubai
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Law No. 12, which not only launched the DIFC but also established
the entities dedicated to the operational, regulatory and judicial control
of the DIFC. In particular, they established the Dubai International
Financial Centre Authority (the “DIFCA”), the Dubai Financial
Services Authority (the “DFSA”), and the Dubai International
Financial Centre Judicial Authority (the “DIFC Judicial Authority”).
These bodies, with their subsidiary components, are responsible for
both the creation and enforcement of the laws, rules, and regulations
of the DIFC.
a. Dubai International Financial Centre Authority
28B
The DIFCA is attached to the government of Dubai and is charged
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with overseeing the general operations of the DIFC. The DIFCA is
responsible for designing and guiding the strategic direction and
philosophy of the DIFC, as well as for promoting and attracting
businesses to the DIFC. Through subsidiary bodies, such as the
Registrar of Companies (the “ROC”), the Registrar of Securities, and
the DIFX, the DIFCA also has authority over most administrative
issues in the DIFC, including registering non-financial entities to
operate in the DIFC and managing the relationships between the DIFC
and its clients.
In addition to its operational duties, the DIFCA is also charged with
58B
creating many of the laws which govern the DIFC. While the creation
and enforcement of financial rules and regulations are delegated to the
Baker & McKenzie 5sole control of the DFSA, the DIFCA has created laws governing
numerous issues in areas where the DIFC is free from the laws and
regulations of the U.A.E. and Dubai, including the companies law and
the laws on contracts, property, and insolvency.
b. Dubai Financial Services Authority
29B
Established under Dubai Law No. 9, the DFSA is the regulator for all
59B
financial and ancillary services in the DIFC. The DFSA’s
responsibilities integrate the regulation of all aspects of the financial
market in the DIFC. This includes acting as the gatekeeper to the
financial industry in the DIFC. The DFSA is responsible for
authorizing the entities, whether businesses, individuals, or market
institutions, that seek admittance into the DIFC as financial services
providers. The DFSA is also responsible for the registration and
regulation of any entities that intend to provide ancillary services
related to the financial industry.
The DFSA also has the ability to make rules and regulations
60B
governing the financial services industry, various market activities,
and other financial activities. This rulemaking power allows the
DFSA to quickly and effectively respond to changing demands or
trends, whether those pressures arise in the DIFC or the broader
regional or worldwide financial markets.
The DFSA also has the power to monitor compliance with its rules
61B
and to exercise certain enforcement capabilities. The DFSA monitors
and supervises all authorized financial services and ancillary services
providers to ensure compliance with the rules and regulations of the
DIFC. The DFSA has the power to conduct investigations when
noncompliance and illegality is suspected, including the ability to
obtain books and records and to compel interviews under oath. The
DFSA’s ability to regulate the entities that are allowed to engage in
financial business in the DIFC represents its main enforcement power,
though when its investigations reveal activities which constitute
criminal activity, the DFSA will also refer the situation to the proper
judicial authorities.
6 Baker & McKenzieDoing Business in the United Arab Emirates
In order to ensure that the DIFC meets its goal of becoming a premier
62B
financial services hub, the DFSA is also tasked with the responsibility
to engaging in discussion and cooperation with other financial
institutions and regulators in the region and throughout the world. By
creating these relationship, the DFSA is not only better equipped to
carry out its numerous tasks in internationally accepted methods
ensuring high quality but also serves to foster and strengthen
relationships throughout the financial world.
In carrying out each of these roles, the purpose of the DFSA is
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twofold. It must promote and incentivize increased investment and
economic activity while continuously monitoring and mitigating the
risks present in the DIFC’s financial services industry. The DFSA
aims to provide regulatory guidance and control in a manner that
allows service providers to enjoy flexibility and economy in their
compliance with regulations while still ensuring the transparency and
integrity to maintain high levels of confidence among investors and
the international financial community.
c. Dubai International Financial Centre Judicial Authority
30B
Given the DIFC’s freedom from most laws of the U.A.E. and Dubai,
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the DIFC requires a specialized judiciary responsible for
administration and enforcement of the DIFC’s particular set of laws,
rules, and regulations. The DIFC Judicial Authority, an independent
body of the DIFC, serves that purpose. The DIFC Judicial Authority
is charged with the administration and enforcement of the laws and
regulations created by the DIFCA and the DFSA and is administered
through a two-tiered court system (the “DIFC Courts”).
The DIFC Courts include both a Court of First Instance and a Court of
65B
Appeal. While the DIFC Courts have no jurisdiction over criminal
matters, they have jurisdiction over any civil or commercial matters
arising out of the DIFC. While DIFC law shall apply and DIFC courts
shall have jurisdiction in any matter arising in the DIFC or through
Baker & McKenzie 7DIFC related business, DIFC laws do provide considerable freedom
6B
for parties to make choices of law and forum in their contracts which
shall be respected in most cases.
2. Jebel Ali Free Zone
13B
The government of the U.A.E. has authorized the establishment of
67B
economic free zones throughout the Emirates, and the foundation and
purpose of the DIFC is not unique. The JAFZ was founded in 1985
following the decree of the late Sheikh Rashed bin Saeed Al
Maktoum. It is the oldest and, aside from the DIFC, the most well
developed free zone in the U.A.E. Due to its relative success and
position as the first free zone in the U.A.E., JAFZ has served as the
model for which the country’s subsequent free zones, such as the
Dubai Technology & Media Free Zone. As a result, a discussion of
the business structures available within JAFZ will provide valuable
insight into creating and operating businesses in the major economic
free zones of the U.A.E.
II. Corporate Entity Formation
1B
Businesses intending to establish a presence within the U.A.E. must
68B
make a foundational determination whether they prefer, or are even
able, to establish their business inside or outside of a free zone. This
determination profoundly impacts the establishment of any presence
in the U.A.E., not only in determining the laws and authorities which
will govern the business, but even the potential forms that such a
business may adopt.
A. Establishing a Presence Outside Free Zones
7B
Generally speaking, foreign parties normally have available to them
69B
the following alternatives for structuring a presence outside the free
zones: (i) forming a U.A.E. company in a joint venture with a local
person or entity, (ii) establishing a branch in the U.A.E. and (iii)
8 Baker & McKenzieDoing Business in the United Arab Emirates
entering into a sponsorship/secondment arrangement with a locally
licensed party.
1. Company Formation
14B
The laws relevant to company formation in the U.A.E. outside the free
70B
zones are (i) U.A.E. Federal Law No. 8 of 1984 Concerning
Commercial Companies, as amended (the “Companies Law”), and (ii)
U.A.E. Federal Law No. 5 of 1985 Promulgating the Civil
Transactions Code, as amended (the “Civil Code”).
The Companies Law recognizes seven different types of companies
71B
while the Civil Code recognizes only one type (essentially a general
partnership). Generally speaking, the Companies Law applies to
companies carrying out “commercial” activities while a company
formed under the Civil Code would be one that engages in
“professional” or “consultancy” activities (such as, for example, a law
firm, architecture/engineering firm or accounting firm).
Accordingly, a company involving a foreign party formed outside a
72B
free zone would normally take one of two forms: (i) a commercial
company – usually a limited liability company (“LLC”) – formed
under the Companies Law or (ii) a civil company (a general
partnership) formed under the Civil Code.
Article 22 of the Companies Law requires that U.A.E. nationals, or
73B
companies wholly owned by U.A.E. nationals, must own at least 51%
of the capital of any company formed in the U.A.E. Although a 1998
amendment to the Companies Law exempts certain classes of
companies from the Companies Law, it has generally not been
possible to form a company under the Companies Law that is 100%
foreign owned. The normal maximum permitted foreign ownership in
a company formed under the Companies Law is 49%; and pursuant to
other applicable laws, regulations and policies, the permitted foreign
ownership threshold may be lower for companies engaged in certain
specific types of activities. Further, a new policy was recently
implemented in Dubai to permit 100% ownership to Cooperation
Baker & McKenzie 9Council for the Arab States of the Gulf (the “Gulf Cooperation
Council” or “GCC”) nationals and companies wholly owned by GCC
nationals for certain types of companies formed under the Companies
Law carrying out specified areas of activity. The scope of this policy
is not yet clear, given its recent implementation.
A civil company, formed under the Civil Code, can be 100% foreign
74B
owned, but shareholding in such companies is normally limited to
individuals, at least in Dubai.
a. LLC’s Formed Under the Companies Law
31B
The LLC is the corporate form most commonly used by foreign
75B
parties for a joint venture relationship in the U.A.E. Due to the
normal requirement under the Companies Law that at least 51% of the
shares of an LLC must be owned by U.A.E. nationals or companies
wholly owned by U.A.E. nationals, a foreign party would necessarily
have to be the minority shareholder in an LLC, a major disadvantage
to a foreign party. However, the LLC structure is flexible and the
Companies Law allows the parties to include protections for the
minority party within the registered constitutive documents of the
LLC (referred to variously as a “contract of establishment” or a
“memorandum and articles of association”). Such protections for the
minority party may include, among other things, (i) supermajority
voting, (ii) a reservation of management control and/or (iii) a
disproportionate allocation of profits. In addition, shareholding
agreements and other arrangements that supplement the registered
constitutive documents of the LLC may offer additional layers of
protection to the minority shareholder.
An LLC provides limited liability to its shareholders. An LLC must
76B
have at least two, and no more than fifty, shareholders at all times.
The Companies Law requires an LLC to have a minimum capital of
U.A.E. Dirhams 150,000 (approximately US$ 41,000). However,
local policies in Dubai require the capital to be at least U.A.E.
Dirhams 300,000 (approximately US$ 82,000), and government
regulations impose higher minimum capital requirements with respect
10 Baker & McKenzieDoing Business in the United Arab Emirates
to certain classes of companies or types of activities. The time frame
to establish an LLC in Dubai normally falls in the range of one to
three months once all the necessary documents have been filed with
the authorities (the time frame is somewhat longer in Abu Dhabi), but
in either Emirate, the time frame can be significantly longer if
additional permits are required from specialized regulatory authorities.
b. Joint Stock Companies Formed Under the Companies Law
32B
The Companies Law recognizes two types of joint stock companies
7B
(each a “JSC”): public and private. Like an LLC, at least 51% of the
shares of a JSC must be owned by U.A.E. nationals or companies
wholly owned by U.A.E. nationals. However, except in circumstances
where government regulatory or policy requirements mandate use of
the JSC structure, such structure is generally not favored by foreign
parties. Among the reasons why the JSC structure is not generally
favored are (i) the procedures for JSC formation are complicated,
time-consuming and require a number of special approvals, (ii) the
minimum capital requirement is high (U.A.E. Dirhams 10,000,000
(approximately US$ 2,730,000) for a public JSC and U.A.E. Dirhams
3,000,000 (approximately US$ 820,000) for a private JSC), (iii) a
public JSC must have at least 10 founders and a substantial percentage
of the shares must be offered in a public offering, while a private JSC
must have at least three founders, (iv) the chairman, vice chairman
and a majority of the board of directors of the JSC must be U.A.E.
nationals, (v) unlike an LLC, the structure does not permit flexibility
in including protections for minority shareholders, and (vi) the JSC is
more heavily regulated than an LLC. It is not possible to predict with
any certainty the time frame to establish a JSC, but it would likely
take a minimum of several months.
c. Civil Companies Formed under the Civil Code
3B
Like an LLC, a civil company formed under the Civil Code offers
78B
flexibility in structuring the corporate governance provisions but, as
noted above, corporate entities normally are not permitted to be
shareholders in a civil company, at least in Dubai.
Baker & McKenzie 112. Branches
15B
A branch can be formed by a corporate person, but not by a natural
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person. The branch structure enables a foreign company to establish a
presence that is wholly owned. Generally speaking, three types of
branches are potentially available to foreign companies in the U.A.E.
outside the free zones: (i) a branch that can act only as a liaison office
(commonly referred to as a “representative office”), (ii) a branch that
can carry out professional or consultancy activities (commonly
referred to as a “consultancy office”) and (iii) a branch that can carry
out certain commercial activities, which, under current policy, are
typically limited to the provision of services.
All three types of branches are conceptually similar, and the main
80B
difference is in the type of activities they are permitted to perform in
the U.A.E. A branch is not considered a separate legal entity but
rather is part of the foreign company. Thus, the foreign company is
considered to be directly doing business in the U.A.E. and has
unlimited liability for the operations of its branch.
The Companies Law requires branch offices to complete licensing and
81B
registration procedures at the Federal level in addition to obtaining
business permits at the Emirate level. In recent years, local policy in
Dubai permitted consultancy offices and representative offices to
obtain business permits at the Emirate level without completing
licensing and registration at the Federal level. However, since early
2005, the Federal authorities have begun to reassert the requirement
for all branches – including consultancy offices and representative
offices – to observe the Federal-level procedures contemplated under
the Companies Law, and the Dubai authorities are, at least for the time
being, implementing a requirement to complete procedures at the
Federal level.
12 Baker & McKenzieDoing Business in the United Arab Emirates In Abu Dhabi and Sharjah, the authorities do not normally distinguish 82B between the different types of branches. They normally subject them to the same registration procedures, except that additional special procedures apply for certain designated activities. The authorities in those Emirates tend to require registration of branches of foreign companies at both the Federal and Emirate levels. When no procedures at the Federal level were required, the time frame 83B for registering a representative office in Dubai normally fell in the range of one to two months once all the necessary documents have been filed with the authorities. The time frame for registering a branch office or a consultancy office in Dubai normally falls in the range of two to three months. The time frame for registering a branch in Abu Dhabi normally falls in the range of three to six months once all the necessary documents have been filed with the authorities, while in Sharjah it has tended to be closer to the time frame for a branch office in Dubai. A local sponsor (typically referred to as a “national agent” or “local 84B services agent”) is normally required to be appointed for each type of branch. In all cases, the sponsor must be a U.A.E. national or a company wholly owned by U.A.E. nationals. Unlike a shareholder or partner, a sponsor has no equity or 85B management interest in the branch and does not bear any of its liabilities. His compensation is an annual fee stipulated in an agreement between him and the foreign company, which is consideration for obtaining and renewing the license and registrations of the office, obtaining visas and work permits for its staff and assisting it in its relations with governmental departments. A common range for an annual sponsorship fee in Dubai is US$15,000 to US$25,000. The fee will depend on, among other things, the status of the national or local services agent and the image of the foreign company in the local community. Baker & McKenzie 13
a. Representative Office
34B
A representative office has limited activities. A representative office
86B
is not permitted to engage in commercial, professional or consultancy
activities within the U.A.E.; it is essentially limited to promoting and
marketing the products or services of the foreign company and
supervising local franchisees, distributors or agents or the like.
Further, a representative office is not permitted to enter into contracts
for the sale of goods or performance of services in the U.A.E., issue
invoices, receive commissions or payments or otherwise generate
revenues for products sold or services rendered in the U.A.E.
b. Branch Office
35B
A branch office would be permitted to carry out the activities
87B
specified in its license. Currently, licenses for such branches of
foreign companies are generally limited to service activities (i.e., the
importation of products through such branches for resale in the local
market generally is not permitted). Generally speaking, a branch
office is permitted to carry out all of the activities that can be carried
out by a representative office and to enter into contracts for the
performance of the services specified in its business permit. It may
also issue invoices, receive commissions or payments or otherwise
generate revenues for services rendered.
c. Consultancy Office
36B
This type of branch has much the same characteristics as a branch
8B
office, except that its activities tend to be limited to professional and
quasi-professional services.
Note that a natural person can establish a “consultancy office” to
89B
practice law, architecture, engineering, accounting or other
professional or consultancy activities, but that type of office is not a
“branch.”
3. Sponsorship/Secondment Arrangement
16B
Sponsorship/secondment arrangements are arrangements whereby a
90B
foreign party brings its staff into the U.A.E. under the umbrella of a
14 Baker & McKenzieDoing Business in the United Arab Emirates company or individual (whether foreign or local) that is already licensed in the U.A.E. for the activities that the non-licensed entity desires to carry out. This type of arrangement is not uncommon in the U.A.E. In some cases, the arrangement is a true secondment arrangement, involving the provision of staff to the local party to assist it in its operations. Under such an arrangement, the non-licensed entity would have to 91B limit its activities to those appearing in the license of the locally licensed party, since such entity would not have its own license or independent presence. Thus, the non-licensed entity would not be able to transact business in its own name or give the impression that it is doing business in the U.A.E. on its own. However, this would not preclude the use of brand names and trademarks associated with the non-licensed entity. Relationships whereby a locally licensed party uses brand names and trademarks associated with a non-licensed entity are fairly common, particularly in the context of franchising relationships. In such an arrangement, the non-licensed entity would not normally be 92B deemed to be doing business in the U.A.E. so long as all activities within the U.A.E. are carried out in the name of the locally licensed party. For example, staff residing in the U.A.E. must have employment contracts with, and visas sponsored by, the locally licensed entity. Office space, warehouses and other facilities must be rented or owned under the name of the locally licensed party. Vehicles used for carrying out the activities would be registered or rented in the name of the locally licensed party. Business cards, stationery and invoices should reflect the name of the locally licensed party. Many foreign parties use this type of structure, often where a distribution or an agency arrangement is the basis of the relationship between the foreign party and the locally licensed party. This type of arrangement is a viable alternative to a foreign party if 93B the activities it desires to carry out in the U.A.E. are of a short or temporary nature (such as for a specific project) or are merely to Baker & McKenzie 15
provide certain personnel to a company in which it has an ownership
interest (whether direct or indirect), but could prove disadvantageous
and restrictive to a foreign party desiring its/his own long-term
presence. Nonetheless, many foreign parties with essentially a long-
term presence use this type of structure, often where a distribution or
an agency arrangement is the basis of the relationship between the
foreign party and the local party.
Note that the U.A.E. recently enacted a law, scheduled to go into
94B
effect in November 2007, that would arguably restrict the use of
purely “sponsorship” arrangements in the U.A.E.
B. Establishing A Presence Inside A Free Zone
8B
The process of establishing a corporate entity/presence in the free
95B
zones of the U.A.E. presents different opportunities than those
available generally in the U.A.E. These opportunities are not uniform
across the economic free zones. However, since the Jebel Ali Free
Zone in Dubai is the oldest free zone in the U.A.E., and other free
zones in Dubai and the other Emirates have essentially copied its
structure and many of its procedures, the discussion below generally
will focus on the JAFZ and the structures that a foreign party can set
up therein. The following discussion is largely inapplicable to the
DIFC.
1. Corporate Structures
17B
There are four general ways for a foreign party to establish a presence
96B
in the JAFZ (all of which can be 100% foreign owned): (i) a branch,
(ii) a free zone establishment (an “FZE”), (iii) a free zone company
(an “FZCO”) or (iv) an offshore company (an “OFC”). At this time,
the OFC entity is available only in the JAFZ, but not in other free
zones in the U.A.E.
16 Baker & McKenzieDoing Business in the United Arab Emirates
Note that the Dubai Technology & Media Free Zone, one of the other
97B
free zones in Dubai, does not distinguish between an FZE and an
FZCO, but, rather, lumps them into one entity called a free zone
limited liability company.
a. Branch
37B
A branch can be formed by a corporate person, but not by a natural
98B
person. A branch is not a separate legal entity and, thus, the foreign
company forming the branch will be considered to be doing business
directly in the JAFZ.
b. FZE
38B
An FZE can be formed in the JAFZ pursuant to Dubai Law No. 9 of
9B
1992 Concerning the Formation of Establishments having Legal
Identity in the Free Zone at Jebel Ali. Unlike a branch, an FZE is an
entity separate from the party forming it (which can be a natural or
corporate person), and provides for limited liability. It must have at
all times only one shareholder and a minimum capital of U.A.E.
Dirhams 1,000,000 (approximately US$274,000).
c. FZCO
39B
An FZCO can be formed in the JAFZ pursuant to Dubai Implementing
10B
Regulation No. 1/99. Like an FZE, an FZCO is an entity separate
from parties forming it (which may be either natural or corporate
persons) and provides for limited liability. It must at all times have
between two and five shareholders and a minimum capital of U.A.E.
Dirhams 500,000 (approximately US$137,000).
Baker & McKenzie 17d. OFC
40B
An OFC can be formed pursuant to the JAFZ Authority Offshore
10B
Companies Regulations of 2003. Like an FZE and FZCO, an OFC is
an entity separate from the party or parties forming it (which may be
either natural or corporate persons) and provides for limited liability.
It may have one or more shareholders, and the regulations does not
specify a minimum capital for an OFC. As noted above, the OFC
structure is unique to the JAFZ and is not currently available in other
free zones in the U.A.E.
2. License/Registration
18B
To establish a presence and operate in the JAFZ, a license must be
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obtained from the JAFZ Authority, which currently issues three kinds
of licenses: (i) trading license, (ii) industrial license and (iii) service
license. The particular licensed activities of the JAFZ operations,
pursuant to the applicable license, would enable the branch, FZE or
FZCO to, among other things, enter into contracts in its own name,
issue invoices, receive payments and, as noted above, import products
into and export them out of the JAFZ. Generally speaking, an OFC is
not permitted to carry out any business inside the JAFZ or elsewhere
in the U.A.E.
The time frame for registering a branch, FZE, FZCO or OFC is
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roughly the same. It normally falls in the range of three to six weeks
once all the necessary documents have been filed with the JAFZ
Authority.
Foreign parties licensed in the JAFZ or any other free zone (under any
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of the foregoing structures) are not permitted to have a branch in the
U.A.E. outside such free zone unless they, with respect to such
branch, appoint a national/local services agent and comply with the
full Federal and Emirate licensing and registration and other
procedures applicable to foreign parties having operations in the
U.A.E. outside the free zone.
18 Baker & McKenzieDoing Business in the United Arab Emirates
3. Sponsorship/Secondment Arrangement
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A sponsorship/secondment arrangement along the same lines as that
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discussed above is also possible in the free zones.
III. Legal Issues in the DIFC
2B
Operating within a free zone in the U.A.E. requires knowledge of and
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adherence to multiple bodies of law. While free zones such as the
DIFC are free from the control of the federal laws of the U.A.E. in
certain respects, there are a number of areas, such as criminal law,
where the free zone has no legal distinction from the rest of the
country and other areas, such as labor law, where free zone laws often
exist in conjunction with, and sometimes subordinate to, the relevant
federal law. The following is a brief analysis of some vital legal
issues for operating a business in the DIFC.
A. Labor & Employment
9B
The responsibility for devising the employment laws for the DIFC
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belongs to the DIFCA. The DIFC has developed its own employment
law through the passage of DIFC Law No. 5 of 2005 (the “DIFC
Employment Law”). While, as with most laws in the DIFC, the
DIFCA is free to make rules and regulations regarding labor and
employment, and employers and employees enter into their contracts
based on these rules, employment in the DIFC must still comply with
the labor laws of the U.A.E.
The DIFC Employment Law has created an office of the Director of
108B
Employment Standards, an officer of the DIFCA who oversees the
administration of the DIFC Employment Law. In addition to
administering the DIFC Employment Law and directing employment
policy in the DIFC, the Director of Employment Standards may also
adjudicate disputes between employers and employees, though these
rulings may be appealed to the DIFC Courts.
Baker & McKenzie 191. Employment Contracts
20B
The DIFC Employment Law does not address the issue of contract
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forms which may be entered into at the commencement of an
employment relationship. However, U.A.E. law allows for two types
of contracts, fixed-term contracts and unlimited term contracts.
Fixed term contracts must have commencement and completion dates,
10B
and may not be made for a period in excess of four years. These
contracts will be terminated upon the completion of this period unless
they are renewed for a similar or lesser period by express or implied
mutual consent of the parties. Under U.A.E. law, any attempt to
terminate the contract by one party, other than for certain violations of
the employment laws of Dubai, will result in the terminating party
being required to compensate the other for the termination.
Unlimited term contracts can be created in a number of ways.
1B
Contracts will be deemed to be of an unlimited time if they (i) are an
oral contract, (ii) do not specify the period of the employment, (iii) are
the continuation of a fixed term employment contract without
agreement upon a renewal period, (iv) are task-based, rather than
period-based, employment contracts, or (v) are renewable and
continue after the work contemplated in the contract is completed.
Under U.A.E. law, unlimited term contracts may be terminated at any
time by mutual consent of the parties or by either party, provided that
the terminating party must give the other party at least thirty days
notice of the termination. An employee’s wages must be paid for the
severance period, or, if an employer fails to give the proper notice,
then thirty days’ wages must be paid to the employee in lieu of notice.
The conditions for terminating the contract without notice and the
consequences of improper termination are substantially similar to
those that apply to fixed term contracts.
The DIFC Employment Law does provide guidance for the
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termination of employment relationships in the DIFC, which varies
somewhat from U.A.E. law. The primary difference is in the notice
requirement. The notice period required to terminate a continuous
20 Baker & McKenzieDoing Business in the United Arab Emirates
employment relationship of less than three months is one week. If the
employment period has lasted at least three months but less than five
years, then not less than one month’s notice is required. If the
employment has been continuous for five years or more, then not less
than three months notice must be given. Termination with cause does
not require the provision of notice, and these notice requirements do
not take away the ability of the parties to mutually consent to
termination without notice, to contractually alter the notice periods, or
to waive or accept payment in lieu of notice. Additionally, following
the termination of any employee whose period of employment lasted
for more than one year, the employee may request, and the employer
must provide, a written notice of the reasons for the termination.
2. Wages and Hours
21B
The DIFC Employment Law does not provide any guidance regarding
13B
salaries or a minimum wage, though it does set certain guidelines to
employers for the payment of wages. Employees must be paid at least
monthly and within seven days of the end of any pay period;
employees must be paid all wages owed within seven days after
termination by either the employer or employee.
There is more guidance provided by the DIFC Employment Law on
14B
the subject of working hours. Unless an employer has obtained the
written consent of the employee, no employee may work more than an
average of forty-eight hours per week. In no circumstances may an
employer direct or allow an employee to work excessive hours that are
detrimental to the health or safety of the employee. All employees are
entitled to one twenty-four consecutive hour break during the course
of any seven day period and to eleven consecutive hours of break in
any twenty four hour period. Any employee who works more than six
hours in a day is entitled to one hour of break for rest and prayer
during the course of the day. During Ramadan, employees who
observe the fast shall not be required to work more than six hours in
any day.
Baker & McKenzie 213. Leave
2B
The DIFC Employment Law includes rules regarding holidays,
15B
vacation leave, sick leave, maternity leave, and special leave for the
Haj. Employees and employers may contract for different leave
terms. However, when an employee is entitled to leave both by law
and by contract, the employee may choose the more favorable terms
but may not make use of both entitlements.
Employees are entitled to paid leave for any national holidays, as
16B
declared by the U.A.E. If the employee and employer agree in
writing, paid holidays may be replaced with either another day of
leave or payment in lieu of the holiday leave.
Annually, employer’s shall give twenty working days leave to any
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employees who have been employed for at least three months.
Employers shall make sure that employees take an annual vacation
within twelve months of completing the year of employment entitling
them to that vacation. Vacation leave may be taken in periods of one
or more weeks. Vacation leave may not be abandoned for payment in
lieu of the vacation unless the employee is terminated or with the
consent of the employer. In an employee’s first year of employment,
vacation leave accrues monthly in one-twelfth portions of the twenty
days.
Employees are entitled to ninety days of sick leave each year. An
18B
employee may be immediately terminated with notice upon taking
more than the ninety allotted days of sick leave, unless the excess
leave is attributable to a medical condition which prevents the
employee from effectively performing their duties.
An employee shall be entitled to up to three months of maternity
19B
leave. This entitlement is dependant upon the employee (i) being
continuously employed by the employer for at least twelve months
prior to the eighth week before the expected childbirth, (ii) providing
the employer with written notice of her pregnancy at least eight weeks
prior to the expected childbirth; (iii) providing a medical practitioner’s
22 Baker & McKenzieDoing Business in the United Arab Emirates
certificate stating the expected or actual birth date, if the employer so
requires, and (iv) providing at least twenty-one days notice of her
proposed first day of leave. Maternity leave is also an entitlement of
female employees adopting a child, with the date of adoption
replacing childbirth in the requirements above. An employee on
maternity is entitled to full pay for the first forty-five days of leave
and fifty percent pay for the latter forty-five days of the leave, if
needed. No employer may terminate or change the position or
conditions of employment because an employee took maternity leave.
The DIFC Employment Law provides that all Muslim employees shall
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be entitled to a special leave of thirty days to perform the Haj
pilgrimage. This leave shall be without pay and an employee is only
entitled to this leave once during the course of employment with a
particular employer.
4. End of Service Gratuity
23B
The DIFC Employment Law provides that all employee’s who
12B
complete at least one year of continuous employment are entitled to an
end of service gratuity upon the termination of their employment.
Employees entitled to collect a gratuity shall receive twenty one days’
wages for each of the first five years of employment and thirty day’s
wages for each year of employment completed thereafter. When
employment terminates during the course of a year, the gratuity shall
be proportioned according to the time actually worked. An employee
terminated for cause shall not be entitled to receive an end of service
gratuity. Where applicable, an employee can be required to choose,
prior to commencing employment, between an employer-offered
pension plan and an end of service gratuity.
5. Safety Regulations / Employers’ Duties
24B
Employers in the DIFC are generally responsible, as is reasonably
12B
practicable, for the health, safety and welfare of its employees while
they are at work. This includes providing a workspace that is free
from various dangers, including harassment and physical safety risks.
Employers are responsible for providing safety measures to minimize
Baker & McKenzie 23whatever risks exist and to ensure that employees are able to
understand the dangers as well as the safety measures in place. This
duty includes whatever language training is necessary to make
employees aware of various health and safety issues. In addition,
there are particular requirements for employers to manage various
workplace health and safety issues, including proper ventilation,
lighting, and cleanliness.
6. Dispute Resolution
25B
The Director of Employment Standards may investigate potential
123B
violations of the DIFC employment law either at the request of an
employee or at its own discretion. An employee may not be punished
for submitting a complaint unless the Director of Employment
Standards determines that the complaint was made in bad faith and
that the employer was harmed by the complaint. The Director of
Employment Standards shall have the power to perform
investigations, including the powers to search relevant business
premises during business hours or to compel production of relevant
materials. The Director of Employment Standards may either levy
monetary fines or may assist the parties in settling the dispute. At all
times during an investigation, parties are entitled to be represented by
lawyers. Decisions made by the Director of Employment Standards
may be appealed to the DIFC Courts, where they will be heard by a
court of first instance.
B. Immigration
10B
The DIFC does not have its own set of immigration laws, and foreign
124B
nationals wishing to work in the DIFC are subject to the laws of the
U.A.E. In order for foreign nationals to become eligible to work in
the U.A.E., they must obtain both work and residence permits.
Residence permits, issued by the Department of Immigration, can only
be obtained after a work permit has been issued to the foreign
national, but are required for many common tasks, such as opening
bank accounts, owning a car, or renting a residence. Residence
permits require a medical examination, and the potential employee
24 Baker & McKenzieDoing Business in the United Arab Emirates
must receive a residence permit prior to being able to apply for
residence permits for their family. However, before residence permits
can be obtained, a work permit must first be issued by the Department
of Labor.
Work permits in the U.A.E., valid for three year periods, must be
125B
completed by the foreign national’s prospective employer, and in the
case of employees wishing to work in the DIFC, should be completed
in conjunction with the DIFC. In the DIFC, the DIFCA provides
sponsorship and visa services to all DIFC entities, their employees and
the employees’ families. Therefore, the DIFC is responsible for
sponsoring all prospective foreign national employees, and the
prospective employers must sign Visa Sponsorship Agreements with
the DIFC in order to gain the necessary work permits. While the
DIFCA is responsible for the visa service and the sponsorship process,
the employers remain liable to the DIFCA for any costs and liabilities
related to the process.
C. Commercial and Regulatory Matters
1B
1. DIFCA Commercial Law
26B
The DIFCA is responsible for the creation and administration of most
126B
of the commercial laws and regulations affecting businesses that
reside or operate within the DIFC. These include the previously
discussed laws regarding company formation, labor and employment,
and taxation. The lawmaking authority of the DIFCA extends across a
broad spectrum of legal issues.
a. Contract Law
41B
DIFC Law No. 6, enacted in 2004, governs contractual relationships.
127B
This law creates a simple legal framework for the DIFC which
promotes a general freedom to contract. The law covers the formation
of contracts without formalities along with the validity and content of
those contracts. In addition to contract formation issues, the law also
governs post-formation and contract dispute issues, such as providing
Baker & McKenzie 25guidance on the interpretation of contracts and setting rules of
performance. For situations in which contracts are breached, the law
provides the consequences and redress for such non-performance, and
also provides guidance as to the measure of damages. The contract
law of the DIFC is not limited to governing the actions of the
contracting parties, but also provides the rules relating to the
assignment of contracts, third parties to contracts, and agency
relationships.
The DIFCA has enacted other laws which apply to the governance of
128B
contractual relationships, such as the law on Implied Terms in Contact
and Unfair Terms and a Law of Damages and Remedies.
b. Insolvency
42B
The DIFCA is also responsible for the creation and administration of
129B
the DIFC’s insolvency law, enacted in DIFC Law No. 7 of 2004. The
law covers various aspects of the winding up and liquidation of a
company’s assets, and is designed to protect the assets of a company
in insolvency and the creditors of such companies. The law governs
the arrangements for the insolvency, the rights and responsibilities of
receivers of the assets in insolvency, and the winding up of the
company’s business. The law includes special provisions for various
types of businesses, including limited liability partnerships,
recognized companies, foreign companies, and other types of
companies.
c. Property
43B
Personal and real property laws have also been enacted by the DIFCA.
130B
The personal property law of the DIFC, DIFC Law No. 9 of 2005,
governs the rules for the transfer of property and the rights of parties
in that property. In particular, the DIFC’s law focuses on transfers of
and property rights in investment property. The DIFC’s real property
law, enacted under DIFC Law No. 4 of 2007, was created to ensure
title and to facilitate dealings in real property located in the DIFC. In
addition to providing the rules for the ownership, lease, and transfer of
26 Baker & McKenzieDoing Business in the United Arab Emirates
real property, the law also creates a Registrar of Real Property,
responsible for the administration of real estate law in the DIFC.
d. Security
4B
DIFC Law No. 8 of 2005 provides guidance on the use of secured
13B
transactions in the DIFC. Any transactions which include the use of
real or personal property as security, as well as the sales of any
receivables or promissory notes, are governed by this law. The law
covers concepts such as the attachment and perfection of property as
security, default, registration and priority, third party rights, and
collections of collateral. The law also created a Securities Registrar
who is responsible for drafting rules and regulations regarding the
securities laws.
e. Governing Law
45B
Two DIFC laws, enacted by the DIFCA, have been enacted to guide
132B
the application of the proper governing law in certain situations. The
first is the Law on the Application of Civil and Commercial Laws.
This law determines the proper governing law in any civil or
commercial matters arising out of the DIFC. If there is a DIFC law
applicable to the subject matter in dispute, it will be applied.
Otherwise, there is a progression of methods for choosing the
governing law of the proper jurisdiction, including by mutual consent
of all parties involved and, if all else fails, the laws of England and
Wales.
The Law Relating to the Application of DIFC Laws, as amended and
13B
restated by DIFC Law No. 10 of 2005, determines the proper law to
apply to contracts. This law allows the parties to a contract to choose
the governing law for their contractual relationship. The law also
allows parties to submit to jurisdiction or arbitration in a chosen
jurisdiction outside of the DIFC.
f. Arbitration
46B
Arbitration in the DIFC is governed by DIFC Law No. 1 of 2008.
134B
Governing all aspects of an arbitration, including the arbitration
Baker & McKenzie 27agreement, the panel, the conduct of the arbitration, and awards, the
law conforms with accepted international standards and is modeled
after the example of the United Nations Commission on International
Trade Law. The law also provides that the DIFC shall recognize and
enforce, with limited exceptions, arbitral awards handed down in other
jurisdictions.
In February of 2008, the DIFC and the London College of
135B
International Arbitration (the “LCIA”) founded the DIFC/LCIA
Arbitration Centre, which led to the 2008 revisions to the arbitration
laws of the DIFC. This development increases access to and the
appeal of the DIFC as a venue for international arbitration, not only to
parties operating in the DIFC.
2. DFSA Financial Laws and Regulations
27B
The DFSA is responsible for legislation and rules relating to the
136B
financial services industry of the DIFC. The most important of these
is DIFC Law No. 1 of 2004, the Regulatory Law. This is the law
which establishes and defines the framework of financial services
regulation within the DIFC. It enumerates the areas which shall be
regulated by the DFSA, and it provides the DFSA with much of its
authority and responsibility. This law defines the rulemaking and
enforcement powers of the DFSA, providing guidance not only
regarding the extent of its authority but also the purpose and aim of
the DFSA in its role as a regulator.
One important role of the DFSA covered in the Regulatory Law is the
137B
prevention of money-laundering. This law, and the subsequent
regulation and oversight of the DFSA, establish the rules and
regulations which govern all providers of financial and ancillary
services in the DIFC.
The DFSA also governs market activities in the DIFC through the
138B
Markets Law, DIFC Law No. 12 of 2004. This law governs the
DIFC’s Authorized Market Institutions, including their own activities
and the trading activities taking place on their facilities. The law also
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