A Guide to Doing Business in the United Arab Emirates
IV. Structures for Doing Business
This section specifically focuses on the types of companies in which foreign equity participation is permitted under Federal Law No. 8 of 1984 concerning Commercial Companies, as amended (the "Companies Law"), and compares and contrasts the material provisions applicable to such companies.
A branch established by a foreign entity under the Companies Law is not considered a separate company but rather a part of the foreign entity. Thus, the foreign entity is considered to be directly doing business in the U.A.E. and has unlimited liability for the operations of the branch.
The Companies Law recognizes seven types of companies for formation under its provisions and permits foreign equity participation in all but one (the general partnership). The companies in which foreign equity participation is permitted are as follows: the public and private joint stock company (the "JSC", which references hereafter is both the public and private variety unless otherwise indicated), the limited liability company (the "LLC"), the limited partnership company (the "LPC"), the share partnership company (the "SPC") and the joint venture company (also known as a contractual venture or consortium company) (the "CC"). Of these, the LLC has been the vehicle of choice for foreign companies forming companies under the Companies Law.
Such company forms will be familiar to civil law lawyers, since the Companies Law is based on the Egyptian companies law of a few decades ago, which in turn was based on the French companies law in the earlier part of the 20th century. Despite the unfamiliar nomenclature to common law lawyers, the JSC, the LLC, the LPC, the SPC and the CC are not dissimilar to, for example, corporations, limited liability companies and partnerships that can be formed under American law. The JSC is essentially the equivalent of a corporation. The LLC is essentially the same as the limited liability company under American law, and is a cross between a general partnership and a limited partnership since all of the partners can participate in its management and yet still have limited liability. The LPC is essentially a limited partnership. The SPC is a cross between a corporation and limited partnership since it can issue transferable stocks and bonds and has general partners with limited liability who can lose their limited liability if they participate in the management of the SPC in excess of what is permitted by the Companies Law. The CC is like a general partnership for a limited purpose, and liability of the partners becomes similar to that in a general partnership if the existence of the CC becomes known to third parties.
Some restrictions applicable to these companies include that their principal offices must be in the U.A.E., they must have at least two shareholders/partners at all times and U.A.E. nationals must generally own at least 51% of their equity. The effect of such restrictions is to, among other things, limit the transferability of interests and prevent the formation of holding company structures under the Companies Law consisting of wholly owned subsidiaries.
The JSC, the LLC, the LPC and the SPC are distinct legal entities. They can enter into contracts in their own names, hold title to assets, sue and be sued, etc.
The CC is not recognized as a distinct legal entity. It is merely a contractual relationship between two or more partners, with its business being conducted under the name of one of the partners. The Companies Law provides no clear guidance on the extent, if any, to which the CC may contract with third parties, hold assets, etc. The CC can be deemed a "de facto" company if its existence becomes known to third parties, at least for the purpose of liability of the partners.
The Companies Law does not limit the lawful activities in which the JSC, the SPC, the LPC and the CC may engage. However, it provides that the LLC may conduct/engage in any lawful activity except insurance, banking and investment of money for others.
Each of the JSC, the LLC, the LPC and the SPC must be registered and licensed with the Federal Ministry of Economy (the "MOE") and with the appropriate authority in the Emirate in which its office will be located.
The CC does not need to be registered or licensed, but at least one of the partners therein must be licensed in the U.A.E.
The government generally does not seek to participate in the ownership or operation of companies except in industries or activities considered to be in the national interest such as certain aspects of telecommunications and petroleum.
Foreign companies are permitted to establish wholly owned branches in the U.A.E. Branches generally are not permitted either to import goods for resale in the U.A.E. or to perform manufacturing or other activities which are reserved for U.A.E. citizens or locally-incorporated companies. Many foreign companies have established representative offices. These offices are branches which do not perform commercial activities, but which serve as regional administrative centers and/or provide marketing or other support.
A branch license permits the holder to open and operate bank accounts, to lease office and residential premises, to sponsor residence visas and labor permits for expatriate employees and (if it is a branch office or consultancy office) to take other actions within the scope of the licensed objectives.
Establishing a branch generally entails, among other things, appointing a U.A.E. national or a company wholly owned by U.A.E. nationals to act as its sponsor. A sponsor has no equity or management interest in the branch and does not bear any of its liabilities. The sponsor's compensation is an annual fee stipulated in the sponsorship agreement.
As previously mentioned, the preferred vehicle for foreign equity investments in the U.A.E. is the LLC due to (among other factors) the LLC's flexible management structure, the availability of minority shareholder protections and the ease of formation. Although LLC's are subject to the Companies Law, the MOE does not have a substantive role in the licensing of LLCs as such licensing is primarily handled at the local Emirate level.
The JSC is not a popular vehicle among foreign investors due to, among other things:
- a high minimum capital investment;
- a lack of protection for minority shareholder interests; and
- the relative inflexibility and high degree of regulation associated with the corporate structure.
However, for a variety of reasons, Emirate governments have been encouraging the formation of JSCs in certain high-profile projects. This is particularly apparent in the Emirate of Abu Dhabi, where shareholding companies have been used for major infrastructure projects. The MOE has a major role in the licensing of the JSC. Local authorities and other Federal authorities also have a role in the licensing process, depending on the nature of the activity (e.g., banks and financial institutions require approval from the Central Bank, etc.).
c. Free Zone Operations
There are various free zones in the U.A.E., the most prominent of which are Jebel Ali Free Zone, Dubai Airport Free Zone, Dubai Technology and Media Free Zone (which includes Dubai Internet City and Dubai Media City), Dubai Multi Commodities Centre Free Zone (which includes Jumeirah Lakes Towers) and Dubai International Financial Centre Free Zone (the "DIFC", see below) in the Emirate of Dubai. Other major free zones include twofour54 in the Emirate of Abu Dhabi, Ras Al Khaimah Free Trade Zone and Ras Al Khaimah Investment Authority in the Emirate of Ras Al Khaimah and Hamriyah Free Zone and Sharjah Airport International Free Zone in the Emirate of Sharjah.
Foreign companies are permitted to establish wholly owned branches in each of these free zones, and such branches are exempt from the requirement to appoint a local sponsor. Legislation in each of the free zones also permits the incorporation of corporate entities which exist and operate outside the purview of the Companies Law and which do not require the involvement of a U.A.E. national shareholder. The establishment of a free zone branch or a corporate entity is handled by the relevant free zone authority.
Additional benefits of free zones include the exemption from customs duties for goods imported into a free zone.
The DIFC is a relatively new financial free zone in the Emirate of Dubai which is exempt from U.A.E. Federal and Emirate civil and commercial laws. The DIFC has established its own laws, regarding among other things, company structures, contracts, data protection, employment, real property, the provision of financial services, the offering of securities and insolvency. The DIFC also has its own financial services regulator, the Dubai Financial Services Authority, as well as its own court system, the DIFC Courts. The DIFC has also partnered with the London Court of International Arbitration to establish the DIFC-LCIA Arbitration Centre.
Many foreign companies offer their goods and services to consumers in the U.A.E. through local agents and distributors. Federal Law No. 18 of 1981 Concerning Commercial Agencies, as amended (the "Commercial Agencies Law"), governs the relationship between foreign principals and local agents and distributors. It offers significant protections to the local party if the agency/distributorship is registered with the MOE. In order to register the agency/distributorship, the agent/distributor must be a U.A.E. national or a company wholly-owned by U.A.E. nationals. Although there are a number of disadvantages to registration of an agency/distributorship from the foreign party's perspective, certain governmental departments may insist on dealing only with registered agents/distributors.
Franchising is an increasingly popular business structure in the U.A.E. Many major fast-food chains have entered the U.A.E. market through franchise relationships. In addition, a number of internationally known retailers have adopted the franchise model for their U.A.E. outlets. Some U.A.E. authorities have taken the position that the Commercial Agencies Law applies to franchise relationships.