United Arab Emirates (UAE) was created on 2nd December 1971. It is a Federal Sovereign State comprising of seven Emirates viz. Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah, Ajman and Fujairah. Each Emirate is headed by a Sheikh (Ruler). The seven Rulers constitute the Federal Supreme Council which is the highest federal political authority and governing body in the country

The Federal Supreme Council elects the President and the Vice-President of the UAE from the members of the Supreme Council. The current President is HH Sheikh Khalifa Bin Zayed Al Nahyan who is also the Ruler of Abu Dhabi. The current Vice-President and Prime Minister of the UAE is HH Sheikh Mohammad Bin Rashid Al Maktoum who is also the Ruler of Dubai. Policy decisions of the Federal Supreme Council are implemented by the Federal Council of Ministers sometimes referred to as the Cabinet or Executive Authority.

The Supreme Council is primarily responsible for policy decisions pertaining to federal matters which include foreign affairs, defence & security, communication including postal and telecommunication, public health, currency, education, nationality & immigration, labour and social security and other enumerated matters. Federal matters are regulated through federal ministries (such as Ministry of Labour, Ministry of Defence, Ministry of Interior, Ministry of Finance & Industry, Ministry of Economy etc).

Under the Constitution, each Emirate Ruler is independent for its affairs except for matters which are specifically reserved to the Federal Government by the Constitution or by Federal legislation.

For carrying business, each Emirate is separate and licence is required for business to be carried in each Emirate. Even in case of federal law such as Commercial Companies Law, implementation is at the Emirate level by issue of licence by the competent authority in each Emirate.

SOURCES OF LAW

The legal system of the UAE is both constitutional and based on Islamic and civil code principles. The applicable sources of law in the UAE are the Constitution itself, federal and local Emirate laws and regulations, Islamic Shariah, and the prevailing customs and practice.

DOING BUSINESS IN UAE-GENERAL OVERVIEW

Business can be done in UAE either within the various Free Zones in UAE or outside the Free Zone. Within Free Zones, 100% foreign ownership is possible whereas in non-Free Zone areas, 51% local ownership is mandatory. Any movement of goods from the Free Zone into non-Free Zone area is deemed to be imports into UAE and subject to customs duty. It is also possible to set up an offshore company in Dubai as a holding company vehicle.

Imports into Free Zone are not subject to customs duty. General rate of customs duty is 5% (100% for tobacco and 50% for liquors) with some exemptions for specified products including food and medicines. Presently, excepting foreign bank branches and oil companies, there is no corporate income tax in UAE. Further, there is no personal income tax in UAE.

Non free zone area-overview

In non-Free Zone area, various forms of businesses are as under
- Sole proprietorship
- Commercial Agencies
- Entities under Commercial Companies Laws (Federal Law of 8 of 1984)
   * General partnerships
   * Limited partnerships
   * Joint participation company
   * Partnership limited with shares
   * Public joint stock company
   * Private joint stock company
   * Limited liability company
   * Branch of a foreign company

Discussion, for the purpose of this presentation, will be restricted to Dubai. Department of Economic Development (“DED”) is the competent authority to receive applications and process licensing documents I non-free zone area in Dubai. Other Emirates will have similar competent authorities.

Free zone area-overview

Business can be established in a Free Zone with 100% foreign ownership. Following forms of business are possible

- Branch of a foreign company or an existing UAE based legal entity
- Free Zone Establishment (“FZE”) in which the sole shareholder is an individual or corporate
- Free Zone Company (“FZC”) in which there are two or more shareholders who could be   individuals or corporate

We now examine the above structures in detail including applicability of such structures for foreign investment

Dubai offshore company-overview

This is a limited liability company similar to an entity which can be incorporated in any other offshore jurisdiction. Such an offshore company can be used as a holding company vehicle, and for owning properties in designated areas in Dubai where such foreign ownership of properties is permitted. Similar to other offshore jurisdictions, Dubai offshore company cannot do business with residents with UAE.

SETTING UP OF NON - FREE ZONE ENTITIES

Sole proprietorship

This entity is 100% registered in the name of an individual (also called Establishment). This is generally restricted to UAE Nationals and other GCC Nationals (i.e. nationals of Saudi Arabia, Sultanate of Oman, Bahrain, Kuwait and Qatar). The sole proprietor has unlimited liability for his business.

Sometimes foreigners carry on the business under power of attorney from the UAE National. However, this is not a recommend legal structure since there is no security of ownership to the foreigner and also the UAE National owner has unlimited liability.

Some professional activities are permitted to be carried on by foreigners as sole proprietorship (such as medicine, engineering, legal consultants and computer consultants and management consultants) subject to fulfilment of professional qualifications. However, in such cases, local service agent (UAE National) who acts as a sponsor is also required to be appointed.

Commercial agencies

Foreign company not wising to have physical presence can appoint an agent or distributor registered with Ministry of Economy under Commercial Agency Law No 18 of 1981. For an agency to be registered following principal conditions are required to be fulfilled

- Agent must be a UAE National or a company owned 100% by UAE Nationals.
- Agent must have exclusivity for UAE or each Emirate
- Agency agreement must be notarized and legalized by UAE Embassy
- Agency agreement must be subject to UAE laws

Above registration gives protection to the Agent against improper termination, and the principal against illegal imports. However, registration of Agency may also make it difficult for principals to terminate the Agreement.

It is also possible for principal to carry on trade with UAE importers without registering the Agency under the above law. Such unregistered agencies are governed by general law under the Commercial Code, and are not subject to protection of Agency law.

General partnership

This consists of two or more partners who are jointly and severally liable with respect to all their assets for the obligations of the company. This type of entity is restricted to UAE Nationals. Hence, this entity is not relevant to foreigners

Limited partnership

This consists of one or more general partners who are jointly and severally liable with respect to all their assets for the obligations of the company, and one or more silent partners who are liable for the obligations of the company to the extent of their share in the capital. However, all general partners must be UAE Nationals. Hence, this type of entity is not relevant to foreigners.

An offshore company's accounting records shall be kept at such place as the directors think fit and shall at all times be open to inspection by the offshore company's directors and the secretary.

Joint participation company

This is a company between two or more partners to divide the profit and losses of one or more commercial enterprises undertaken by one of the partners in his own name. The contract is not expected to be disclosed to third parties dealing wit the venture. Third parties only have recourse against the partner with whom they have dealt with but if the existence of the joint venture is disclosed to third parties by act of the partners, the partners jointly become liable to third parties. Decisions of the joint venture have to be made by consent of the all the partners unless otherwise provided in the agreement. Joint venture agreement regulates the obligations between the parties and the method of profit distribution and this contract is not subject to registration.

This type of entity is used for specific contracts and projects where the foreigner expects to do business for a defined or short period of time within existing licensed entity, and no separate registration required.

Partnership limited with shares

This is similar to limited partnership but with negotiable shares

This consists of one or more general partners who are jointly and severally liable with respect to all their assets for the obligations of the company, and one or more shareholding partners who are liable for the obligations of the company to the extent of their shares in the capital. Capital of the company is divided into negotiable shares. However, all general partners must be UAE Nationals. Hence, this type of entity is not relevant to foreigners.

Public joint stock company (PJSC)

This is an entity with capital divided into equal negotiable shares, and the shareholder is liable only to the extent of his share in the capital. This is similar to a public listed company as known in common law countries. Minimum capital required to form a PJSC is AED 10 million (AED 40 million for banking company and AED 25 million for investment companies, and AED 50 million for insurance companies). A PJSC must have 10 founder members (this may be relaxed by the government in case of government owned companies or other cases), management vested in a Board of Directors with Chairman and majority directors being UAE Nationals and 51% shares must be held by UAE Nationals. Founder members must hold at least 20% of the capital but not more than 45% of the capital. At least 55% is required to be offered to the public.

Various regulatory requirements have to be complied with for forming a PJSC including the preparation of founder’s agreement, founders committee, and a prospectus for public issue of shares supported by business plan and feasibility studies, auditors certificate, due diligence survey, memorandum and articles of association in approved format, and other compliance requirements.

Considering the various restrictive rules, a PJSC is inappropriate for foreigners.

Private joint stock company

This is similar to Public joint stock company except that there is no invitation to public for share subscription. Minimum capital required is AED 2 million and minimum number of shareholders is 3. Chairman and majority of directors have to be UAE Nationals. All provisions applicable to public joint stock company are applicable to this entity, except the provisions pertaining to public subscription.

Considering the restrictive rules, a private joint stock company is inappropriate for foreigners.

Limited liability company (“LLC”)

LLC is closest to the concept to private limited company as understood in common law and is widely used by foreigners to conduct business in UAE. Hence we will examine this in detail.

Important features of LLC are as follows:
* LLC shall not engage in the business of insurance, banking, investment of money on behalf of other parties;
* Minimum of two Partners; maximum 50;
* Minimum capital required in Dubai, AED 300,000 - each share of AED 1,000; (although minimum capital stipulated as per law is AED 150,000);
* 51% shares to be held by UAE Nationals, at all times;
* Each Partner's liability is limited to nominal value of capital;
* Capital must be fully paid up on establishment. Capital must be deposited in a bank account and the amount can only be withdrawn after the LLC has been entered in the Commercial Register. Capital can be subscribed to in kind. There is no issue of share certificates;
* Profit/loss to be distributed equally among the partners unless the Memorandum of Association specifies otherwise. Any provision for excluding a partner from profit or exempting him from loss shall be void;
* LLC shall not offer its shares for public subscription;
* Transfer of shares shall be restricted and existing partners shall have the first right of refusal. Transfer of shares must be notarised before notary public;
* Management may be entrusted to one or more Managers (equivalent to Directors), selected from amongst partners or outside party (number not to exceed five);
* If the number of partners exceeds seven, a Supervisory Board is to be formed;
* Directors shall be responsible for preparing annual accounts and get them audited within three months from the end of the financial year and hold the Annual General Meeting within four months from the end of the financial year;
* Notice of Annual General Meeting to be sent by registered post (21 days before Annual General Meeting);
* Partners may attend the Annual General Meeting personally or through a proxy
* Register of Partners, Minutes of Directors and Partners have to be maintained;
* A resolution shall be null and void if it violates the Companies Law, or the Memorandum of Association of the company, or is passed for the benefit of some of the partners, or to the detriment of other partners without regard to the interests of the company. A claim for nullification shall not be heard after one year has elapsed from the date of resolution and submission of the claims shall not result in the suspension of the implementation of the resolution unless the Court orders otherwise;
* 10% of the net profit shall be transferred to a legal reserve (until such reserve is equal to 50% of the paid up capital) which is not available for distribution.

Where UAE National has not invested any capital, foreign partner brings in full capital and LLC is usually formed with minimum capital wherein 51% shares are held in UAE National’s name. Additional capital is brought in by the foreign partner by way of loan capital. As regards 51% shares held by UAE National, a written understanding is signed with him whereby the rights and benefits relating to 51% shares can be assigned to the foreign partner if such capital is contributed by the foreign partner.

With a small capital, banks do not give credit facilities unless the foreign partner gives personal guarantee and/or provides other collateral such as fixed deposits/mortgage of assets. In case of loan capital, banks usually impose a condition of subordination of loan amount in favour of bank and/or non-withdrawal of loan capital.

Under the Companies Law, profit/loss distribution ratio can be different from the capital contribution ratio.

Formation procedures for LLC

Following procedures to be followed in Dubai for LLC formation
* Signing prescribed application form by partners and obtaining approval of trade name, activities and partners from The Department of Economic Development, Government of Dubai.
* Signing of’ the Memorandum of Association for forming a LLC, before Notary Public.
* Following documents should be delivered to DED
- Prescribed application approving trade name, activities and partners approved from The Department of Economic Development;
- Notarised Memorandum of Association in original and copy;
- A certificate from the Bank for the total amount deposited by each partner, with the undertaking from the bank not to make payment of the amount except to the Company's Director/s after producing a proof of entry in the Commercial Register;
- Certificate from Director/s that the shares have been fully paid up and allotted to the partners;
- Certificate from Auditors regarding Capital Contribution by partners and a Certificate confirming appointment as Auditors;
- Passport copies of all partners;
- Tenancy contract for the premises;
If the partner is a foreign body corporate, following documents duly notarised at the place of incorporation and legalised by UAE Embassy, attested by UAE Foreign Ministry, and Arabic translation authenticated before Ministry of Justice have to be submitted :
* Resolution of the Board of Directors, specifying the Representative and his powers;
* Power of Attorney in favour of the Representative;
* Memorandum & Articles of Association of the foreign body corporate; &
* Certificate of Incorporation.

DED will check the application and above documents and enter in the Commercial Register and furnish the Ministry of Economy and Commerce, with a copy of the Memorandum of Association and other enclosures, along with a copy of entry application indicating that the entry has been effected, giving the date thereof and a copy of the certificate of entry in the Commercial Register. The Ministry shall arrange for publishing the details of LLC in the Companies Bulletin after payment of fees.

Once the requisite fees are paid, DED will issue the following
- Commercial registration
- Trade licence
- Extract of partners

The Company can also submit an application for becoming a member of Dubai Chamber of Commerce & Industry

LLC cannot commence its activities except after its name is entered in the Commercial Register and after having obtained trade licence from DED.

On issue of trade licence, bank can release the capital deposited to the Director/s. LLC cannot set up branches in other Emirates except after complying with the trade licence rules of the concerned Emirate.

LLC has to renew its commercial registration and trade licence every year.

Special approvals for certain activities

Although DED is the competent authority for issue of licence, for certain activities special or initial approvals are required from other authorities such as

Branch of a foreign company

A branch of foreign company can be established for carrying the activities of the parent company. Branch does not have a separate legal entity of its own but is considered a part of the parent company. Generally, this will be in the form of promotional activities of the parent company or carrying out non-trading service activities of the parent company. In general, trading activities (import/export of goods) are not permitted to be carried by the branch

It is mandatory for this type of entity to appoint a local service agent (sponsor) who is not financially liable or responsible for the business or activities of the branch. However, he is responsible for rendering sponsorship services against an agreed amount of fees for services such as visas, labour permits, registration of the branch, renewal of licenses and other agreed services. Ownership and financial liability is with the parent company

Branch has to apply and register with the Ministry of Economy, the Foreign Companies Register and DED. Foreign company’s documents have to be notarised, attested and legalised by UAE Embassy and translated into Arabic (similar to corporate partner in a limited liability company-see above). In addition a service agent agreement with UAE National has to be notarised, and 2 years annual accounts have to be submitted for documents to be processed. In general, the branch can carry out limited activities, and the procedures are long drawn out.

SETTING UP OF FREE ZONE ENTITIES

Companies established in the free zones are not subject to Commercial Companies Law. They are deemed to be outside of UAE, and are subject to Free Zone regulations under which such free zone is formed. In the absence of specific regulations under the Free Zone laws, other UAE laws will apply to the free zone entities to the extent these are not in conflict with Free Zone regulations. There are several free zones in different Emirates, with Dubai being a pioneer in the development of multiple free zones with emphasis on niche areas

Dubai

Jebel Ali Free Zone (www.jafza.co.ae )
Dubai Airport Free Zone (www.dafza.gov.ae)
Dubai Internet City (www.dic.ae)
Dubai Media City (www.dubaimediacity.com)
Knowledge Village (www.kv.ae)
Dubai International Financial Centre (www.difc.ae)
Dubai Multi Commodities Centre (www.dmcc.ae)
Gold and Diamond Park (www.goldandiamondpark.com)
Dubai Maritime City (www.dubaimaritimecity.ae)
Dubai Silicon Oasis (www.dso.ae)
Dubai Outsource Zone (www.dubaioutsourcezone.com)
Dubai Cars & Automotive Zone (www.ducamz.ae)
Dubai Autoparts City (www.aafz.ae)
Heavy Equipment & trucks Free Zone (www.aafz.ae)
Dubai Textile City (www.aafz.ae)
Dubai Industrial City (www.dubaiindustrialcity.ae)
Dubai Flower Centre (www.dubaiflowercentre.com)
Dubai Logistics Cit (www.dubailogisticscity.net)
International Media Production Zone (www.impz.ae)
Dubai Studio City (www.dubaistudiocity.com)
Dubai Biotechnology & Research Park (www.dubiotech.com)
Dubai Healthcare City (www.dhcc.ae)
Dubai Techno Park (www.tp.ae)
Dubai Humanitarian City (www.dhc.ae)
Dubai Aid City (www.dubaiaidcity.ae)

Sharjah

Sharjah Airport International Free Zone (www.saif-zone.com)
Hamriyah Free Zone (www.hamriyahfz.com)

Ajman

Ajman Free Zone (www.ajmanfreezone.gov.ae)

Ras Al Khaimah

Ras Al Khaimah Free Zone (www.rakftz.com)

Fujairah

Fujairah Free Zone (www.fujairahfreezone.com)

Umm Al Quwain

Ahmed Bin Rashid Free Zone (e-mail-abrpaftz@emirates.net.ae)

Websites give details of the procedures, cost of operation, facilities & incentives available and other useful information.

Free zones are formed with a view to attract foreign investment. Principal benefits of the free zone are

- 100% foreign ownership (i.e. no local partner or sponsor)
- guaranteed income tax exemption for specified number of years (15 years or 50 years) with option to renew the tax exemption
- duty free imports of goods into the free zone
- single window clearance for facilities including licensing, work permits and residence visa.

Free zone entities are not allowed to trade directly within UAE, but may trade with entities within the free zone or outside UAE. Free zone entities may buy from UAE. Free zone entity can make a sale through a distributor or agent for whom purchase from the free zone entity will constitute import into UAE and custom duty will be leviable.

As mentioned in the introduction, foreigners can operate either as a branch in free zone (of an existing parent company overseas) or form a FZE (with a single shareholder) or form a FZC (with 2 or more shareholders)

Minimum capital varies from free zone to free zone. In Jebel Ali free Zone and Dubai Airport Free Zone, capital is AED one million for FZE and AED 500,000 for FZC. In Saif Zone, capital is AED 150,000 for FZE and FZC. In Ras AL Khaimah Free Zone, capital is AED 100,000 for FZE and FZC (US$1=AED 3.673)

Given below is the procedure for Jebel Ali Free Zone (General procedure for establishing business in the free zone is similar across different free zones with minor variation).

- an application has to be made to the free zone with project details.
- once this is approved by the free zone, necessary legal documents have to be submitted to the free zone
- when the documents are approved, capital has to be deposited in a bank (in case of FZE or FZC. Such capital deposit is not required for branch of a foreign company)
- when the proof of capital is give to the free zone, registration of FZE or FZC is completed on payment of prescribed fees
- appropriate licence is issued on payment of the licence fees and the rental of the premises.
- entity can commence business

Following type of licences are issued by the free zones

- Trading licence for import export sale or distribution of products mentioned in the licence
- Industrial licence for importation of raw materials and manufacture of goods mentioned in the licence and export thereof.
- Service licence for business activity which involves provision of services mentioned in the licence. I certain free zone, such as Jebel Ali Free Zone, service licences are easily issued.
- National industrial licence issued for entities established in the free zone or outside the free zone. This allows import of raw materials duty free and duty free export of goods to GCC countries. The entity must be owned 51% by a GCC national with 40% value addition. This must be certified by the Ministry of Industry and the GCC Secretariat. For free zone entities, such exemption is presently difficult to obtain.

SETTING UP OF DUBAI OFFSHORE COMPANY

An offshore company can be set up in Dubai within Jebel Ali Free Zone (Jafza) under Jafza Offshore Companies Regulations, 2003.

An offshore company must be registered through approved Registered Agent. The office address of the Registered Agent is the registered office of the Company.

Minimum number of shareholder required- one (1). Minimum number of Directors-2 (two). Secretary required-1(one). Director can also be a Secretary. Directors or Secretary must be natural persons. No minimum capital is prescribed.

All shares must be fully paid when allotted. A company may not create different classes of shares. Bearer shares cannot be issued. Presently, joint shareholding is not allowed.

Shareholders need to visit Jafza and sign the incorporation documents in the presence of Jafza-alternatively a power of attorney, notarized and legalized by UAE Embassy, can be issued to a nominated person who can then sign before Jafza.

In case of individual shareholders, following documents are required
- Detailed CV
- Original bank reference
- Clear passport copy of shareholders/directors
- Proof of address of shareholders/directors

In case of corporate shareholder, following documents, notarized and legalized by UAE Embassy, are required
- Memorandum & Articles of Association or Foundation document
- Certificate of incorporation
- Board resolution and power of attorney
- Certificate of good standing
- Original bank reference
- Proof of address of directors

Jafza incorporation fees is AED 10,000. Annual Jafza renewal fees, due on anniversary of incorporation each year, is AED 2,500 (US$1=AED 3.673).

No offshore company, which is incorporated under these Regulations, shall:
- Carry on business with persons resident in the United Arab Emirates;
- Own an interest in real property situate in the United Arab Emirates;
- Carry on banking business;
- Carry on business as an insurance or re-insurance company, insurance agent or insurance broker; or
- Carry on any other business which may, by regulations made by the Authority, be prohibited by the Authority.

An offshore company shall not be treated as carrying on business with persons resident in the United Arab Emirates by reason only that:
- It makes or maintains professional contact with legal consultants, accountants, management companies or other similar persons carrying on business within the United Arab Emirates;
- It prepares and maintains books and records within the United Arab Emirates;
- It holds within the United Arab Emirates meetings of its directors or members;
- It owns real property on the Palm Islands or Jumeirah Islands or any properties owned by Nakheel Company LLC or any other real property approved by the Authority; or
- It holds an account in a bank in the United Arab Emirates for the purpose of conducting its routine operational transactions.

If an offshore company wishes to conduct trade or other business in a Free Zone or elsewhere in the United Arab Emirates, it must obtain the appropriate licence to conduct the trade or other business activity from the competent authorities (such as by forming FZE/FZC or limited liability company in which the offshore company can be a shareholder).

Dubai offshore company is similar to offshore companies in other jurisdictions. It can be used as a holding company vehicle. It is also used for owning properties in Dubai where foreign ownership of properties is permitted in designated areas.