K&L Gates A Guide to Establishing a Business Presence in Dubai

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1 K&L Gates A Guide to Establishing a Business Presence in Dubai This guide written by K&L Gates lawyers, includes a high level overview of the regulatory environment to establish a business presence in Dubai. The overview describes the differences between incorporating in a free trade zone and outside of such zones, and some of the vehicles available to establish a Dubai-based business. It is a summary document relating only to the Emirate of Dubai. Specific issues which may influence the type of business establishment and its location include, but are not limited to, the nature of the business, the nationality of the person/ entity establishing the business, and whether business is to be undertaken in the United Arab Emirates outside of Dubai. These particular issues are not dealt with in detail in this guide. Businesses considering establishing a presence in Dubai should discuss their specific requirements in detail with their legal and tax advisers first to ensure that the appropriate structure is adopted and licences obtained. This guide reflects the position as at July In particular a revised UAE company law is expected to be issued in the near future which may significantly change the UAE s business landscape. The Business Environment To facilitate foreign investment into Dubai, the government has established a number of free trade zones. A summary of the main free zones is provided below. The advantages of operating in a free zone rather than in the rest of Dubai are: there is generally no tax on profits (subject to certain time restrictions); in most cases, 100% foreign ownership is permitted; for the most part, the regulations governing free zones are published in English; there are no restrictions on foreign exchange or repatriation of capital (in certain free zones); and operational support and business continuity facilities are available. The main disadvantage of operating from within a free zone is that businesses are restricted as to the type of dealings they may conduct outside of such zones. In contrast, a business wishing to operate locally in Dubai would need to comply with local laws and licensing requirements (which are discussed further below). The largest potential disadvantage to establishing locally is that foreign ownership restrictions may apply, although these may be revised as part of the new companies law. The Free Zones Many free zones currently exist in Dubai, each with its own individual industry focus and regulatory environment. In summary though, businesses operating in the free zones are not subject to many of the restrictions imposed by federal and local law and regulations. Some (but not all) of the free zones that are available include: Jebel Ali Free Zone (JAFZ) located next to the largest port in the Middle East, it is primarily designed for import and export businesses. Dubai International Financial Centre (DIFC) primarily for financial service providers, having its own legal system, court, financial services regulator (Dubai Financial Services Authority), and stock exchange (Nasdaq Dubai). Dubai Technology and Media Free Zone business activities include design, development, use, and maintenance of everything related to information technology, e-commerce,and media. Dubai Media City (DMC) for every kind of media business, which broadly includes media and marketing services, printing and publishing, music, film, new media, leisure and entertainment, broadcasting, and information agencies. Dubai Knowledge Village an educational campus that provides facilities for training and learning institutions to operate which include universities, training centres, professional centers, and HR companies. Dubai Health Care City provides quality healthcare and an integrated centre of excellence for clinical and wellness services, medical education, and research. Dubai Multi Commodities Centre a commodity market place, providing industryspecific market infrastructure and a full range of facilities for the gold and precious metals, diamonds and coloured stones, energy, and other commodities industries.

2 Dubai Airport Free Zone a general industrial and office free zone next to Dubai International Airport. Dubai Silicon Oasis high-technology park for the microelectronics and the semiconductor industry. Dubai Logistics City (part of Dubai World Central) a logistics platform with all transport modes, logistics, and value added services, including light manufacturing and assembly located near Dubai s new airport which is currently under construction. Dubai International Academic City is a free zone dedicated to higher education. Dubai Outsourcing Zone is a base for both captive and third-party outsourcing operations to provide mid- and high-end services in areas such as finance, accounting, information technology, payroll processing, engineering, research and development, and design. Dubai Maritime City is a mixed used site which, although not a free zone, can offer 100% ownership. The type of business activity that is to be operated will dictate which free zone is appropriate, either for business reasons and/or due to the individual free zone s regulations regarding who is permitted to establish within the zone. Further information on these and other free zones can be provided on request. Establishing in the Free Zones The free zones operate independently of each other and each has its own Free Zone Authority (FZA) which is responsible for issuing to businesses the necessary licences for operating in its respective free zone. As each free zone is different, it will be necessary to liaise closely with the relevant FZA so as to meet its particular requirements. An individual or entity establishing in a free zone will need to incorporate an operating entity to carry out its business in the free zone. What type of corporate entity that is required will depend on the free zone but is likely to be through one of the following: Free Zone Establishment (FZE) An FZE may have only one shareholder and has a separate legal personality independent of the shareholder. Free Zone Company (FZCO) An FZCO is very similar to an FZE and again has a separate legal personality independent of the shareholders. However, in contrast to an FZE, it may have between two to five shareholders. A branch office of a foreign or local company A branch office of a foreign or local company is not a separate legal entity. Liabilities of the branch of a foreign or local company attach to the foreign company establishing the branch office. A Limited Liability Company (LLC) (in the DIFC) An LLC has a separate legal personality and it may have one or more shareholders. There is no minimum capital requirement for the establishment of an LLC. The capital of an LLC shall be divided into interests, each of which may be of a different value and class. Such interests may not be represented by securities. A company limited by shares (Ltd) (in the DIFC) A company limited by shares has a separate legal personality and it may have one or more shareholders. There is no requirement for minimum capital for the establishment of such a company. The capital of the company shall be divided into transferable shares. An offshore company (in JAFZ) An offshore company may have one or more shareholders and has a separate legal personality. An offshore company can not carry out business with companies or individuals resident in the UAE and no residence permit or any kind of visas can be issued to an offshore company. There is no minimum capital requirement for the establishment of an offshore company. It is not required that an offshore company has a physical existence or office in the free zone. However, an offshore company may lease an office in the free zone and have a bank account in Dubai (inside or outside the free zone). An offshore company shall appoint a registered agent in the free zone approved by the free zone authority. The branch office route is likely to be the simplest to establish although consideration should be given to the desirability of ring fencing liability within a new limited liability entity. Again, depending on the particular free zone, there are minimum capital requirements for incorporating an FZE or an FZCO. The types of license that will be granted by the relevant free zones authorities will depend on the type of industry serviced by the free zone. The licences include trade licenses, industrial licences, retail licences, service licences, warehousing licences, and professional service licences. Businesses considering establishing a presence in Dubai should discuss their specific requirements in detail with their legal and tax advisers first to ensure that the appropriate structure is adopted and licences obtained. Annual fees will be due to the relevant FZA for these licences together with a one-off set up fee. There will be other incidental fees relating to immigration and, of course, an annual rental payment for office or industrial space. These licensing fees are subject to change by the relevant authority and will be dependant on the free zone and the type of licence applied for. A discussion with the relevant FZA regarding the type of licence required and any applicable fees should be held at the outset.

3 Establishing Outside a Free Zone The UAE Federal Law No. 8 of 1984 on Commercial Companies, as amended (the UAE Companies Law) applies to all companies, branch offices, and representative offices of foreign companies established and operating in Dubai outside the free zones. There are seven forms of company available under UAE Companies Law. Limited liability company (LLC) The form of an LLC requires the number of shareholders of an LLC to be between two and fifty. Exceeding the statuary number of shareholders may result in dissolution of the LLC and personal liability of its members. The number of directors of an LLC must be between one and five. An LLC has a separate legal personality independent of the shareholders. The liability of each shareholder to the other shareholders and to third parties shall be limited to such Shareholder s capital contribution to the LLC. The objects of the LLC must not include insurance, banking, or investment of funds for the account of third parties. The LLC must have an initial capital sufficient for it to achieve its objectives and the founders of the LLC have the right to determine the amount of such initial capital. Where any of the shareholders of an LLC is a non-gcc national, the portion of shareholders who are UAE nationals must be no less than 51% of the capital of the LLC. An LLC may have a 100% GCC national ownership, but if any non-gcc national becomes a shareholder in the LLC, UAE nationals must then hold at least 51% of the share capital of the LLC. Public joint stock company The form of a public joint stock company requires at least 10 founding partners and an initial capital commitment of AED 10 million (approximately US$2.7 million). The capital of a UAE public joint stock company should be divided into transferable shares of equal value. The nominal value of each share shall not be less than AED 1 (approximately US$0.27) or more than AED 100 (approximately US$27). All of the company s shares shall have equal rights and shall be subject to equal obligations. Except for shares in public joint stock companies which are wholly owned by the UAE federal government or the governments of the Emirates making up the UAE, shares in all public joint stock companies must be listed on a securities market in the UAE (the Dubai Financial Market or the Abu Dhabi Securities Exchange). A public joint stock company has a separate legal personality independent of the shareholders. Where any of the shareholders of a public joint stock company is a non-gcc national, the share of shareholders who are UAE nationals must be no less than 51% of the capital of the public joint stock company. A public joint stock company may have a 100% GCC national ownership, but if any non-gcc national becomes a shareholder in the public joint stock company, UAE nationals must then hold at least 51% of the share capital of the public joint stock company. Private joint stock company The form of a private limited company requires at least 3 founding members and a minimum initial capital commitment of AED 2 million. Shares in all private joint stock companies may not be offered for public subscription. In all other respects, provisions applicable to a public joint stock company also apply to a private joint stock company. A private joint stock company may be converted into a public joint stock company. Joint participation company (general partnership) The form of a general partnership requires at least two partners who must be UAE nationals. In a general partnership, all partners are collectively liable for all of the partnership debts. Shares in a general partnership may not be represented by transferable instruments. The shares in a partnership may be transferred only with the consent of all partners or in accordance with the restrictions set forth in the general partnership s articles of association. Simple commandite company (simple liability partnership) The form of a simple liability partnership requires at least one general partner liable for all of the simple liability partnership debts and at least one limited partner whose liability is limited to such partner s capital contribution to the simple liability partnership. All partners in the simple liability partnership must be UAE nationals. A limited partner may not interfere in the management of the simple liability partnership even if authorized, but he may take part in the internal management within the limits specified in the simple liability partnership s articles of association. If a limited partner breaches such restriction, then he shall become liable for the simple liability partnership debts resulting from his act. Share commandite company The form of a share commandite company requires general partners liable for all of the share commandite company debts and limited partners whose liability is limited to such partners capital contribution. An initial capital commitment of AED 500,000 is required. All partners in a share commandite company must be UAE nationals. A limited partner may not interfere in the management of the share commandite company even if authorized, but he may take part in the internal management within the limits specified in the share commandite company s articles of association. If a limited partner breaches such restriction, then he shall become liable for the share commandite company debts resulting from his act. The capital of the share commandite company shall be divided into transferable shares of equal value. Private unlimited company This company has no legal presence; it exists only between partners and is unknown by third parties. It deals with customers and others in the person of one of the partners who carries out its affairs not in his capacity as a representative of the company, but as the sole owner of the business. If the partners act so as to disclose to third parties the existence of a company, then the private unlimited company may be deemed an actual company, with its partners collectively liable to third parties. There is no need for a private unlimited company to be publicly established, that is registered at the commercial register, as the existence of the company is not publicly known. There is only the contract or deed of the company which is set by partners and limited solely to them. Adjustment of shares and participation in profits and losses are agreed upon between partners.

4 The LLC, the private joint stock company and the public joint stock company are the most commonly used forms of company. The other forms of company are not commonly used in the UAE for several reasons, including restrictions on foreign ownership and foreign management. Non-GCC shareholders may hold up to a 49 percent interest in an LLC, a private joint stock company or a public joint stock company. However, profits of an LLC do not need to be apportioned in proportion to ownership interests and where any shareholder in an LLC is a non-gcc national, it is currently permitted for the profits (and losses) in the LLC to be distributed disproportionably to shareholders respective shareholdings provided not less than 20% of profits are distributed to the UAE national shareholders. A custom has developed pursuant to which non-gcc shareholders enter into side agreements with UAE national shareholder(s) pursuant to which UAE national shareholders assign their profits to non-gcc shareholders. However, the enforceability of such side agreements is not certain and the prudent view is that a UAE court might consider such side agreements as an attempt to circumvent UAE restrictions on corporate ownership by non-uae nationals and as a breach of UAE Federal Law No. 17 of 2004 concerning Combating of Commercial Concealment, as amended (the UAE Anti- Concealment Law) entered into force on 31 December 2009 which aims to criminalize the practice of enabling a non-uae national to conduct an economic or professional activity which is prohibited by UAE laws and regulations. Specific conditions may be required for forming a company in Dubai outside the free zones, depending on the nature of activities to be conducted by the company. It should be noted that only companies 100% owned by GCC nationals or UAE nationals may carry out some specific activities. In most cases, the licensing and registration procedures of a company in Dubai will entail, among other things, (i) obtaining a trade name reservation certificate and an initial approval from the Dubai Department of Economic Development; (ii) executing and notarizing the articles of association of the company; (iii) obtaining a commercial, a professional or an industrial license and a registration certificate from the Dubai Department of Economic Development; and (iv) obtaining a membership certificate from the Dubai Chamber of Commerce & Industry. Each of these steps will require the shareholders to submit certain documents and to carry out certain procedures. Additional approvals from other authorities may be required before obtaining a license and a registration certificate from the Dubai Department of Economic Development, depending on the form of the company to be licensed and registered and the nature of activities to be listed on the license. Foreign companies are permitted to establish wholly owned branches and representative offices in Dubai. The primary difference between a branch office and a representative office is that a branch office may carry out activities similar to those of its parent company including sales, import, or export of products or services; to issue invoices and payment receipts; to execute contracts; and to generate revenue in the UAE for products sold or services rendered within or outside the UAE. In contrast, a representative office may only promote its foreign parent company s activities, by gathering information and soliciting orders. It can not carry on the parent company s trading activities. There are also further restraints on the number of employees the representative office can sponsor. A branch or a representative office is not a separate legal entity. Liabilities of the branch or the representative office attach to the foreign company establishing the branch office or the representative office. Generally, foreign companies must appoint a service agent as a condition for licensing and registration of a branch or a representative office in the UAE. The service agent must be a UAE national or a company wholly owned by UAE nationals. Unlike a shareholder, a service agent has no equity or management interest in the branch office or the representative office and does not bear any of its liabilities or obligations. The compensation of a service agent is typically an annual fee stipulated in an agreement (the Service Agency Agreement) between the a service agent and the foreign company, which is consideration for obtaining and renewing the license and registrations of the branch office or the representative office, obtaining visas and work permits for its staff, and assisting it in its relations with governmental departments. The fee will depend on, among other things, the status of the service agent and the image of the foreign company in the local community.

5 The licensing and registration of a branch or a representative office of a foreign company in Dubai would need to be carried out in approximately the following sequence of events: (i) obtaining a trade name reservation certificate and an initial approval from the Dubai Department of Economic Development; (ii) obtaining an initial approval from the Ministry of Economy; (iii) executing and notarizing the Service Agency Agreement; (iv) obtaining a commercial, a professional, or an industrial license and a registration certificate from the Dubai Department of Economic Development; (v) obtaining a certificate of registration of the foreign company in the register of foreign companies maintained by the UAE Ministry of Economy; (vi) obtaining a membership certificate from the Dubai Chamber of Commerce & Industry. Each of these steps will require the shareholders to submit certain documents and to carry out certain procedures. Additional approvals (external approvals) from other authorities may be required before obtaining a license and a registration certificate from the Dubai Department of Economic Development, depending on the nature of activities to be listed on the license. Companies established and operating in the UAE outside the free zones are permitted to establish wholly owned branches and representative offices in Dubai. Such companies are not required to appoint a service agent or to obtain an initial approval or a certificate of registration from the UAE Ministry of Economy as a condition for the licensing and registration of a branch or a representative office in Dubai. Annual fees will be due to the relevant authorities for the licences and certificates together with one time setup fees. There will also be other incidental fees relating to immigration. These fees are subject to change by the relevant authorities. A discussion with the relevant authorities regarding the type of licences and certificates required and any applicable fees should be held at the outset. In addition, an office space needs to be leased within Dubai outside the free zones. A license from the Dubai Department of Economic Development cannot be issued until an office lease has been signed and submitted to the Dubai Department of Economic Development. As such, the type of business entity to be used should be considered carefully to ensure the most appropriate one for the business is chosen. As noted above, it will invariably be necessary to appoint a local service agent or equity partner when establishing in Dubai outside of a free zone. The type of entity established will depend on whether the agent/partner is paid a fixed fee or has a right to participate in profits and the extent of his influence over the management of the business. Again, these issues should be discussed in detail with your lawyers and tax advisers when considering where and how to establish in Dubai. Finally The structure to be used by a business seeking to establish in Dubai is dependent on a number of legal, licensing, and tax considerations, and the level and location of the business that is likely to be transacted in the region. The above is only a brief summary of the key considerations. We are happy to provide more specific advice on request. About K&L Gates K&L Gates delivers legal services on an integrated and global basis, with lawyers located in 36 cities in the Middle East, Asia, Europe, and the United States. K&L Gates Dubai office is located in the Dubai International Financial Centre. The office advises local and international corporations active in the United Arab Emirates and throughout the Middle East, with particular emphasis on projects and construction; dispute resolution including arbitration; corporate matters, and mergers and acquisitions, investment funds, financial services regulatory advice, and banking and finance. The lawyers in our Dubai office have considerable experience and industry connections and can also leverage the proven capabilities of their colleagues throughout the firm s U.S., Asia, and Europe offices. With strong presence in key capital cities and world commercial and financial centers, our global network of legal resources allows us to offer strategic counsel on a variety of issues around the world. Please contact us directly for more information on how we may be able to assist you or your business. K&L Gates delivers legal services on an integrated and global basis.

6 K&L Gates LLP Currency House, Level 4 Dubai International Financial Centre P.O. Box Dubai, United Arab Emirates Telephone: Fax: Anchorage Austin Beijing Berlin Boston Charlotte Chicago Dallas Dubai Fort Worth Frankfurt Harrisburg Hong Kong London Los Angeles Miami Moscow Newark New York Orange County Palo Alto Paris Pittsburgh Portland Raleigh Research Triangle Park San Diego San Francisco Seattle Shanghai Singapore Spokane/Coeur d Alene Taipei Tokyo Warsaw Washington, D.C. K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit K&L Gates comprises multiple affiliated entities: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and maintaining offices throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), in Tokyo, and in Singapore; a limited liability partnership (also named K&L Gates LLP) incorporated in England and maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an office in Taipei; a Hong Kong general partnership (K&L Gates, Solicitors) maintaining an office in Hong Kong; a Polish limited partnership (K&L Gates Jamka sp.k.) maintaining an office in Warsaw; and a Delaware limited liability company (K&L Gates Holdings, LLC) maintaining an office in Moscow. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners or members in each entity is available for inspection at any K&L Gates office. This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer K&L Gates LLP. All Rights Reserved _3167