PART FOUR – COMMERCIAL LEGISLATION in the UAE

1. PART FOUR – COMMERCIAL LEGISLATION in the UAE Practical Steps and Procedures for Company Incorporation in the UAE Ch 17

2. Forms of Business Organization • Three major forms in the World • Sole proprietorship • Partnership • General • Limited • Corporation • Public Corporation • S-Corp • Limited liability company (LLC)

3. Advantages Easiest to start Least regulated Single owner keeps all the profits Taxed once as personal income Disadvantages Limited to life of owner Equity capital limited to owner’s personal wealth Unlimited liability Difficult to sell ownership interest Sole Proprietorship

4. Advantages Two or more owners More capital available Relatively easy to start Income taxed once as personal income Disadvantages Unlimited liability General partnership Limited partnership Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership Partnership

5. Advantages Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital Disadvantages Separation of ownership and management Double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate) Corporation

6. What is a Corporation ? A firm that owned by stock holders, who hold shares in the business. Corporation managed by elected Board of Directors. Example: Microsoft, GM, GE. In UAE : Dubai Islamic Bank, Emirates Bank. It could be closely held, when all shares held by a small group, or Public, when its shares widely traded. Corporation have limited liability, means the shareholders are not responsible of the firm’s debts. Corporate Article draws the purpose of business, number of shares, number of directors, officers… etc.

7. Setting- Up Business in the UAE Under UAE law, foreign entities interested in establishing a formal presence in the UAE have five options: 1- create a permanent establishment, of which there are seven different types: General Partnerships, Limited Partnerships, Joint Participation (Ventures), Public Joint Stock Companies, Private Joint Stock Companies, Limited Liability Companies, Partnerships Limited with Shares. 2- establish a branch office 3- create an entity in a UAE free zone 4- create a civil company (only in Sharjah and Dubai) 5- Inter into a commercial agency agreement.

8. Setting- Up Business in the UAE Permanent Establishment 1- General Partnerships: This entity may only be established between UAE nationals, who are jointly and unlimitedly, to the extent of their personal assets, responsible for the company’s liabilities. 2- Limited Partnerships: This entity usually has one active partner who manages the company and a silent partner who does not participate in day-to-day management. 3- Joint Participation (Ventures): This entity is an association between at least two partners who will share the profit and loss in one or more commercial businesses conducted by one of the partners in his or her own name.

9. Setting- Up Business in the UAE Permanent Establishment 4- Public Joint Stock Companies: This entity comprises any company whose capital is split into publicly subscribed negotiable shares of equal value or any company in which a UAE public body holds any share capital. There is a minimum capital requirement of AED 10 million and that capital must adequately achieve the objectives of the company. This entity requires a minimum of 10 founding members. UAE businesses involving banking, insurance or investment of funds on behalf of third parties must take the form of a public joint stock company.

10. Setting- Up Business in the UAE Permanent Establishment 5- Private Joint Stock Companies: This entity requires a minimum of three founding members who, between them, fully subscribe to a minimum capital of AED 2 million. The shares of private joint stock companies may not be offered for public subscription. Private joint stock companies may be converted into public joint stock companies if (i) the company has operated for two or more financial years, (ii) the shares are fully paid up, (iii) the company has achieved net profits distributable to shareholders of an average of at least 10% of its capital during the two years preceding the application to convert, and (iv) a majority of the shareholders holding at least 75% of the company’s shares adopt a resolution of the extraordinary general assembly to convert

11. Setting- Up Business in the UAE Permanent Establishment 6- Limited Liability Companies: This entity is defined as an association with a maximum of 50 partners and a minimum number of two partners. Each partner’s liability is limited to the extent of its share participation in the capital of the company. LLCs are no longer required to meet the minimum capital requirements of AED 300,000 (in Dubai) and AED 150,000 (in Abu Dhabi and the other Emirates). A new test of “sufficient capital” is to be adjudged by the Department of Economic Development of the relevant Emirate (including consideration of the size and planned activities of the company). Foreign companies wishing to establish an LLC in the UAE should seek guidance on the current practice of the relevant Emirate regarding minimum share capital.

12. Setting- Up Business in the UAE Permanent Establishment 7- Partnerships Limited with Shares: This entity is formed by general partners who are jointly liable to the extent of their personal assets and participating partners who are liable to the extent of their share participation in the company. General partners must be UAE nationals. The minimum capital required to form a partnership limited with shares is AED 500,000, and participating partners are prohibited from being involved with the day-to-day management of the partnership. They may, however, participate in its internal administrative affairs.

13. Setting- Up Business in the UAE 2- Establish a branch office Branch Offices vs. Representative/Liaison Offices • A branch office has the same legal identity as its parent company and conducts business under the name of its parent company. While each Emirate has its own licensing rules for branch offices, this type of entity can carry out a variety of activities (as approved by the Department of Economic Development of the relevant Emirate). Branch offices are regarded as fully-fledged businesses permitted to perform contracts or conduct other activities as specified in its license. • Alternatively, a representative/liaison office is limited to promoting its parent company’s activities. This means that a representative office is only permitted to perform such activities as gathering information, soliciting orders, and marketing projects to be performed by the company’s head office. This type of office is also limited in the number of employees that they sponsor (usually three to four).

14. For example, in order to open a Branch Office in Abu Dhabi, a foreign company must comply with points 1 and 2 from the following list: 1. Obtain the following documents in the home country of aforementioned company • Official document evidence that the company is duly registered and established in that country, indicating its legal form, paid up capital, as well as names, title, and powers of its representative. • Resolution from the company’s board of directors (or other competent administrative entity) regarding opening of its branch in Abu Dhabi and practicing its activity there. • True copy of the memorandum of association of the foreign company, or its articles of association. • The last two approved financial statements (balance sheet, statement of profit and loss, and notes to the financial statements) of the company, in addition to the auditor’s report thereon. • A declaration from the company addressed to the UAE Ministry of Economy in which it undertakes to bear any financial obligations caused by its branches in the United Arab Emirates. • A notarized power of attorney for the person who will sign the agency agreement with the company’s national agent in Abu Dhabi and who will represent the company before the Abu Dhabi authorities.* *All of the above documents (except item d) must be attested at the Embassy of the UAE in the country of origin. In addition, all these documents must be translated into Arabic in the UAE and certified by a UAE-certified translator and attested by the UAE Ministry of Justice.

15. For example, in order to open a Branch Office in Abu Dhabi, a foreign company must comply with points 1 and 2 from the following list: • 2. Obtain the following additional documents to be submitted by the company applying for a branch license. However, these documents do not need to be attested outside the UAE • Licensing application. • Details list of activities in which the company wishes to practice in the state. • Agency contract concluded between the foreign company and the local agent • List of the major operations carried out by the company outside the UAE plus the previous experiences in the field of activity intended to be practiced, in addition to the countries where such activities are taking place. • A statement showing the number of staff numbers expected to be appointed in the company’s branch office in Abu Dhabi.* *The working capital of the branch may not be less than AED 250,000 which may be required to be deposited in a bank in Abu Dhabi. Alternatively, the UAE Ministry of Economy may request an open-ended unconditional bank payment guarantee favoring the Ministry for AED 50,000 issued by a bank in the UAE.

16. Setting- Up Business in the UAE 3- Create an entity in a UAE free zone In contrast, the UAE allows foreign businesses to operate within “free zones.” Free zones allow for up to 100% foreign ownership and are subject to reduced or different trade barriers, tariffs, and quotas. However, free zone companies may only operate within the free zone boundaries and are generally limited to performing solely those activities listed in their license(s). If a free zone company chooses to operate outside these boundaries, it must adhere to the requirements of the UAE Commercial Companies Law in compliance with the licensing procedure in the applicable Emirate. Generally, free zones are designated by the government to a specific commercial sector. For a non-exhaustive list of free zones in the UAE, see below. Different types of licenses that can be issued in a Free Zone are: • General Trading License • Trading License • Industrial License • Service License • National Industrial License

17. Setting- Up Business in the UAE 4- create a civil company (only in Sharjah and Dubai) It is currently possible in Dubai and Sharjah to create a civil company (Work Companies, Persons' Companies, Speculative (Mudharaba) Companies). These entities are establishments which are sole traders operating under a license. Civil companies are usually not intended to trade (e.g., engage in the purchase and sale of goods, contracting, transport, banking and finance, and other similar transactions) and are typically used by the professions. Civil companies may not be formed within the Emirate of Abu Dhabi.

18. Setting- Up Business in the UAE 5- Inter into a commercial agency agreement. • Commercial Agency Agreement • Foreign companies may engage in a commercial agency arrangement which is defined as any arrangement whereby a foreign company is represented by a UAE agent to distribute, sell, offer, or provide goods or services within the UAE for a commission or profit. The agent must either be a person holding UAE nationality or a company that is 100% owned by UAE nationals. The agent must be registered with the Ministry of Economy. Unless otherwise agreed in writing between a foreign company and its commercial agent, an agent is entitled to receive a commission on the sale of products in his or her designated Emirate, irrespective of whether such sales are made by or through the agent.

19. Other Business Opportunities • Offshore Companies: Following the introduction in 2003 of the Regulations for Jebel Ali Free Zone (JAFZ) Offshore Companies, international companies can establish JAFZ offshore companies, with benefits similar to other international offshore jurisdictions. Ras Al Khaimah has, since 2006, allowed for the establishment of offshore companies. • Public Sector Procurement: Each Emirate has specific provisions regulating government procurement activities. Public sector work is generally awarded on the basis of the Public Tenders Law, which prescribes minimum standards in relation to government procurement across the UAE. Public defense contracts have their own set of industry-specific rules. • Specialized Economic Zones. The UAE has specialized economic zones, such as those established by ZonesCorp in Abu Dhabi, which offer investment incentives such as certain reductions on infrastructure costs, administrative support, simplified approvals processes and residential cities for workers. Companies situated in specialized economic zones are subject to the requirements of the UAE Commercial Companies Law (including the 51% UAE participation requirement described above). • Dubai Fast-Track License. The Emirate of Dubai Department of Economic Development (DED) is offering a fast-track trade license that will be valid for 120 days, giving businesses time to not only complete official licensing paperwork and registration but also allow them to hire employees, test products, and establish new ventures. A valid rental contract and business owner’s work history are prerequisites for the license. To learn more, contact the Dubai Department of Economic Development.

20. Setting- Up Business in the UAE All businesses require a license, and licensing procedures vary from Emirate to Emirate. Specific information is available through the following Chambers of Commerce & Industry: • Abu Dhabi Chamber of Commerce & Industry • Ajman Chamber of Commerce & Industry • Dubai Chamber of Commerce & Industry • Fujairah Chamber of Commerce & Industry • Ras Al KhaimahChamber of Commerce & Industry • SharjahChamber of Commerce & Industry • Umm Al Quwain Chamber of Commerce & Industry