Out-Law Guide | 04 Dec 2012 | 11:29 am | 7 min. read
The United Arab Emirates (UAE) is a federation of seven Emirates; Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al-Khaimah, Sharjah and Umm AlQuwain. It has established and efficient air and sea connections and developed infrastructure, making it an exciting prospect for any business looking to establish a foothold, or expand, in the Middle East and North Africa (MENA) region.
Having celebrated its 40th year of union in 2011, the UAE is one of the youngest nations in the region, with an estimated population of 8.26 million, of which approximately 90% are expatriates employed in a wide range of industries. Although it is an oil-rich state – producing around 2.81 million barrels per day – the UAE has diversified its economy, becoming a regional and global centre for business, trade and finance.
The UAE's economy is steadily expanding; real GDP growth for 2012 is estimated at 2.3% by the IMF. Such growth is driven by high oil prices and strong economies in Asia, as well as developed tourism, logistics and transport sectors. The UAE has also arguably benefitted from regional instability by providing a 'safe haven' for investors.
Although the UAE comprises seven Emirates, it is the Emirates of Abu Dhabi and Dubai that are likely to be of most interest to foreign investors due to their established infrastructure and business environment, but that is not to say that the other Emirates do not offer opportunities too.
Abu Dhabi, the capital of the UAE, has approximately 8% of the world's proven oil reserves and 5% of the natural gas.
The Emirate has put the oil revenues to good use and has an impressive investment portfolio. As the world looks ever more urgently to renewable energy, the Abu Dhabi government is actively seeking ways to diversify its economy, with the development of new industrial cities, real estate developments and other major projects including ports, airport expansion and new hotels.
With stellar growth between 2000 and 2008, Dubai established itself as the Gulf region's exhibition, financial, trade and tourism hub. The global economic crisis hit Dubai's real estate sector particularly hard, however the Dubai economy is slowly recovering, having benefitted from the years of investment in infrastructure prior to the crisis, and latterly its 'safe-haven' status during regional instability. Dubai, which hosts the vast majority of the UAE's economic Free Zones, can boast excellent connectivity to the wider region through Dubai International Airport and state airline,
The Northern Emirates
Collectively referred to as the Northern Emirates, Sharjah, Fujairah, Ajman, Umm Al Quwain and Ras Al Khaimah are less developed than Abu Dhabi and Dubai, and so attract less foreign investment. However, to varying degrees each of the Northern Emirates is taking steps to develop their economies. Each of the Northern Emirates has a port and some have an international airport.
Sharjah, the third largest of the Emirates, hosts a significant portion of the UAE's manufacturing base. Sharjah has established two economic Free Zones; Sharjah Airport Free Zone and Hamriyah Free Zone and has two active ports. Sharjah is more conservative than Dubai; the sale and consumption of alcohol is not permitted at all in the Emirate, and Sharjah’s decency law requires that people dress modestly.
Ajman lies to the Northwest of Sharjah and is home to one economic Free Zone – Ajman Free Zone. Industry in Ajman is focussed on manufacturing, with a variety of factories producing goods including foodstuffs, beverages, tobacco, textiles, leather goods, paper products and ready-made garments. Ajman also has an active boat-building industry, manufacturing boats ranging from traditional wooden dhows to more sophisticated luxury yachts.
Fujairah is situated on the Gulf of Oman. Fujairah port plays a key role in the Emirate's economy having been deepened and extended in 1985 in order to accommodate larger shipping lines. The port gives access to the UAE without the need to enter the Gulf through the Straits of Hormuz. The government of Fujairah has established one economic Free Zone – Fujairah Free Zone – providing an alternative to the Free Zone offerings of the other Emirates.
Umm Al Quwain
Umm Al Quwain hosts a variety of industrial developments, such as a cement factory and manufacturing units producing pipes and corrugated sheets. Agriculture and fishing are another important part of the local economy.
With less development than Dubai and Abu Dhabi, steps have been taken by the Umm Al Quwain government to encourage tourism in the Emirate, which is home to a number of natural attractions.
Ras Al Khaimah
Ras Al Khaimah (RAK) is the northernmost of the Emirates and is the main farming area of the Northern Emirates.
Mining is also an important industry in RAK, with two quarries and four cement plants. Factories also produce tiles and ceramics, glass, tableware and pharmaceuticals. The RAK Government has established RAK Free Zone, which is proving to be a viable alternative to the Dubai Free Zones. Geographically, RAK is strategically located at the entrance to the Strait of Hormuz and hosts a deepwater port.
UAE or establishment in one of the many economic Free Zones.
Foreigners can own residential and commercial property in certain designated areas, including Free Zones.
There are several available vehicles through which a foreign investor may operate in the UAE. These are outlined in detail below.
Foreign businesses wishing to operate in mainland UAE through a limited liability company will be required to have a local shareholder holding at least 51% of the shares. There have been various indications over the years that the requirement of a locally held majority shareholding may be relaxed. However to date no definitive steps have been taken towards such relaxation, and this issue remains a key concern for foreign investors despite various practices developed to minimise the potential risk associated with the requirement.
A popular alternative is establishment in one of the many Free Zones, which permit 100% foreign ownership, although businesses established in a Free Zone are ostensibly prohibited from carrying out activities in mainland UAE.
Companies located in a Free Zone will be subject to the specific laws of that Free Zone along with the Federal laws of the UAE and the local laws of the relevant Emirate, where the relevant Free Zone’s laws are silent. The exception to this is Dubai International Financial Centre, which has its own set of laws and is not governed by the laws of the UAE other than the criminal laws.
Legal and Regulatory Framework
The sources of law within the UAE
The legal system in the UAE is based both on civil code principles and on the Islamic Shari'ah. The sources of law for civil matters in the UAE are:
The separation of power between the Federation and Emirates
The main sources of law governing day to day commercial matters in the UAE are the Federal and local Emirates laws and regulations.
Certain legislative and executive authority is reserved exclusively to the Federal Union. These include matters of substantive legislation related to civil, commercial, corporate and penal matters.
The Constitution reserves to the individual Emirates sovereignty over matters within their respective territorial borders, which are not exclusively reserved to the jurisdiction of the Federal Government. One such example relates to the issuance of rules and regulations governing the real estate sector. (see our guide to UAE laws on IP, real estate, taxation and anti-corruption).
The Civil Code framework
The UAE is governed by a civil law system that relies on codified laws rather than precedent created by past legal decisions, as is the case with common law jurisdictions.
The significance of the Islamic Shari'ah
Although the main sources of law governing day to day commercial matters in the UAE will arise from the Federal and individual Emirate laws, Shari'ah Law plays an important role in the lives of UAE citizens and residents alike.
The Islamic Shari'ah is the divine set of rules and regulations regarding life as conveyed to man through the holy Prophet Mohammed (peace be upon him). It is a collection of legal tenets, laws and regulations that are intended as a way of life for Muslims.
The Shari'ah is extremely important in relation to matters of a personal nature, such as marriage, domestic relations, inheritance and lineage, but in relation to day-to-day commercial matters it is less so.
Islamic culture and customs
Although the local business environment has become very westernised, researching the Islamic culture and customs is a must for any business seeking to operate in the UAE. A few key points to note:
Non-Muslims should not be offended by this, and should simply wait until a handshake is offered by a member of the opposite gender; and
Payment terms and timing
Approach to payment terms and timing are likely to be different to the approach of the foreign investor. Foreign Investors will need to be aware of lock-up periods to manage cash flow.
Changes to the regulatory regime
The UAE is growing and developing at a fast pace. This often involves change – rapid change – in the regulatory regime that underpins business.
Björn Gehle, Partner
[email protected] / +971 4 373 9642
Alison Hubbard, Partner
[email protected] / + 971 4 373 9693