Establishing Sole Proprietorship
A foreign investor is permitted to practise certain types of business activities permitted to non- nationals without the necessity of having a national partner; e.g. some specialised professions such as the provision of medical services, engineering consultancies, legal practice and consultancies, computer consultancies and similar services provided that such an investor holds a valid and legal U.A.E. residence permit. Also, it is a condition that he should have a local service agent according to a service agency contract authenticated by the Notary public. In addition, the residence of such an investor should come under the sponsorship of the same business in the name of which he carries on his activity.
Appointment of Commercial Agent (Exclusive Distributor)
A foreign company may market its products within the U.A.E. by appointment of a commercial agent subject to the provisions of the Commercial Agencies law no. 18 of 1981. A commercial agent as per this law is not the same as the legal agent as defined in the Civil Transactions code and commercial transactions Law. According to the precepts of these two laws, the agent may bind the principal in those matters which he is authorised to conduct, and he may conduct commercial transactions in his name and deal with others on behalf of the principal. But as set out in the commercial agency law, the commercial agent is a merchant conducting his activities independently of the principal and deals with others in his name and cannot in anyway bind the principal in such dealings or transactions. He merely purchases products or services from the principal as per an independent sale agreement and then sells the same to his clients as per other agreements. Obligations of the principal towards the agent are confined to what has been stipulated in the agency agreement. The definition of the agent in the commercial agency law is the same as that of the exclusive distributor in foreign laws. It may be that this is what prompted some agents to call this agency a distribution agency and define the agent as a distributor.
It is preferable to use the term of “exclusive distributor” and there is no objection to defining an agent as such as per the provisions of the law or in the light of practices employed by the Ministry of Economy and Commerce. As per the provisions of the law,then, an agent is defined as that person who handles the products or services of the principal by exclusive sale or distribution within the territory covered by the agency.
As per the practices of the Ministry of Economy and Commerce, a commercial agency agreement may be registered as such whatever its designation, so long as it complies with the basic elements required by the law. The most important of these elements is that which stipulates that dealing should be exclusively with one agent, with attestation as required by the law; that the agreement should not contain provisions violating that which has been stipulated in the law and it should be stated either: that this is an agency agreement as per the provisions of the Commercial Agencies Law, or that an agent has been appointed as per the provisions of the above law. Therefore the agency agreement should include the following:
- The agent should be an exclusive agent. In other words he should monopolise distributions of the products or services of the principal in the agency territory, which should be defined as either all of the U.A.E. or any part thereof, such as one or more of the seven emirates.
- The agent should be an U.A.E. national if an individual. But if the agent is a body corporate (i.e. company) it is conditional that all the partners be U.A.E. nationals.
- The agency agreement should be registered with the Ministry of Economy and Commerce. This registration will afford the agent sufficient protection, as it will prohibit the entry to the U.A.E. of any products or services which are delineated in the subject-matter of the agency agreement through any party other than the agent or those licensed to do so by the agent. The agency agreement cannot be terminated, even if only valid for a limited period, except through the two methods stipulated by the law. It is not permitted to register a new agency agreement for any other agent in connection with those products or services which may be the subject-matter of a registered agency agreement, unless the previous agency has been cancelled from the Commercial Agencies Register at the Ministry of Economy and Commerce.
- Should a dispute arise between the principal and the agent, the principal may terminate the agency agreement by one of two methods; either by cordial agreement with the agent or by referring the matter to the Commercial Agencies Committee at the Ministry of Economy and Commerce. The Committee will assess the reasons for which the principal wishes to terminate the agency agreement and will settle the dispute accordingly. The purpose of assigning the authority for terminating an agency agreement to the Ministry of Economy and Commerce is not intended to render termination impossible, but to ensure that any decision for termination will be based upon objective reasons as assessed by a non-biased authority with some expertise in the field of in commercial affairs and problems. Thus such a decision will never be left to personal judgement and will not be based upon the subjective or arbitrary discretion of a given party.
Opening a branch or a representative office of a foreign company
The Companies Law, in article 313, allows a foreign company to exercise its principal activity in the U.A.E. by means of opening a branch or a representative office there. The difference between the two is that a foreign company which opens a branch in the U.A.E. may exercise freely those activities for which it has been licensed. Of course certain provisions of the law and executive regulations govern these licences. Legally there are certain activities which are solely confined to U.A.E. nationals; such as banking, money investment, insurance and commercial agencies. The executive regulations include those conditions and procedure for licensing adhered to by the Department of Economic Development, which are issued from time to time in the form of by-laws or local orders.
A company which opens a representative office in the U.A.E. may engage in the business of promoting the products and services provided by the parent company and facilitate contacts between the company and its U.A.E. clients. However, the office will not be licensed to conduct business operations or direct marketing in any manner whatsoever, even extending to such activities as obtaining credit facilities, submitting offers etc.
The main stipulation for opening an office or a branch of a foreign company in the U.A.E. is the appointment of a service agent, who should be an U.A.E. national. Such an agent is not an empowered agent who can bind his principal as explained in the definition of the term ‘agent’ in the Commercial Companies Law. This law provides that such an agent will not responsible for undertaking any financial obligations concerning the activities of the company’s branch or office within the U.A.E. or abroad. He should not interfere in those matters related to the company’s management or activities. His duties towards the company and others are confined to the provision of such services as may be required by the principal. These services usually include the obtaining of entry or residence visas, the acquiring of the necessary licences or government authorities e.g. submitting tenders, following them up, and notifying the foreign company of all the announcements related thereto, following up the company’s needs and affairs and keeping it informed of the same.
The service agent will be remunerated by lump sum for the services rendered to the foreign company; which sum should be the subject of an agreement made between him and the company. Furthermore, the service agent should be an U.A.E. national or a company wholly owned by nationals if a corporate body. Foreign companies usually prefer local companies to individuals by virtue of their wide contacts with the governmental authorities and their economic viability and strong financial standing.
Procedure for establishing a branch of a Foreign Company
Apart from those companies licensed to practise activities in the U.A.E. Free Zones, foreign companies may not practise activities in Dubai or establish any offices or branches unless they have first obtained a licence issued by the Ministry of Economy and Commerce subject to the approval of the Department of Economic Development. The licence issued shall determine the activity the company is allowed to practise.
Foreign companies licensed to operate in the U.A.E. may not commence their activities prior to being inscribed in the Ministry’s Register of Foreign Companies and the Commercial Register at the Department of Economic Development, and obtaining the Department’s Trade Licence. To set up a branch of a foreign company the following steps should be observed:
- An application should be submitted to the Department of Commercial Affairs at the Office of the Ministry of Economy and Commerce in Dubai. This application should include the following data: Name, type of company and address of its head office and the other countries where it carries on its activities.
- Type of activity, specialisation or type of operations proposed to be conducted in the U.A.E.
- Main operations carried out by the company abroad and its previous expertise in that field of activity which it intends to conduct.
- Name of the local service agent in the U.A.E. and his address if he is an individual, but if the agent is to be a corporate body (company) its legal form, capital, and names of the shareholders and their addresses are required. All of the shareholders should be U.A.E. nationals.
The following documents should also be attached to the applications:
- An official certificate from the concerned authorities in the country wherein the foreign company is registered stating that it has been incorporated and registered in that country according to the provisions of its prevailing laws together with details of the legal form of the company and its capital.
- A resolution of the Board of Directors of the company to set up the branch or the office and to practise activities in the U.A.E. together with the power of attorney given in this regard to the representative of the company who submitted the application, provided that such documents have been legally notarised and authenticated by the concerned governmental authorities.
- A certified copy of the memorandum and articles of association of the company authenticated by the concerned governmental authorities.
- The last two audited balance sheets of the foreign company together with the auditor’s report authenticated by the concerned governmental authorities, or any other attested document which proves the sound financial position of the company.
- The agency deed drawn up between the foreign company and the local agent together with a certified copy thereof.
- The passport of the local agent and a copy of either it or his identity card if the local agent is an individual. In the event that the local agent is a juridical person (company), its memorandum and articles of association attested by the concerned government authorities should be attached, as well as its trade licence and certificate of its inscription in the Commercial Register together with copies of all the relevant documents.
- The Department of Commercial Affairs at the Ministry of Economy and Commerce, after registering the application, assigning it a number and making sure that the required documents are complete will then refer it to the Department of Economic Development according to the following: In the case of acceptance being given, the application will be referred to the Committee of Foreign Companies at the Ministry for approval of the content of the application and for determining the proposed activity of the branch. This committee will then prepare its recommendations and refer them to the Minister of Economy and Commerce for consideration in making his final decision. The Department of Commercial Affairs at the Ministry will then issue the licensing decision,
- In the case of rejection, the application and the attached documents must be returned to the Department of Commercial Affairs to be kept there, and the concerned parties shall be notified of the rejection decision forthwith.
- Completion of registration procedure in the Commercial Register and issuing of the trade licence by the Licensing Department at the Department of Economic Development.
- Registration of the company’s branch with Dubai Chamber of Commerce and Industry in accordance with the requisite procedures.
- Inscription of the Company’s branch in the Foreign Companies’ Register at the Ministry of Economy and Commerce.
The Executive Regulation of the Law has set out general requirements with which foreign companies should comply. In this respect, reference should be made to Ministerial Decision no. 58 of 1985, issued by the Minister of Economy and Commerce, determining therein conditions and procedure of licensing foreign companies to operate in the country.
These include the following:
- Each foreign company granted a licence to operate in the U.A.E. should have an auditor, provided that he is licensed and his name has been inscribed in the Chartered Accountants Register.
- Any company practising activities in the U.A.E. and wishing to amend the data according to which it obtained the licence, should approach the Department of Commercial Affairs at the Ministry of Economy and Commerce through the office concerned with such amendments.
- Foreign companies licensed to practise activities in the U.A.E. should renew their inscription in the Register of Foreign Companies annually and one month prior to the expiry date of their registration.
- In case the company wishes to cease its activities, it should apply to the Ministry requesting the cancellation of its inscription in the Foreign Companies Register, and the business of the company shall not be deemed to have ceased until the Ministry’s decision approving the cancellation has been issued.
- All documents pertaining to foreign companies must be submitted to the Ministry of Economy and Commerce in Arabic, and if they have originally been written in a foreign language, a duly certified Arabic translation should be attached thereto.
Participation in National Companies
Reference has already been made to the types of commercial companies in existence. It has already been mentioned that only one type is solely confined to U.A.E. nationals; namely the Partnership Company. Partnership in-commendam and Partnership Limited by Shares, as stipulated by the law, are open to foreign participation.
However, a Partnership Limited by Shares may not suit non-national investors, as the law stipulates that joint partners must undertake management and profits must be divided as per capital participation. Therefore the following legal forms are likely to be the most suitable for foreign investors:
- Limited Liability Company
This is the most important type of company for non-nationals. The law stipulates that the number of partners should not amount to less than two and not to more than fifty. The law also provides that the share capital of such a company should not be less than AED150, 000; however the competent authorities in Dubai have altered the minimum share capital to AED 300,000. The shares of such a company are not open for subscription by the public, and the company does not issue negotiable shares. Non-national partners are permitted to hold shares not exceeding 49% of the capital, however profits may be shared according to other ratios agreed upon, taking into consideration the efforts of non-national partners in management, introduction of technology or the provision of expertise. The expatriate partner may undertake management of the company.
- The Public Shareholding Company
This company issues – as do the corresponding types of company in other countries – shares for public subscription. A foreign partner may own up to 49% of these shares except in those companies whose activities may be carried out by U.A.E. nationals only. The capital of a public shareholding company should not amount to less than 10 million dirhams. As it issues shares, which may be put out to public subscription and traded in on exchange markets, it is subject to all the control procedures necessitated by such a state of affairs. It may be useful to remark here that although the law provides that the majority of the Board of Directors, and also the president should be U.A.E. nationals, a later amendment permitted the choice of the vice president from among non-U.A.E. shareholders. This clearly shows that non-U.A.E. shareholders can participate in the management of the company at the highest echelon, or it can be said in fact that the law accommodates a kind of marriage between the majority of capital, in connecting the office of President with it, and the need for practical expertise, in offering non-U.A.E. members the office of Vice President.
- The Private Shareholding Company
Like the Public Shareholding Company, this company issues shares, but not through public subscription.
The capital should not amount to less than two million dirhams, and the number of shareholders is not to be less than three. In all other respects the same provisions which are applicable to Public Shareholding Companies govern this type of company.
- The Joint Venture (Consortium Company)
This is a clandestinely set up company, the existence of which is known only to its partners and those contracting with it. It is principally suited to implementing a particular project licensed in the name of a local partner who wishes to join with another partner – who may be non-national – in order to set up such a company where the joining partner is able to contribute not only capital but also know-how and management. Such a company need not be licensed, as the licence of the local partner is sufficient to conduct the business of the company thereunder. Also it will not be registered or published in the Ministry’s Bulletin. Nevertheless, the incorporation is a solid contract legally binding on the partners and can be authenticated before the Notary Public (as has been decided by the Department of Legal Opinions and Legislation). Although the capital of this company should be divided as to 51% in respect of the local partner and 49% in respect of the foreigner, still the ratio of sharing the profits need not follow the capital sharing ratio, and the percentage of profits distribution may also be otherwise, particularly if the foreign partner undertakes the management of the company in addition to contributing his share in the capital.
This type of company is deemed to provide an appropriate legal form for the relationship between national and non-national partners better than ‘ the sleeping partner ‘ and side agreements practices. It is hoped that this legal form will put an end to the above practices as well as problems which may result from them.
In the matter of firms exercising non-commercial activities such as those which have been established by professionals and artisans, these companies are not required to have a local partner. Accordingly Local Order no. 63 of 1991 was issued which permitted non-nationals to form such companies subject to compliance with certain conditions, the most important of which is that the company should have a local service agent.
Investment by a Non –National in the Free Zone
Foreign companies or non-national individuals may invest in the business projects of the Free Zone without the need to have a national partner and it is possible to have 100% foreign ownership of the capital.
Incorporation and licensing of such firms is subject to the special procedures prevailing in the Jebel Ali Free Zone (see below).
Incentives for investment in the Free Zone
Regional Distributor: For companies involved in marketing or distribution of products, the combination of sophisticated port facilities and Free Zone incentives has proven to be irresistible. Companies can choose to set up a base in the Free Zone totally independent of any local partner or agent. As a tax-free centre this company can have complete control over its regional distribution from one central warehouse to the company’s sales agents in nearby countries.
Ready Made Facilities: Since the Free Zone utilises some of the most advanced facilities and efficient services, any operation here becomes extremely cost effective. These facilities include air-conditioned warehouses, the Gulf’s largest cold stores and an ultramodern container freight station. These are backed up by experienced staff, computer monitoring and control systems, computerised inventory control, modern narrow-aisle racking and cargo handling equipment, supported by extensive services which include promotional repacking, co-packing and shrink wrapping.
Superb Communications : The communications available at Jebel Ali Free Zone are second to none. Modern telephone, telex and telefax services are on hand with direct dialling to over 154 countries. Major international courier firms are well represented and provide services at competitive rates.
Excellent Support Services: Dubai Ports, comprising the terminals of Port Rashid and Jebel Ali, provide efficient cargo handling facilities enabling Dubai to rank as the 16 th busiest container port in the world, patronised by over 100 shipping lines. Dubai International Airport is capable of handling 250,000 tonnes of cargo per year. Clearance procedure at both sea and airport is well organised and delays in obtaining cargo, often experienced in other countries, are non-existent in Dubai.
100% Foreign Ownership: - The difficulties encountered by foreign companies in view of the restrictions stipulating operating with local partners have been solved by the proclamation of decree no.1 issued by the Dubai Government establishing the Free Zone Authority, as a result of which 100% foreign ownership is now possible.
Recruitment Problems: - Decree no. 1 allows the Jebel Ali Free Zone Authority to overcome the problems and difficulties of employing expatriate staff because the Free Zone Authority itself acts as a nominal employer of staff whom companies wish to hire. Companies can recruit themselves or, if they wish, the Free Zone Authority will supply employees to the company’s specification.
100% Repatriation of Capital and Profits.
No Corporate Taxes: - Companies operating in the Jebel Ali Free Zone are exempt from corporate taxes for a minimum of 15 years, renewable for a further 15 year period. There is no income tax and units operating within the Free Zone are also exempt from import and export duties. Even if the above taxes were to be imposed elsewhere in the country in the future, the Free Zone companies will continue to enjoy their exemption.
Procedure for investment and licensing in the Jebel Ali Free Zone
A Company wishing to set up a project in the Jebel Ali Free Zone needs to complete certain formalities. Once these have been finalised, the Jebel Ali Free Zone Authority (JAFZA) is able to approve the application and implementation can begin. Preliminary steps a company needs to take are as follows:
- Submission of a completed Preliminary Questionnaire: This document sets out the company’s intentions and should be completed and despatched to JAFZA. From the information provided, JAFZA can make an initial assessment as to whether or not the company’s needs can be met.
- Submission of Licence application: After consideration of the Preliminary Questionnaire, the company will be provided with the following forms: Licence Application and Appendix
- Information Required for Planning (proforma)
- P Form ( Consumer request for power supply)
- E Form, if applicable (this covers environmental issues).
- The appendix included with the licence application sets out the documents that will eventually be required concerning the legal status of the company.
- The Applicant Company should complete the relevant forms and return them to JAFZA. Documents called for in the appendix to the licence or FZE application are
- not required at this stage.?? Is there a section missing?
- Provisional Approval: After receipt of the licence application and associated documents, JAFZA will once again consider the proposal. If provisional approval is given, the company will be asked to prepare and submit the documents called for in the appendix to the licence application.
- At the same time the company will receive for its information: a specimen Lease Agreement
- a specimen Personal Secondment Agreement (if applicable)
- Information note 3 and Planning and Construction Regulations (if applicable)
- Copies of Free Zone notices.
- Preparation of Agreement: - After JAFZA has received and checked all documents requested in the appendix to the licence application, the company’s representative will be called in for a meeting, and if required, details of the project will be discussed and finalised.
- JAFZA will then prepare a Lease Profile setting out the main particulars of the lease and the company will be required to sign this document. JAFZA will give its conditional approval for the project. Thereafter, an actual Lease Agreement and Personal Secondment Agreement, if required, will be prepared by JAFZA for signature by the company.
- Signature of Agreements: - When the documents have been prepared, the company will be asked to sign the agreements and to pay the agreed rent and licence fee prior to collecting the Licence, Lease and Personnel Secondment Agreements. At the time of signing the Lease and Personnel Secondment Agreement, the Applicant Company will be required to provide those insurance policies called for in the agreement.
- Staff Sponsorship by JAFZA: - If the company requires the Jebel Ali Free Zone Authority to sponsor its employees, applications for entry permits may be submitted once the Licence has been issued. The bank guarantee called for in the Personnel Secondment Agreement will be required at this stage, together with visa charges. It should be noted that staff sponsored by JAFZA do not have the right to work anywhere else in the U.A.E.
- Preparation for construction of factory sites and plant projects: - If the project calls for the erection of a structure, or the installation of machinery, detailed plans should be submitted by the lessee through a local registered consultant. At the same time, the applicant should present a request for an estimate of the cost of electricity supply. Both of these may be submitted at any time after the lease has been signed.
- When the plans have been approved and the estimate for electrical connection accepted in writing by the lessee, a Building Permit will be issued. Work may then be executed by a locally registered contractor under the supervision of the consultant and with intermittent inspections by JAFZA.