Doing business in Dubai

Januray 2008

INTRODUCTION

There are several reasons why Western companies consider establishing their business in the United Arab Emirates (UAE), and more specifically in Dubai. It is worth to mention the extraordinary economic boom currently taking place in this region of the world with a real gross national product growth rate of 9% in 2006 (compared to 3% for Canada). There is also the absence of corporate taxes (in many cases) and personal income taxes that make it a real tax haven.

This article presents the seven main legal forms of business possible for a foreign company that wants to settle in Dubai.

The General Partnership

This form of business is strictly limited to the National Emiratis. Therefore, foreign companies are not able to establish themselves under this form of business.

Limited Partnership and Share Partnership Company

These forms of businesses are not recommended by Dubai authorities.

Joint Venture

The joint venture, or momentary grouping, is a contractual agreement between two companies that wish to associate mainly for the realization of a specific project. However, one of the parties must be a local resident and hold at least 51% equity in the joint venture. This form of business establishment does not require registration with the authorities and the contractual agreement does not have to be published.

The condition of having 51% local interest is very often found in partnerships with foreign companies and demonstrates the intention of the UAE to develop an entrepreneurial fabric locally rather than letting foreign companies take control of local industries. We see this condition in several other Gulf countries, such as Qatar for example,

In practice, the parties may contractually provide a profit and loss distribution that is different from their respective equity holdings.

The subsidiary or local office of a foreign company

A foreign company may also open a subsidiary or a representative office in Dubai which will be 100% owned by it. However, it is mandatory for the foreign company to appoint a local representative who must be local resident or a wholly-owned company held by a local resident.

These local representatives are commonly called sponsors. They are usually not directly involved in the company's activities but often help with administrative hassles (visas, permits, etc.). In some cases, however, the sponsor can help the foreign company obtain contracts through its contacts in the region.

A sponsor will obviously be paid for his services. The compensation base varies according to the extent of the services rendered. If you choose this form of establishment, you will probably want to have an influential sponsor. However, be aware that his remuneration will also be related to his degree of influence in the UAE.

Private and Public Shareholding Companies

These forms of companies are specifically planned for certain activities. Banks, insurance companies and other financial institutions must by law establish themselves as "public shareholding companies" unless they establish themselves via a subsidiary or a local office as mentioned in the preceding paragraph.

Shareholding companies are more prestigious vehicles since they are generally used for large projects. The reason is that the minimum capital required to establish a "public shareholding company" is 10 Million Dirham (2.7 Million CAD) and 2 Million Dirham (500K CAD) for a "private shareholding company".

It should be noted that the Board of directors of these companies must be composed of a majority of Nationals including the Chairman of the board.

Limited Liability Companies

This form of establishment resembles our Canadian companies. For example, the liability of the shareholders of these companies is limited to their invested capital, hence the name "Limited Liability". This vehicle is also more flexible since the minimum capital required is fixed at 300,000 Dirham only (approximately 80K CAD).

Here again, the foreigner can not own more than 49% of the shares (and 51% for a local resident), although in practice the parties will often provide for a distribution of profits in different proportions.

Professional Companies

A professional firm can establish itself in Dubai and be wholly owned by the foreign firm that comes to live there. It must provide professional services and the number of employees it can hire is limited. It must also have a local agent who must be a local resident.

This option may be of interest to a professional firm that starts operations in Dubai and does not plan to hire a large number of employees locally.

Conclusion

We have seen that local law generally provides for the need to have a local partner up to 51% and that foreign companies will often circumvent this rule by contractual agreements and provide for a different distribution of profits and losses. Be aware, however, that the legal value of these agreements is questioned by some foreign observers since the parties are completely circumventing the text of the law. However, this practice is now quite common and could even be said to be institutionalized since locally established law firms and accountants do not hesitate to recommend this practice to their clients. You will probably want to have a legal opinion on the validity of your agreement from a local lawyer.

In closing, it is worth mentioning that the choice of one or the other of these legal vehicles obviously depends on the exact nature of the activities of the company that wishes to establish itself in Dubai. The growth ambitions of the company must be taken into account. There is no ready-made recipe for everyone and your legal advisor will need to understand your goals in order to properly advise you.