GILS Corporate law: UAE
UAE
(1) Forms of doing business and Establishment
1.1. What are the options for establishing a company's presence in a country (branch, representative office, subsidiary, etc.), and what are their key advantages and limitations?
The regulatory framework for establishing businesses in the UAE permits foreign companies to access the market via corporate entities like branches, subsidiaries, and representative offices with its own advantages and limitations.
Branch Office: A branch office serves as a regional outpost of the parent company and is established to promote its business within the country. It allows the parent company to conduct commercial activities, although certain restrictions may apply, such as limitations on trading. However, it's important to note that a branch office does not have a separate legal identity, making the parent company fully liable for its actions. Additionally, the income generated by the branch is taxable in the country where the parent company is resident. Each branch office in the UAE requires a local service agent (LSA) but does not have its own equity participation or liability for the business.
Subsidiary: A subsidiary is a company that is owned and controlled by its parent company, but unlike a branch office, it has a separate legal identity. This means that the subsidiary can have its own independent financial liability. While a subsidiary can be managed from abroad or within the UAE, its management and workforce must be located within the UAE. Subsidiaries generally have more freedom in their activities compared to branch offices.
Representative Office: A representative office is established by foreign companies for market research and studying production capabilities without commercial activity. Representative offices cannot carry out business activities or make profits. They are primarily used for promotional or marketing activities and serve as a low-cost option for establishing a regional presence. However, they do not have the legal capacity to conduct business transactions.
1.2. What is the process for creating a legal entity or another form of presence in the country, including the laws to follow, legal entities to be considered, documents required, stages and terms for registration?
The process of establishing a business presence in the UAE is considered a strategic decision, as business owners must choose between mainland and free zone options.
To establish a business in the mainland, a licence must be obtained from the Department of Economic Development (DED) in the respective Emirate where the business will be located. Conversely, for registration in any of the 40-plus active free zones in the UAE, businesses need to obtain a licence from the relevant freezone. This process can be made easier by seeking the assistance of local professional experts. We at GRATA International UAE specialise in providing such assistance. We cater to both local and international clients, offering tailored solutions to meet their specific business needs.
Documents: company incorporation encompasses several crucial steps, necessitating the submission of diverse documents to the relevant authorities. These documents typically include identification papers for shareholders, directors, and the appointed manager. Moreover, compliance with Anti-Money Laundering (AML) regulations mandates the disclosure of Ultimate Beneficial Ownership (UBO) details and local addresses. Certain business activities may additionally require lease agreements to validate physical business locations. By leveraging expert assistance, companies can establish a robust legal framework and embark on a path toward successful incorporation.
Mandatory Capital Amounts and Their Principles: It's essential to note that while setting up a business in the UAE, certain mandatory capital amounts and principles vary depending on the type of legal entity being established and the business activity. However, it's important to understand that the capital requirement is not explicitly defined for most business activities by the respective regulatory authorities. Instead, it should be reasonable and commensurate with the size, nature, and scale of the business operations.
Steps for incorporation: Incorporating a company in the UAE involves several main steps: choosing the business activity and legal structure, reserving a unique trade name, seeking initial approvals, preparing legal documents like the MOA and AOA, appointing shareholders and directors, obtaining necessary approvals, applying for permits, and securing a lease agreement for office space if so mandated.
1.3. What additional authorizations/approvals are required to create a legal entity or start operations, and how do they vary depending on the type of business (if any)?
Additional authorizations and approvals required to create a legal entity or commence operations in the UAE vary depending on the type of business and the jurisdiction (mainland or free zone). For mainland companies, approvals may include obtaining permits specific to the business activity, such as healthcare, education, hospitality or financial services. For certain activities, additional approvals from other government regulatory agencies may be required, such as the Ministry of Health, the Dubai Municipality, DHA, the Securities and Commodities Authority or the Central bank etc.
Generally, businesses in free zones benefit from streamlined processes and fewer restrictions compared to mainland companies. However, they may still require external approvals related to specific regulated activities.
Overall, the specific authorizations and approvals vary based on factors such as the business activity, jurisdiction, and regulatory requirements. It's essential for businesses to thoroughly research and understand the regulatory landscape applicable to their industry and seek professional guidance to ensure compliance and a smooth establishment process.
1.4. What are the most common types of Legal Entities in your country and the differences between them in terms of taxation, liability, and management?
1.4.1. What are the shareholder structures of these types of legal entities?
1.4.2. What is the Shareholders’ responsibility in these types of legal entities?
1.4.3. What is the responsibility of the representatives in these types of legal entities?
1.4.4. Briefly, what are the characteristics of the other types of Legal Entities?
The common legal forms of company formation in Mainland, Free zone, and Offshore in the UAE include:
1. Sole Proprietorship: Owned and operated by a single individual, with limited or unlimited liability;
2. Limited Liability Company (LLC): Provides limited liability to its shareholders;
3. Partnership: Involves two or more individuals sharing profits and liabilities;
4. Public Joint Stock Company (PJSC): Allows public subscription and trade to shares and is subject to higher regulatory requirements;
5. Private Joint Stock Company: Operates similarly to a PJSC but with restrictions on share transferability.
The legal forms of company formation in the UAE, encompassing Mainland, Free zone, and Offshore entities, vary significantly in terms of liability, and management. Sole Proprietorships (which are not in the form of limited liability) entail unlimited liability for their owner, subjecting owner to liability arising from the business activities of the entity. Limited Liability Companies (LLCs) provide shareholders with limited liability, while Free Zone Companies (FZCs) within the same nature of the LLCs but strictly operate within the respective zones where they are incorporated. Partnerships involve joint and several liabilities among partners, whereas Public and Private Joint Stock Companies offer limited liability to shareholders. Management structures vary, with entities being managed by owners, appointed managers, directors, or elected boards, depending on the legal form and jurisdiction.
In the UAE, directors of a company bear the responsibility of overseeing its operations and making decisions that serve the company's interests and stakeholders. Upholding fiduciary duties, they are obligated to act with loyalty, care, and diligence, while avoiding conflicts of interest. Outlined in the updated Commercial Companies Law, Federal Decree-Law no. (32) of 2021, their roles and responsibilities are further defined, including conditions and procedures for appointment, resignation, and dismissal. Relevant laws such as Federal Decree-Law No. 50/2022 Issuing the Commercial Transactions Law and the Civil Transactions Law also govern directors' conduct. Furthermore, adhering to best governance practices is essential. This involves attending board meetings regularly, staying informed about the company's affairs and financial performance, and seeking independent advice when necessary.
1.5. What are the operating costs associated with the maintenance of a legal entity or presence in the country?
Operating costs for maintaining a legal entity in the UAE encompass licence renewal fees, office rent, utilities, employee visas salaries, government fees, taxes, insurance premiums, maintenance, administrative expenses, compliance costs, and miscellaneous expenses. Licence renewals and office rent are recurring costs, while utilities and employee salaries are ongoing. Miscellaneous expenses cover marketing, training, and contingencies. Budgeting for these expenses is essential for sustaining operations and compliance with UAE regulations while ensuring financial viability.
(2) General taxation issues
2.1. What tax obligations are associated with doing business in the country?
On December 9, 2022, the UAE Ministry of Finance issued Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (UAE CT Law), which outlines the tax treatment for corporations and businesses in the UAE. According to the UAE CT Law:
UAE Free Zone Entities (Qualifying Free Zone Persons): Qualifying Free Zone Persons are subject to corporate tax rates of 0% on their Qualifying Income and 9% on non-Qualifying Income.
Other Businesses Operating in the mainland: Businesses operating outside of free zones are subject to corporate tax rates of 9% on their taxable income exceeding a threshold, which is AED 375 000. Taxable income below this threshold is subject to a 0% tax rate.
Exemptions: Certain entities may qualify for exemptions from corporate taxation under the UAE CT Law. Exemptions are available for government entities, extractive businesses, qualifying public benefit entities, and qualifying investment funds, among others. It is essential for businesses operating in the UAE to understand and comply with these tax regulations.
Additionally, Value Added Tax (VAT) in the UAE was introduced in 2018 under Federal Decree-Law No. 8 of 2017/ It is an indirect tax applicable to the supply of goods and services. The standard VAT rate is 5%, with certain goods and services categorised as zero-rated or exempt supplies. Exemptions include undeveloped lands, residential properties, life insurance, public transport, and specific financial services.
2.2. What tax and customs incentives are available in a country?
TAX INCENTIVE
The UAE government provides various measures to assist businesses and foster economic development.
Benefits for Free Zone Companies: Companies registered in Free Zones may qualify for a 0% UAE CT rate on certain income if they meet specific criteria, including maintaining adequate substance and deriving qualifying income.
Encouraging Business Restructuring: Tax relief is offered for corporate restructuring transactions, such as mergers and spin-offs, under certain circumstances.
Facilitating Intra-Group Transfers: Tax relief is available for transfers of assets or liabilities within the same qualifying group, subject to specific conditions.
Assistance for Small Businesses: Small businesses with annual revenues below AED 3 million have the option to elect not to be subject to UAE CT, providing them with tax relief.
Support for Foreign Tax Payments: Businesses operating in the UAE can receive credit for foreign taxes paid on their UAE taxable income, up to the amount of Corporate Tax (CT) due on that income. These measures are designed to attract investment, support small enterprises, and streamline business operations in the UAE. For detailed information and eligibility criteria, we recommend consulting with tax advisors or legal experts familiar with UAE tax regulations.
CUSTOM INCENTIVE
The UAE government has implemented measures to facilitate trade and support economic growth through customs policies.
Customs Duty Refund under Dubai Government's Economic Stimulus Package: The Dubai Government has introduced a customs duty refund program as part of its economic stimulus package. This initiative aims to provide relief to businesses importing goods into Dubai by offering refunds on customs duties paid.
Customs Duty Structure: Customs duty is imposed on imported goods in accordance with Federal Decree-Law No. 15 of 2022. The duty is typically calculated based on a tariff structure, with a general rate of 5%, although certain goods may be subject to higher rates, such as tobacco and alcohol.
Exemptions from Customs Duties: Certain imports are exempt from customs duties, including goods in transit, personal and household goods imported by foreigners or UAE nationals residing abroad, goods for military and internal security use, and goods for diplomatic missions or charity associations.
Free Trade Agreements: As a member of the Gulf Cooperation Council (GCC), the UAE benefits from free trade agreements with the European Free Trade Association (EFTA), Singapore and the Greater Arab Free Trade Area Agreement (GAFTA), covering 17 Arab countries.
2.3. What are the accounting and reporting requirements for different types of presence, and how often must they be submitted?
Companies in the UAE, including those in the DIFC, are now required to comply with International Financial Reporting Standards (IFRS) for their accounting and reporting practices. There are several types of financial reports, they are financial statements, Board of Directors reports, Management Decisions & Analysis reports, Audit reports, Corporate Governance reports, Notes to accounts, and Prospectus.
Additionally, companies subject to return filing must prepare an appropriate audit report within the regular deadline. Usually, this period is from 3 to 6 months from the date of the fiscal year-end. This report should accurately reflect the company's financial position and performance in accordance with IFRS regulations and any other applicable standards or regulations in the UAE. Foreign companies registered in the UAE must submit audit reports and audited financial statements for their branches as a mandatory requirement every year. The audit must be performed by a UAE-registered auditor, in line with Federal Law No. 12/2014 (as amended) and read with Ministerial Decision No. 403/2015.
2.4. What is the taxation of dividends for foreign investors?
According to the Corporate Tax Law, dividends received from Resident Persons are fully exempt from any conditions. Conversely, dividends received from foreign juridical persons are exempt provided that the conditions for Participation Exemption are satisfied, serving the purpose of mitigating double taxation. Ministerial Decision No. 116 of 2023 delineates a "dividend", encompassing ordinary dividends, dividends in kind, other distributions, and nonarm's length payments.
2.5. What strategies exist for minimising tax liability when conducting international business?
When conducting international business, strategies for minimising tax liability include establishing offshore entities in jurisdictions with favourable tax laws, utilising transfer pricing to set market-based prices for intercompany transactions, leveraging double taxation treaties to avoid being taxed on the same income twice in different jurisdictions, maximising deductions and exemptions available under tax laws, optimising business structures for tax efficiency, employing tax-efficient financing options, and maintaining compliance with tax regulations. These approaches enable businesses to strategically manage their tax liabilities while operating globally, ensuring they pay taxes efficiently and in accordance with applicable laws. Seeking guidance from tax professionals familiar with international tax regulations can further enhance the effectiveness of these strategies.
(3) Regulatory and miscellaneous
3.1. What are the general data protection and privacy requirements in the country, and how do they affect company operations?
The UAE's data protection laws, governed by Federal Decree-Law No. 45 of 2021, significantly impact businesses by requiring fair, transparent, and lawful handling of personal data. Applicable to both data controllers and processors, the law covers all personal data processed within the UAE, including sensitive information. Companies must adhere to key principles such as purpose limitation, data accuracy, and security. Compliance with these regulations is overseen by the UAE Data Office, ensuring accountability and enforcement. Companies must implement measures such as data protection impact assessments and breach notification procedures to comply. Overall, adherence to these laws is crucial for maintaining customer trust, avoiding penalties, and safeguarding against data breaches.
3.2. What labour law features should be considered when hiring local and foreign employees?
When hiring both local and foreign employees in the UAE, it's essential to consider various labour law (Federal Decree-Law No. (33) of 2021 Regarding the Regulation of Employment Relationships and its amendments) features to ensure compliance and fair treatment. These features encompass equality and nondiscrimination, ensuring that all employees, regardless of nationality, are treated fairly in the workplace. Regulations concerning the employment of juveniles safeguard the rights of young workers. Recruitment and employment processes must adhere to legal standards to maintain transparency and fairness. Employment contracts play a crucial role, outlining terms and conditions for both parties. Provisions such as non-competition clauses protect employers' interests post-employment. Employers are obligated to provide a safe working environment and timely payment of wages to their workers. Forced labour is strictly prohibited, emphasising the protection of workers' rights. Furthermore, labour laws regulate working hours, overtime, and entitlements, ensuring employees' well-being and fair compensation. Provisions for public holidays, annual leave, maternity leave, and sick leave contribute to promoting work-life balance and employee welfare. Adhering to these labour law features fosters a conducive work environment, upholds workers' rights, and promotes equitable employment practices in the UAE.
3.3. What are the requirements for currency regulation and currency control?
Currency regulation and control in the UAE, overseen by the Central Bank and Ministry of Finance, entail compliance with foreign exchange rules, licensing for financial activities, and strict anti-money laundering measures. Financial institutions must report transactions, adhere to capital controls, and navigate taxation requirements. Adherence to regulations is crucial for maintaining monetary stability, preventing illicit activities, and ensuring compliance with tax laws. Businesses and individuals engaged in currency transactions must stay informed and follow regulatory guidelines to avoid penalties and maintain financial integrity in the UAE.
3.4. What corporate law features should be considered when planning mergers, acquisitions, and company restructuring in the country?
When planning mergers, acquisitions, and company restructuring in the UAE, several corporate law features are crucial. Regulatory approvals from bodies like the Securities and Commodities Authority and Department of Economic Development are essential. Understanding foreign ownership restrictions, due diligence requirements, and drafting precise transaction documents are pivotal. Post-transaction integration also demands careful consideration. Engaging legal experts well-versed in UAE corporate laws ensures compliance and smooth execution.
3.5. What are the most efficient mechanics for dispute resolution?
In the UAE, disputes can be efficiently resolved through:
UAE Common Law Courts: Utilising specialised commercial courts like the DIFC Courts and ADGM Courts offers a formal legal process in accordance with common law system for resolving disputes promptly and effectively.
UAE Local Courts: The legal structure in the UAE runs in two systems: the Federal Judiciary presided by the Federal Supreme Court as the highest judicial authority in the UAE and the local judicial departments at the local government level.
a. Federal Courts: The Federal Judiciary, led by the Federal Supreme Court, serves as the apex judicial authority in the UAE, overseeing matters of federal law and disputes between emirates and the federal government. It operates alongside local judicial departments, with each emirate having the option to participate in the Federal Judiciary or maintain its own local judicial system.
b. Dubai Courts: Independently operating within the UAE's federal framework, Dubai Courts handle a wide array of cases, including civil, criminal, family, and commercial disputes.
c. RAK courts: Operating within the UAE's legal system, RAK Courts adjudicate civil, criminal, and family law matters within the emirate of Ras Al Khaimah.
Arbitration: UAE offer various arbitration services catering to the needs of businesses and individuals in the UAE, providing options for dispute resolution in both Arabic and English languages through various key arbitration institutions:
- Dubai International Arbitration Centre (DIAC): It is an independent arbitration institution based in Dubai, United Arab Emirates. Established in 2007, DIAC provides a platform for resolving commercial disputes through arbitration. It operates under its own set of Arbitration Rules and offers services in both Arabic and English languages.
- Abu Dhabi Commercial, Conciliation and Arbitration Centre (ADCCAC): Established by the Abu Dhabi Chamber in 1993, ADCCAC resolves commercial disputes through arbitration or conciliation. ADCCAC offers services in Arabic or English and has accredited mediators for resolving disputes through mediation.
- Abu Dhabi Global Market Arbitration Center and Alternative Dispute Resolution: Relatively new but equipped with advanced technology, ADGM arbitration centre follows UNCITRAL model laws and provides digitised dispute resolution services.
- Other Institutes: Sharjah has its Commercial Arbitration Centre, and Ras Al Khaimah has the Centre for Reconciliation and Commercial Arbitration.
Choosing the appropriate mechanism depends on factors such as the nature of the dispute and parties' preferences. Our expertise at GRATA International ensures swift, effective, and tailored solutions to your disputes, safeguarding your interests and fostering positive outcomes.
Authors:
Issam Dahman, Sarah Rizwan.
