Dubai: an ever-expanding market

With its rapidly growing commercial sector and favourable tax regime, combined with a pleasant climate throughout most of the year and high standard of living, foreign businesses and individuals are increasingly looking to relocate to Dubai. The Dubai Government is keen to attract such inward investment and a number of new initiatives have been implemented to encourage this.

Range of work

Dubai has become a very important location for international law firms as a base for their Middle East business. The number of law firms with offices in Dubai has increased enormously over the last few years and this is a trend which seems set to continue, as there appears to be continuing confidence in the Dubai economy.

Major US and UK law firms have been in Dubai for a number of years now. Historically the US firms were predominantly engaged in providing services to the oil and gas sector and UK firms were involved in traditional mergers and acquisitions and project finance work, but the range of work being undertaken now covers all major areas of legal practice. The large ports in Jebel Ali and the Dubai Maritime City ensure that shipping and maritime law is an important focus for many firms, and Dubai’s property sector is particularly high profile with a huge number of buildings under construction, or proposed in the next few years. In addition to this the more conventional M&A business continues to keep lawyers busy, along with the cash rich sovereign funds looking for investment opportunities, and increasing finance work including Islamic finance as investors look to invest in the wider regional market.

Licence please

All proposed businesses in Dubai need to be issued with a trade licence, specific to their proposed activities, and this also applies to law firms. Law firms wishing to obtain a professional licence must first obtain the approval of the Ruler’s Court, then lodge an application with the Department of Economic Development, which has the discretion to decline applications. The procedure for a law firm applying for a professional licence to practise will depend on factors such as the length of time the firm has been in operation in another jurisdiction, number of partners and proposed areas of practice.

There are now a considerable number of law firms in Dubai and undoubtedly the market could become saturated. This may lead to a restriction on the number of firms granted licences in the future. Firms must also consider their proposed client base because all legal specialisms are represented in Dubai, and while the city may be expanding rapidly, if a firm cannot offer services which set it apart from the competitors, it may find there is a lack of business. In the last year we have seen a couple of international firms closing their Dubai offices.

Some law firms choose instead to establish an association with an established Dubai law firm, either because they cannot obtain a professional licence in their own right or to avoid the costs of setting up and running their own office.

There is no regulator which governs the way in which law firms practise, but most reputable law firms will be regulated in their home country, with the individual lawyers holding practising certificates from the law society in which they were admitted.

Scottish qualified lawyers are free to practise as legal consultants in Dubai without the need to pass any exams in local or Sharia law or to convert their degree. There is of course a requirement that any prospective lawyers are approved by the Ministry of Labour, which must be satisfied that there is a commercial justification for issuing an employment visa, but in practice this should not be a difficulty. Most of the work carried out by Scottish lawyers relates to corporate and commercial activities such as company acquisitions and disposals, energy, real estate, joint venture agreements and commercial contracts; and knowledge and experience in these areas will be readily transferable.

Generally there is no income or corporation tax in Dubai, which is a considerable incentive to anyone considering relocating. It is currently expected however that VAT or an equivalent form of sales tax will be introduced in the next couple of years.

Choosing a legal structure

In many cases lawyers will be contacted by clients who wish to establish a business in Dubai, to take advantage of the growing economy and beneficial tax position. While it will be necessary to take advice from suitably qualified and experienced Dubai lawyers, it is useful to have background knowledge of the types of legal structure commonly operated in Dubai.

There are a number of legal structures which can be considered by foreign businesses, and since the inception of ‘’free zones’’ it is now possible to establish a legal entity with 100% foreign ownership.

The type of legal structure which a business should adopt will be driven by its proposed activities. It is not simply a case of setting up in business. All businesses that operate outside of a free zone must obtain a trade licence from the Dubai Department of Economic Development and in some instances the federal Ministry of Economy, which specifies the permitted activities, and the business is restricted to carrying out those activities.

Local agents

If the business intends to sell its products to customers in Dubai without actually establishing a legal entity, it can appoint an agent or distributor in the territory which can source and market direct to customers, handle logistics, sponsor employees and generally assist with sales of the products.

The United Arab Emirates legal system distinguishes between two forms of commercial agencies, the registered commercial agency and the unregistered commercial agency. The main difference lies in the laws governing each. The registered commercial agency affords significant protections to the commercial agent, who must be appointed on an exclusive basis. The law does not distinguish between agency agreements regarding franchises, distributorships, commission agreements and other forms of sales representation. As such, legal advice should be taken when creating the relationship.

Rules for corporations

In respect of foreign investors establishing a presence outside of a free zone, the vehicle most often used is the limited liability company (LLC). It is a requirement that a UAE national, or a 100% UAE owned company, must hold at least 51% of the shares in an LLC. Certain categories of business may require that the entity be 100% owned by a UAE national. It is permissible to state in the memorandum of association that profits may be shared in different proportions to the shareholdings, as it is not possible to have separate classes of shares. In Dubai the maximum proportion of the profits which may be distributed to the foreign shareholder is 80%. There is no requirement that any of the directors or managers of the company must be UAE nationals.

A range of side agreements are often executed between foreign investors and their UAE partners, to regulate and define the interests of the shareholders and their involvement in the business, particularly in situations where the foreign shareholder provides all the capital and management; but care must be taken when entering into such agreements to ensure that they do not breach the new UAE Commercial Concealment Law, due to come into force in 2009.

Branches and offices

A foreign company can establish a branch or representative office in Dubai. The branch/representative office is regarded as part of its parent company and does not have separate legal status. The foreign company remains fully responsible for the liabilities of its branch/representative office. This also means that profits of the branch/representative office are treated as profits of the parent and may therefore be liable to tax in the parent company’s jurisdiction.

A representative office is limited to marketing the activities of its parent, and as such is issued with a professional/non-trading licence and may not carry out business activities, which must be referred to the parent. A branch office is a fully fledged business, permitted to conduct business activities and enter into contracts in the name of the parent.

Both the branch and representative office must appoint a local ‘’sponsor’’, who must be a UAE national or a 100% national owned company. The sponsor is not required to participate in the management of the office and in practice their role is confined to providing specific services such as assisting in communicating with government departments and obtaining permits necessary for the conduct of business, including work permits. The sponsor will be paid a fee for their services, which will be commercially negotiated.

Free zone entities

Free zones are geographic areas which cater to specific commercial sectors. In recent years the number of free zones and the range of permitted business activities have increased considerably. Traditionally the free zones have been located around major seaport or airport facilities. However it has been increasingly common for free zones to focus on specific business sectors. For example, the Dubai Internet and Media Cities cater respectively to IT and media related activity. The Dubai Knowledge Village aims to attract companies serving the educational and academic sectors, and a number of Scottish universities are establishing a Dubai presence. Dubai Healthcare City focuses on medical service providers and the Dubai International Financial Centre (DIFC) is the destination of a number of international banks, investment companies and businesses supporting the financial and commercial sector. One benefit to the companies which choose to establish themselves in these specialist free zones is that the majority of their potential clients and customers will be located close to hand.

Free zones permit investors to establish a presence in the Middle East region with 100% foreign ownership. Unlike most other corporate entities in the UAE, companies operating within the free zones do not require a UAE national partner or sponsor. All of the business activities of a free zone entity must be carried on within that free zone, however, and it may not carry out business activities in Dubai outside of the free zone.

Shares in free zone incorporated companies may be owned by individuals or by corporations. Such companies have separate legal personality and can contracts in their own name. As with LLCs, the liability of the members is generally limited to the amount paid by them for their shares.

In most cases the information relating to the directors, shareholders and financial information of free zone licensees remains private and is not held on any publicly available register. It is a general requirement of the free zone authorities that each registered entity submits audited accounts on an annual basis. However these accounts also remain private and may not be accessed by any third parties.

Any business wishing to be established in the free zones must provide information relating to their projected business activities to the free zone authorities at the stage of submitting their application for a licence. The licence to be issued will depend on the type of proposed business activities.

Dispute resolution

As part of the process of facilitating the requirements of international businesses, Dubai has been focused on ensuring that its legal framework can support the significant rate of its economic expansion. Specialist courts are being set up, such as a Property Court which will deal exclusively with property related disputes. In 2007 the Dubai International Arbitration Centre adopted a new set of rules which equip it with the necessary framework to encourage the use of arbitration as an alternative method for dispute resolution. The DIFC has its own common law based court system, although the jurisdiction of the DIFC court is limited to companies within the DIFC or those dealing with DIFC companies. This court provides international companies with a familiar and well established system of litigation. Further, the UAE has acceded to the New York Convention, meaning that foreign arbitration awards should now be enforceable against local companies.

Gordon Inkson is a Scottish qualified lawyer working in the Corporate, Projects and Finance team in the Dubai office of Holman Fenwick Willan. The office, one of 10 the firm operates globally, specialises in mergers and acquisitions, corporate and project finance, regulatory work, new businesses, shipping and transport,real estate and insurance.