Tuesday, 18 February 2014

Questions and Answers guide to establishing a business in the United Arab Emirates


1. What is the legal system in your jurisdiction based on (for example, civil law, common law or a mixture of both)?


The UAE is an Islamic state and Islamic Sharia law is the main source of legislation under Article 7 of the UAE Constitution. The rules and principles of Islamic jurisprudence are relied on in the understanding, construction and interpretation of the provisions of the Civil Code. In addition, under Article 75 of Federal Law No. 10 of 1973, the Supreme Court must apply the provisions of Sharia law, federal laws and other rules of custom and principles of natural law and comparative law insofar as they are not inconsistent with the provisions of Sharia law.

The UAE is a federal state and laws are promulgated at various levels, all of which may cover the same issue or topic with differing impact. Federal laws override the individual laws passed by the seven Emirates within the Union.

There are also carve outs for free zones within the seven Emirates, with laws which are passed by the relevant Emirate but limited to the area within the free zone.

The most prominent free zone is the Dubai International Financial Centre (DIFC), an international offshore financial center, which came about as an effort to bridge the gap between the world's major financial centers. It has its own:

ü  Financial services regulator, the Dubai Financial Services Authority (DFSA).

 

ü  Exchange, the Dubai International Financial Exchange (DIFX).

 
 

ü  Legislation based primarily on common law principles.


DIFC Court.



All financial services activities within DIFC are regulated. Authorised firms are categorised depending on the activities allowed under their licence. There are also unregulated firms, mainly single family offices, company service providers, real estate developers and retail shops, as well as registered entities such as law firms and accountancy practices.

The companies in the rest of the UAE are monitored by different regulators, depending on their activity.

In general, any economic entity (of any nature), whether within or outside of DIFC, must be licensed. In addition, depending on the nature of the activity, it may also need to be regulated. The nature of the licence defines the activities that the company can engage in when conducting its business. This contrasts with the wide range of activities in which a company can engage in most common law jurisdictions.
 
Business vehicles

2. What are the main forms of business vehicle used in your jurisdiction?

What are the advantages and disadvantages of each vehicle?


There are a number of options available for setting up a business in the UAE.

Under the Commercial Companies Law (Federal Law No. 8 of 1984 Concerning Commercial Companies as amended by Federal Law No 1 of 1984 and Federal Law No 13 of 1988, Federal Law No. 15 of 1998) (CCL), foreign investors are only permitted to hold up to 49% equity ownership in UAE companies, meaning 51% of the shares must be held at all times by one or more UAE nationals.

The limited liability company (LLC) is the most popular method of establishing a commercial company in the UAE, unless the business involves banking, insurance and investment activities conducted on behalf of third parties, where a public joint stock company is required.

The LLC requires a minimum of two and a maximum of 50 members, and minimum capitalisation of AED300,000. Management of the LLC is vested in the managers (up to five natural persons) who may or may not be UAE nationals.

Other commercial structures regulated under the CCL are general partnerships, simple limited partnerships, joint participation, public joint stock company, private joint stock company and partnerships limited with shares, most of which, except for the private and public joint stock companies, are not readily used.

Foreign companies may also obtain the approval of the concerned authorities and open a branch of the company in the UAE, provided that the company has a UAE national as an agent.

In addition to registering under the CCL, it is possible to register in one of the many free zones. Within the free zones, foreign nationals can own 100% of the share capital of the free zone entity, without the support of a UAE national that is required under all entities available under the CCL. The free zones are situated throughout the UAE, many within Dubai and numerous others throughout the other Emirates. In total, there are over 25 free zones, some specifically for certain industry sectors, such as Dubai Internet City which is solely for the IT industry. The more popular free zones besides DIFC include Jebel Ali Free Zone, Dubai Multi Commodities Centre and Dubai Media City.
 

Establishing a presence from abroad


3. What are the most common options for foreign companies establishing a business presence in your jurisdiction?


The most common options for foreign companies establishing a business is either a limited liability company (LLC) or a free zone entity.

An LLC can be compared to a joint venture, in that the foreign company, or individual, enters into a relationship with a UAE national, or company owned by one or more UAE nationals (Local Partner), to carry on business. For the majority of businesses the foreign company, or individual, can only legally own 49% of the business with the Local Partner legally holding 51%. The memorandum of association (memorandum) sets out the relationship between the parties. The foreign national can be given certain preferred rights under the memorandum; such as being entitled to 80% of the profits and the ability to appoint the manager of the LLC.

In the majority of cases, the LLC is formed and the local partner is paid an agreed fee each year under a side agreement which states that, in consideration of the fee, the local partner will legally hold the 51% of the company but the foreign company will beneficially hold 100% of the share capital of the LLC. Foreign companies have become comfortable with the use of such side agreements, although their enforceability has not been conclusively tested in the courts.

Establishing a business in one of the UAE's numerous free zones is a common option for foreign companies. To date the free zones have been successful in attracting a large number of foreign companies and foreign direct investment. Advantages in setting up in a free zone include:


100% foreign ownership.


100% repatriation of capital and profits.


100% import and export tax exemptions.


No corporate taxes for 50 years.


No personal income tax.


Each free zone has its own independent free zone authority, responsible for issuing free zone operating licenses and assisting companies with establishing their business in the free zone.

Foreign companies can either register a new company in the form of a Free Zone Establishment (FZE) or simply establish a representative office or branch of their existing or parent company based within the UAE or abroad.

An FZE is a limited liability company governed by the rules and regulations of the free zone in which it is established. Under Federal Law No. 15 of 1998, except for acquiring nationality in the UAE, the provisions of the CCL do not apply to FZEs, provided that the free zones have special provisions regulating such companies.

It is, however, to be noted that there are restrictions on doing business with other free zones and in areas not covered by free zones within the UAE (onshore). These restrictions vary in scope and nature.



4. How can an overseas company trade directly in your jurisdiction?


Any company incorporated outside the UAE can engage in commercial and professional activities through the following legal forms:


-Branch, or a representative office, of a foreign company.


-Limited liability company (see Question 2).


-Private or public shareholding company.


A branch of a foreign company can conduct selected commercial and professional activities, but, for example, cannot import goods into Dubai; this will be managed by a local trader or commercial agency. The branch office must have an independent budget, its own profit/loss statements and must appoint a UAE-accredited auditor. A branch must also have a local service agent, who must be a UAE national or a company owned by one or more UAE nationals.

A representative office is not a business structure in its own right but is rather a business activity that a branch can conduct. It can promote and market the parent company's business, but not conduct business operations. A representative office also requires a local service agent.

A private shareholding company is a partnership of at least three individuals. This type of company can be created for any commercial or industrial type of business, although professional activities are not allowed under this legal form.

A public shareholding company is a company whose capital is divided into transferable shares of equal value. It must have a minimum capital of AED10 million.

The business name cannot include the name of any of the shareholders, with the exception of patents registered in the name of a shareholder or if the business uses a store that has the name of a shareholder. The phrase "Public Shareholding Company" must be included in the business name.



5. What are the formalities for setting up a partnership?


For a general partnership, the general principles include that:


A general partnership is an arrangement between two or more partners whereby each of the partners is jointly and severally liable to the extent of all their assets for the company's liabilities.


Only UAE nationals are allowed to be partners in a general partnership.


All partners are considered to be agents of each other, and the bankruptcy of any partner leads to the bankruptcy of all the partners.


The company shares cannot be represented in negotiable certificates.


Partners are severally and personally responsible for the company's obligations and any agreement to the contrary is not enforceable against third parties.


Company administration is undertaken by all partners, unless the company contract or an independent contract assigns the administration to a partner or to a non-partner party.


For a simple limited partnership:


The partnership is formed by one or more general partners who are liable for the business liabilities to the extent of all their assets, and one or more limited partners liable for the business liabilities to the extent of their respective shares in the capital only.


Only UAE nationals are allowed to be general partners.


The simple limited partnership is a partnership for all partners and is subject to partnership rules, including:

the simple liability contract must include in addition to the other data, the name of each limited partner, his surname, nationality, date of birth, country, capital share and capital contribution;


-the limited partner is only liable towards the company's debtors to the amount of his capital share;


-a limited partner cannot intervene in the company administration-related issues related to others even if authorised to do so. Instead, he can obtain a copy of the loss/profit accounts and the balance sheet and check the validity of the data by reviewing the company's records and documents by himself or by a representative from any of the partners or others, as long as this does not harm the company. If the limited partner violates this ban, he becomes responsible for all the obligations resulting from the business;


-the limited partner may be liable for all the company's obligations if the business administration he carried out leads others to believe that he is one of the ultimate actual partners, in which case the rules and regulations of the actual partners will apply to the limited partner;


-if the limited partners carried out any of the banned administration business based on an explicit or implicit authorisation from the partners, such partners will be held jointly responsible with him for the obligations resulting from such acts;


the limited partnership must issue resolutions with the consensus of all partners and limited partners, unless the memorandum of association specifically provides that resolutions may be passed by a majority of the partners, the majority being either by way of numbers or capital contribution, as stated in the memorandum of association;


-resolutions to amend the company contract cannot be passed unless duly approved by all partners and limited partners.



6. What are the formalities for setting up a joint venture?



A limited liability company formed under the provisions of the CCL has many similarities with a "joint venture" in other jurisdictions.

Onshore companies

Onshore joint ventures are established by a joint venture agreement and must be registered. A foreign national or a foreign company can both enter into joint ventures in onshore UAE, subject to certain qualifications discussed below. The terms of agreement and association are set out in a standard memorandum of association issued by the Department of Economic Development (DED), which is signed before a notary public. The documentary requirements for initial approval are as follows:


Registration and licensing application, as well as proof of reserved trade name.


Photocopy of applicant's passport (together with residence permit/visa details for non-GCC (Gulf Co-operation Council) states' nationals).


Photocopy of applicant's naturalisation identification for UAE nationals only.


No-objection letter from the applicant's current sponsor for non-GCC nationals.


Photocopy of the director's passport, and no-objection letter from the director's current sponsor.


Approval issued by other government authorities according to the type of activity.


The company's board of directors resolution to subscribe to the new company if the partner is an existing corporate entity in UAE or abroad (the resolution must be attested by UAE embassy/consulate or by a GCC state embassy/consulate and UAE Ministry of Foreign Affairs, and duly translated into Arabic).


Once the above documents have been submitted, the second step involves submission of:


An initial approval receipt.


All documents provided under the initial approval stage above.


A photocopy of the office lease including the plot number.


An original photocopy of the memorandum of association duly authenticated by a notary public.


The contract of the limited liability company (LLC).


If the partner is an existing corporate entity in UAE or abroad the memorandum of association and the commercial register certificate must be attested by UAE embassy/consulate or by a GCC state embassy/consulate and UAE Ministry of Foreign Affairs, and duly translated into Arabic.

All applications for establishing an LLC "onshore" are filed with the DED. According to current UAE laws, a UAE national must own and control 51% of the shares in the LLC whereas non-nationals can own no more than 49%. However, this requirement is relaxed for those companies that are wholly owned by GCC nationals who are exempt from the above requirement.

Typically, the partners in a joint venture enter into a formal shareholders' agreement. However, such an agreement must be consistent with UAE law and the registered memorandum of association. If there are inconsistencies between the two, such provisions are unenforceable. This is generally how joint ventures are carried out within the UAE.

Free zones

Each free zone entity has its own rules and regulations, which are generally less onerous, for incorporating companies in the respective free zones. It is not necessary to have a UAE national as a partner to incorporate a company in the free zone; they can be 100% owned by non-UAE nationals.

Unincorporated joint ventures

Unincorporated joint ventures are often used for short term operations. Two or more parties can form a private unlimited company so that the company that is licensed to carry out a certain business may do so on behalf of the other company which does not possess a licence (section 56, CCL).

Due to the UAE licensing requirements, all joint ventures must include a vehicle that has the appropriate licence to carry out the business activities either from the DED or a free zone authority.



7. Are trusts available in your jurisdiction?


Trusts do not exist as such under UAE Law, although there are Islamic trusts, governed by Sharia law. Trusts as vehicles for beneficial owners are not available in the UAE with the exception of the DIFC Free Zone. DIFC does recognise trust principles, which will be familiar to common law lawyers.
 

Forming a private company


8. How is a private limited liability company or equivalent corporate vehicle most commonly used by foreign companies to establish a business in your jurisdiction formed?


Regulatory framework

A limited liability company (LLC) can be formed under the provisions of the CCL.

Onshore. The LLC is the most commonly used vehicle for incorporating an onshore company, in accordance with the CCL. The incorporation process is regulated by the Department of Economic Development (DED). This is a two-step process. The first step is choosing the business activity of the LLC. There are over 2,000 business activities available and the selection may have an effect on the minimum share capital requirements and the ownership structure. LLCs can conduct any industrial or commercial business, but cannot engage in professional businesses other than banking, insurance or investment. LLCs cannot practice law, auditing, accountancy or any other type of consulting service.

Free zone. Each free zone has its own set of requirements, rules and regulations for registering a company. The requirements depend on whether the owners of the new company are individuals or whether it is a corporate entity. Other considerations for registering in a free zone are:


Office space requirements.


The number of visas needed.


The activity of the company.


Once these are ascertained, the appropriate free zone can be approached and the requirements, rules and regulations can be ascertained for setting up an appropriate business vehicle.

The most commonly used vehicle in a free zone is a company limited by shares or a LLC.

For more information on the regulatory authorities, see box: The regulatory authorities.

Tailor-made or shelf company

All companies whether those formed under the CCL or within a free zone are formed on a tailor-made basis. It is not possible to purchase a shelf company.

Formation process

Onshore. To register an LLC under the CCL and obtain a licence from the DED is a two-stage process:


Initial approval. The documents required include:

the registration and licensing application, as well as proof of reserved trade name. This involves an online application with the DED;


copy of applicant's passport;


copy of the director's passport;


approval issued by other government authorities according to the type of activity;


the company's board of directors resolution to subscribe to the new company if the partner is an existing corporate entity in UAE or abroad (the resolution must be attested by UAE embassy/consulate or by a GCC state embassy/consulate and UAE Ministry of Foreign Affairs, and duly translated into Arabic).


Documents required after getting the initial approval include:

initial approval receipt (plus all documents submitted for initial approval);

photocopy of office lease including the plot number;

original photocopy of the memorandum of association duly authenticated by the notary public.


If the partner is an existing corporate entity in UAE or abroad the memorandum of association and the commercial register certificate must be attested by UAE embassy/consulate or by a GCC state embassy/consulate and UAE Ministry of Foreign Affairs, and duly translated into Arabic).

The fees depend on the business activity of the LLC. All fees are paid to the concerned local government office.

Free zone. To register within a free zone, once the free zone is decided on, the specific requirements for registration will depend on the rules of that particular free zone.

Fees vary from free zone to free zone, with the more established free zones, such as Jebel Ali Free Zone and DMCC/JLT Free Zone being more expensive than free zones incorporating virtual offices in other Emirates, such as Fujairah and Ras Al Khaimah.

Free zones have been created on an industry specific basis, for instance a software service provider that wishes to incorporate a company in a free zone would have to establish a company in Dubai Internet City. The trade licence issued to a company will vary as the trade licence defines the business activity that a company may engage in.

Company constitution

The main document for constitution of a limited liability company, formed under the CCL, is the memorandum of association. The memorandum of association is a document that regulates a company's external activities. The memorandum of association records, among other things, the company's name, the company's headquarters, the purpose for which the company was established, the names of its shareholders including their nationality and place of residence, the number of shares held by them, the names of the directors, the company's commencement and expiry dates and other key financial and legal information.

There is no set or standard form of memorandum of association and this must be drafted by a law firm or the DED provide a service for preparing a memorandum of association.

Within each free zone, the company's shareholders sign the company's memorandum of association, which are in a standard form for each free zone and are not generally amended in any way.
 

Financial reporting


9. What financial reports must the company submit each year?


For a limited liability company (LLC) registered under the CCL, there is no requirement to file any accounts with any authority, until it is to be closed or liquidated where an auditor must submit audited accounts.

Generally, there is no requirement to file accounts within the free zones. One exception is Dubai Multi Commodities Centre (DMCC) free zone, where audited accounts must be submitted annually.

If the overseas company has a branch in the UAE, there is no UAE filing requirement and the branch accounts must comply with the overseas company law.
 
Trading disclosure


10. What are the statutory trading disclosure and publication requirements for private companies?


For a limited liability company (LLC) registered under the CCL, the company must keep at its headquarters a record of:


The names, nationalities, professions of the shareholders.


The number and value of shares owned by each of the shareholders.


All actions involving shares and the dates on which they were undertaken.


All LLCs must display their name and sign at their premises and include full details including address, name and licence number on their letterhead and invoices. There is no such requirement for websites.

The LLC's name must include the phrase "Limited Liability Company", in addition to a statement showing the company's capital.



11. How do companies execute contracts or deeds?


Contracts are executed by company seal and/or signature by the manager, director or authorised signatory.

A number of important documents, such as the memorandum of association and a power of attorney must be signed before the notary public.

Any change in the company's constitutional documents arising out of any change in the persons holding shares also requires the documents to be notarised before presenting them to the Department of Economic Development to effect the changes.
 


Membership



12. Are there any restrictions on the minimum and maximum number of members?


A limited liability company (LLC) must have no more than 50 members and no less than two (CCL).

The rules vary between the free zones. Generally, there is no restriction on the number of members.
 


Minimum capital requirements



13. Is there a minimum investment amount or minimum share capital requirement for company formation?


For a limited liability company (LLC) formed under the CCL, the minimum capital requirement depends on the business activity of the company and must be sufficient to achieve the company's corporate purpose (Article 227, CCL).

For a company registered in a free zone, the minimal capital requirement varies between the free zones.



14. Are there restrictions on the transfer of shares in private companies?



For a limited liability company (LLC) registered under the CCL, the shareholders can transfer their shares to one of the other shareholders (Article 230, CCL). A shareholder can also transfer shares to a non-shareholder. However, existing shareholders have a right of pre-emption over the shares to be transferred, at the price specified in the notice given to the directors by the shareholder looking to relinquish his shares (Article 231, CCL). If more than one existing shareholder wishes to purchase the shares the shares are divided between the purchasing shareholders in the proportions in which they hold shares (Article 232, CCL ).

There are no restrictions on transfer of shares within the free zones.
 


Shareholders and voting rights



15. What protections are there for minority shareholders under local law? Can additional protections be given?


Part 10 of the DIFC Companies Law provides protections for minority shareholders in takeovers. For example, a minority shareholder has a right to be bought out by an offeror where, as a result of a takeover offer, the offeror has acquired at least 90% of all shares in the company.

There are no express provisions for the protection of minority shareholders under UAE Law.

There is no concept of unlimited liability in the UAE in the context of companies.



16. Are there any statutory restrictions on quorum or voting requirements at shareholder meetings? Do quorum or voting rights need to be proportionate to shareholdings?


Under DIFC Law, at a general meeting of the company two shareholders personally present or represented by proxy represent a quorum. At any meeting of the holders of any class of shares other than an adjourned meeting, persons holding at least one-third in share value of that class of shares will represent a quorum.

Under UAE Law 50% of the voting rights based on paid up share capital is considered a quorum for shareholders' meetings.



17. Are specific voting majorities required by law for any corporate actions (for example, increasing share capital, changing the company's constitution, appointing and removing directors, and so on)?


Special resolutions (75% of votes) are required under DIFC Law for some corporate actions such as increasing share capital and liquidation.

There is no such requirement under UAE law.



18. Can voting majorities required by law be disapplied to protect a minority shareholder (for example, through class rights or weighted voting)?



Voting majorities cannot be disapplied. However, there are provisions under the DIFC law to protect minority shareholders (see Question 15).
 


Secretary restrictions

19. What are the conditions or restrictions on establishing a business in specific industry sectors? Are there industry sectors in which it is not permitted to establish a business?


In the UAE, the business activity of the company is limited to the nature of the trade licence that has been obtained. The law in the UAE and also in free zones provides for a list of business activities and sectors which are permitted.

There are a number of rules under the CCL relating to establishing a business in the form of a limited liability company (LLC). For example, LLCs can conduct any industrial or commercial business, but not professional activities other than banking, insurance or investment. For example, LLCs cannot practice law, auditing, accountancy or any other type of consulting service. The business activity that the foreign company is anticipating entering the UAE market with should therefore be carefully considered.

Similarly in free zones, the nature of the activity permitted will depend on the regulations of the free zone.
 

Foreign investment restrictions


20. Are there any restrictions on foreign shareholders?


A foreign shareholder can hold no more than 49% of the issued share capital In an LLC formed under the CCL. The standard rule can be varied for certain business activities, for example, in a real estate company a foreign national cannot own any of the share capital.

There is no such restriction in the free zones.



21. Are there any exchange control or currency regulations?


Currently there are no exchange control or currency restrictions except for restrictions in relation to transactions involving Israel or Israeli citizens.



22. Are there restrictions on foreign ownership or occupation of real estate, or on foreign guarantees or security for ownership or occupation?


Only four Emirates allow foreign ownership of real property:


Dubai.


Abu Dhabi.


Ajman.


Ras Al Khaimah.


However, ownership by foreigners in these emirates is restricted to designated areas.

Foreign ownership is restricted to the buildings on the land and does not include the land itself.
 


Directors



23. Are there any general restrictions or requirements on the appointment of directors?


In relation to companies under CCL in the UAE, directors must not have been convicted of a criminal offence involving dishonesty or immorality, and cannot be directors of more than five companies in the UAE. The chairman of the board must be a UAE national.

Under DIFC Law, the following are not entitled to be directors:


-Individuals under 18 years of age.


-Individuals who are disqualified from holding directorships (for example, having been convicted of a criminal offence, guilty of insider trading and so on).


-Undischarged bankrupts.


-Legal entities.


Board composition

24. What are the legal requirements for the composition of a company's board of directors?


Structure

Within the UAE, in both the free zones and limited liability companies (LLCs) registered under the provisions of the CCL, great emphasis is put on the manager of the entity. The manager:


Has his name appear on the trade license.


Have full powers to carry out management affairs of the company.


Has the right to bind the entity in the eyes of all third parties who the entity deals with.


It is possible to have up to five managers. If there is more than one manager, the memorandum of association may provide for the formation of a managers panel.

In addition to the standard board of directors, when the number of shareholders exceeds seven, a supervisory board consisting of at least three of the shareholders must be put in place (Article 240, CCL).

This supervisory board can, among other things:


Examine the company's books.


Take stock of cash or goods.


Require the managers at any time to submit reports about their management.


The supervisory board is not usually accountable for the actions of the directors.

Number of directors or members

The management of the LLC under the CCL can be undertaken by up to five managers. Unless otherwise specified in the manager's contract, his tenure lasts for the duration of the company or until removed by a unanimous board resolution.

There is no restriction in the free zones.

Employees' representation

Employees do not have a right to representation in either a LLC formed under the CCL or in any company formed in a free zone.
 
Reregistering as a public company

25. What are the requirements for a business to reregister as a public company?


Membership

A public company must have at least ten founding members and management must be vested in a board of directors with chairman and majority directors who are UAE nationals. 51% of shares must be held by UAE nationals. Founder members must hold at least 20% of the capital but not more than 45% of the capital. The founders must select from among themselves a committee comprising not less than three and not more than five members to undertake the foundation procedures with the concerned authorities.

The management of a public company is vested in a board of directors comprised in accordance with the memorandum of association, which will state:


The number of the directors (not less than three and not more than 12 directors).


Their term of office (not exceeding three years).


Share capital

A public company has its capital divided into transferable shares of equal value and the respective shareholder is only liable to the extent of his own share capital The company capital must be adequate to achieve the objectives of its incorporation, and must be at least AED10 million.
 
Tax

26. What main taxes are businesses subject to in your jurisdiction?


The UAE does not levy any form of tax.

27. What are the circumstances under which a business becomes liable to pay tax in your jurisdiction?



The UAE does not levy any form of tax.



28. What is the tax position when profits are remitted abroad?


As there is no tax regime, the UAE has no restrictions or regulations on foreign exchange. Capital, profits, interest, and royalty payments may be repatriated freely.

29. What thin-capitalisation rules and transfer pricing rules apply?


In the absence of a tax regime, thin capitalisation and transfer pricing are not issues that are covered by the UAE regulatory regime.
 


Grants and tax incentives



30. Are grants or tax incentives available for companies establishing a business in your jurisdiction?


The UAE does not levy any form of tax.
 


Employment



31. What are the main laws regulating employment relationships?


UAE

Employment matters in the UAE are governed by Federal Law No. 8 of 1980 Regulating Employment Relations as amended by Federal Laws No. 24 of 1981, No.15 of 1985 and No.12 of 1986 (Employment Law). This is a Federal piece of legislation and therefore applicable to all the Emirates of the UAE, which in turn is enforced by the Ministry.

Under the Employment Law, the Arabic language must be used for all employment records, contracts, files, data and so on, and for all instructions and circulars issued by the employer to his employees. A copy of the employment contract in a secondary language is allowed for an employee whose first language is not Arabic. However, if there is a dispute between the two versions of the contract, the contract in the Arabic language will prevail.

The Employment Law applies to all staff and employees working in the UAE, irrespective of whether they are UAE nationals or expatriates. Certain categories of individuals are exempted from the Employment Law, including:


Staff and workers employed by the federal government, government departments of the member emirates.


The employees of municipalities, public bodies, federal and local public institutions, and federal and local governmental projects.


Members of the armed forces, police and security units.


Domestic servants.


Agricultural workers and persons engaged in agriculture (this exemption does not include persons who are employed in corporations which process agricultural products and/or those who are permanently engaged in the operation or repair of machines required for agriculture).


A partner in a business is not considered an employee and is therefore not required to obtain an employment card from the UAE. However, employees working on a commission basis are considered as employees even if they are partners in the entity they are working for.

The Employment Law covers all aspects of the employer-employee relationship including:


Employment contracts.


Restrictions on the employment of juveniles and women.


Maintenance of records and files.


Wages.


Working hours.


Leave.


Safety and protection of employees.


Medical and social care.


Codes of discipline.


Termination of employment contracts.


End of service benefits.


Compensation for occupational diseases.


Labour inspections.


Penalties.


Employment related accidents, injuries and death.


An employee who is subject to the Employment Law is entitled to fixed minimum notice periods and fixed maximum working hours except for managerial level staff. Overtime payment is defined and the employee will be compensated for overtime at an inflated rate. The employee is given the option of payment in lieu at an inflated rate for working on a public holiday. In addition, for both the employee and the employer, the Employment Law is clearer on compensation for termination without due notice, on termination of an employee without notice for misbehaviour and on the possible scope of non-competition obligations imposed on an employee on termination.

The UAE does not allow the formation of trade unions.

In addition, mandatory rules of law apply in relation to termination and compensation regardless of any choice of law in an individual's employment contract. The general rule is to have a written employment contract as it provides certainty as to the terms of the employment according to the prevailing laws. However, oral employment contracts are also valid with adequate proof of its terms, which may be established by all admissible means of evidence.

DIFC free zone

Although the Employment Law stipulates that it applies to all employees (other than the ones listed above), in practice employees in the free zones are subject to the rules and regulations of the particular free zone and maintain their own employment contracts. However, the Employment Law will still apply and the provisions in the employment contract must be in accordance with it. Importantly, free zone employees are sponsored by the relevant free zones and not by their employers.

Such employees are seconded by the free zones to companies established in the free zones in return for, among other things, a bank guarantee which is required to secure the employees' dues and any end of service benefits which may be payable on termination of their employment contracts. Although the free zones are technically the employees' sponsor, the employees maintain a right of action against their employers before the courts.

Employment Law No. 4 of 2005 as amended (DIFC Employment Law) governs the employer/employee relationship in the DIFC. There are certain differences between the Employment Law and the DIFC Employment Law, including that:


The DIFC Employment Law does away with the distinction between limited (fixed-term) contracts and unlimited contracts (broadly, oral contracts for no specified period) and the different rules that otherwise apply to them. For instance, there is no reduction in an employee's severance pay for a limited contract.


Annual leave days consist of working days, they accrue pro rata and are exclusive of public holidays.


The employee is entitled to 90 days sick leave and is paid at his normal rate of pay for the full 90 days.


Ramadan hours are stated to apply only to those who are fasting.


No specific day of the week must be taken off as a rest day, which is good for those companies that would like to co-ordinate with the working week of Western countries or countries with Sunday as their weekly rest day.


32. What prior approvals (for example, work permits, visas, and/or residency permits) do foreign nationals require to work in your jurisdiction?


For immigration purposes, a foreign partner is sponsored by the entity he is a partner in, as an investor rather than as an employee, and will deal with the immigration authorities directly rather than through the Labour Office, if his name is on the business entity's licence, and subject to a minimum investment requirement in the entity. However, if the partner holds an employee position in addition to his partner status, he is considered as an employee for the work he is doing in the company.

When a new business is established, it must be registered with the Ministry before the employment of staff. The free zones authority sponsoring the employees refers directly to the immigration authorities and not to the Ministry. However, the Ministry may still deal with disputes between employees and their employers in the free zones, unless the free zone authority has a special ordinance governing the relationship between employee and employer.

An application must be made to the Ministry to employ any foreign employee in the UAE. The application must be approved by the Ministry before the employee entering the UAE. New businesses must register or open a file with the Ministry before they can employ staff (see Question 19). In addition to obtaining the Ministry's approval to employ non-UAE nationals, certain immigration procedures need to be followed.

There is also a requirement for certain employers to submit to the Ministry a bank guarantee as security for end of services benefits and repatriation costs related to their employees. This procedure is also applicable to employers in most of the free zones.

Where the intended employee is a UAE national, an employment contract may be entered into at any time. Employment contracts for non-nationals must be drawn in the format approved by the Ministry on an application made by the employer. However, employment contracts for national employees do not need to be in writing and the terms and conditions of employment may be proved by any means of proof admissible by law. The Ministry does not issue employment permits for expatriate employees unless a formal written employment contract is filed with the Ministry.
 

Proposals for reform


33. Are there any impending developments or proposals for reform?


It was announced earlier this year that a new Commercial Companies Law has been approved.

Essentially the structure established under the existing CCL remains in place, for example the limitation of foreign investment to 49%, with incremental changes.

Changes include:


Explicit provision for the creation and registration of a pledge over shares in an LLC.


Non-pre-emptive issuance of new shares to strategic investors.


Removal of requirement that the value of bonds issued must not exceed a company's capital.


A statutory objective promoting social responsibility for commercial companies.


A new prohibition on companies providing finance assistance to a shareholder to enable them to hold securities issued by that company.


Provision for sole shareholder companies.


The new law is expected to promote confidence and economic growth.



You can reach me on


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