Certain considerations start-up founders need to keep in mind before taking the leap and establishing a business
Launching a start-up is never an easy task with much planning involved from the creation of a business idea to setting up a physical office, and finally to establishing the brand as a significant player in the industry.
The basics of entrepreneurship remain the same internationally, while the differences arise from the business practices specific to the selected region and the laws that govern it. This applies to the UAE as well, wherein the entrepreneurial environment and legal framework create a positive outlook for emerging start-ups in the region.
Starting up a new business in the UAE, entrepreneurs face numerous choices to be made. Founders have to choose the right location and form of the company, structure a company and its ownership, employ people, enter into contractual arrangements with customers and suppliers, resolve disputes, and so on. Understanding of the UAE legal framework may considerably help entrepreneurs to make right decisions and future-proof their start-ups.
Peculiarities of the UAE legal system
The UAE legal system is the backbone to rules and regulations that need to be followed by entrepreneurs while setting up a business.
The UAE is predominately a civil law jurisdiction which is influenced by French and Egyptian law. It also follows the principles set out by the Islamic Sharia Law, which governs such aspects of life for Muslims, as personal matters and morality. Notwithstanding the importance of Sharia Law, it is important to note that its application in the UAE is limited to:
• personal matters, such as divorce, wills and inheritance,
• commercial matters expressly covered by the Sharia, such as Islamic banking,
• issues when there is no specific legislation on a subject.
Being a federation composed of seven member emirates, the UAE has federal and local legislation. Federal laws and regulations are applicable to the country as a whole across all the emirates while local laws and regulations govern matters not covered by the federal legislation within an individual emirate. Major sectors, such as immigration and labour relations, are governed at the federal level, however, licensing of businesses is largely governed at the local level by relevant local authorities.
The legal framework for commercial activities in the UAE is established on a federal level, with each emirate exercising a tailored set of rules and regulations within its respective territory. Commercial companies operating in the UAE are required to establish a formal legal presence and be licensed. Some licenses require prior approval from certain ministries and other authorities, such as the ones for banks and financial services providers, or law firms, or pharmaceutical products manufacturers.
Commercial licenses are specific to the proposed activity and location of the business, never being generic. For example, a licensing permit issued for a business venture in Dubai does not by default permit the business to be conducted in the emirate of Abu Dhabi.
Therefore, selection of the location for a new business entity is one of the key considerations for start-ups in the UAE as it determines which legal authority to turn to for registration procedures.
Entrepreneurs may decide to opt for a mainland company, free zone entity or an offshore company depending on the location of a target audience and company needs.
Below is a brief overview of these three options.
They are typically used for trade within the local UAE market. The Federal Law No. (2) of 2015 On Commercial Companies defines the following forms in which companies can be established in the UAE:
• Joint liability company,
• Simple commandite company,
• Limited liability company,
• Public joint stock company,
• Private joint stock company.
The law also sets out requirements for companies regarding shareholders, directors, minimum capital levels and incorporation procedures.
An important consideration when establishing a mainland company is that it should have one or more UAE partners holding at least 51 percent of the share capital of the company. Moreover, certain classes of activities, for example, real estate brokerage, can be exercised exclusively by UAE nationals. Due to the requirement of local participants, maximum foreign equity participation for mainland companies is 49 percent. However, agreements can be tailored so that the majority of profits go to the expat partner. Another consideration to keep in mind - mandatory existence of a physical office in the mainland.
Free zone companies
Free zone establishments do not require to have a UAE national as its partner, and this is one of the advantages of setting up a business in a free zone. Introduced to attract foreign investments, free zone companies can be 100 percent owned by a foreign investor. Hence for complete ownership, expat business owners may look to the free zones as base locations. Trading, distributorship, warehousing, manufacturing and many other activities may be performed in these zones, and there is no duty for import and export of goods into and from the free zone except for exports into mainland UAE.
A regulatory authority exists in each free zone, which governs and administers the companies located there according to the free zone regulations.
Typically, free zones are industry focused and are tailored to particular industries and, therefore, only authorise specific types of activities. The entity established in the free zone can only operate its activity within the free zone it is registered.
An offshore company may be a solution if you do not need to set up a physical office, there is no requirement to issue residency visas, and all activities of the business are outside of the UAE. Offshore companies should operate their business from abroad and are not permitted to conduct business within the UAE. However, they can interact with local banks and set their local legal representatives.
Offshore companies are registered and located within free zones.
Currently, there are two free zones in the UAE, where offshore companies can be established, JAFZA and RAKIC.
Company legal documents
Proper legal documentation plays a crucial role in protecting the business and its owners over the course of a company’s lifetime. Here are some key legal documents, essential for every company formed in the UAE:
Founding documents: Considered to be the most important legal documents of any company, they establish the objectives of the company, its name, location, structure of capital and management, the duties and responsibilities of key members of the organisation along with detailed descriptions of how they can be amended and so on. Usually, these documents include memorandum of association, shareholders agreement, board resolutions, and other company bylaws.
Trade license: Trade license is proof that the company is duly registered and is officially allowed to operate in the UAE. It can be of different types depending on the type of business and contains the information about the form of company, its trade name, permitted activities, registered address, partners, and managers of the company.
It is important to timely amend the license according to any current changes in the business, such as new office address, new manager, and so on, and renew the license in time to keep it valid.
Employment contracts: Appropriate labour contracts with employees ensure that a legally binding connection has been established with those who work for the company. The terms and conditions of the employment should be mentioned in the contracts with absolute clarity to minimise chances of future disputes. The labour contracts for mainland and free zone companies should be registered with the UAE Ministry of Labour and the concerned free zone authorities respectively.
Trademark registration certificate: Trademarks and copyrights are protected in the UAE by national laws and widely accepted international conventions, but many start-ups do not pay enough attention to their trademark protection.
There is a common misunderstanding that registration of the company in the UAE gives automatic rights for the trademark associated with the registered trade name, which is profoundly untrue. Trademark owners have to apply for a registration certificate in order to get exclusive rights to the trademark. Ignoring the process can later cause issues with the intellectual property rights.
Some other considerations
Companies in the UAE should adhere to the visa and work permit requirements.
Employees who work for a mainland company would require labour cards and work permits to be issued by Ministry of Labour (Ministry of Human Resources & Emiratisation). The employees who work in free zone companies would require work permits or employment cards issued by the respective free zone authority.
Residency visas for expat employees have to be sponsored by their employers. A female employee, however, in some cases may be sponsored by her father or husband.
In a situation where there is a dispute between the contracting parties, it is important to know how the disputes will be resolved. As a civil law jurisdiction, the UAE legislation recognises the right of freedom of contract. This permits many contractual arrangements, especially related to international transactions, to be governed by English law, with disputes heard not in the UAE courts, but through international arbitration centres or before DIFC Courts in Dubai or ADGM Courts in Abu Dhabi.
Entrepreneurs in the UAE can choose the binding arbitration as a preferred method to resolve disputes. Arbitration decisions made in other nations also can be recognised in the UAE since recently UAE sanctioned the New York Convention for the Recognition and Enforcement of Foreign Arbitral Awards. Furthermore, the London Court of International Arbitration (LCIA) is often selected by international business parties who have business in the UAE. Among local business entities, entrepreneurs may choose the Dubai International Arbitration Centre (DIAC) or the Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC).
The new federal law on bankruptcy has been issued in September last year and came into force on the 29th of December 2016. The law deals with one of the problems that entrepreneurs in the region face: financial defaults.
It helps to ease the process of dealing with such cases and promote investments due to the flexibility and ease brought about. The new bankruptcy law lowers risks for new start-ups by many ways, such as allowing entrepreneurs to skip jail term, even if they are not able to repay a debt. It gives debtors some comfort to stay in the country by restructuring their debts. Another objective of the new law is to provide a much safer legal framework that will help indebted firms in avoiding bankruptcy and dissolution.
The UAE Government has taken many steps in these years to make the legal proceedings involved in registration, operation and liquidation of companies in the UAE, much more convenient and comfortable, for any business, and has encouraged entrepreneurs from all over the globe to set up a business in the country. At the same time, there are various options available for entrepreneurs to set up business entities, and it is essential to clarify the necessary aspects before establishing a business in the UAE.
It is advisable for start-up founders to consult experienced lawyers who can provide the advice regarding all the legal procedures to start a business. All things considered, the United Arab Emirates is still a much more flexible country for those with novel ideas to turn their visions into a tangible reality.