Privatization & Free Trade Zones
Each emirate enjoys a high level of autonomy and different emirates have pursued different models. The emirate of Abu Dhabi, for example, has embraced utility privatization, embarking on new power projects through joint ventures with foreign investors, and selling some of its existing assets.
Many of the seven emirates have avoided privatization and instead developed free trade zones. The Abu Dhabi Government has plans to privatize its water and electricity sector within the next 10 years. Although 11 companies have been formed in a revamped Abu Dhabi Water and Electricity Authority (ADWEA), the government still retains contro. It is unclear exactly when foreign investors will be allowed to buy stakes in the generating and distributing companies. Four of the 11 companies will be involved in power generation: the Al Mirfa Power Company, Umm al-Nar Power Company, Bainounah Power Company and Al Taweelah Power Company. The two new distribution companies are the Abu Dhabi Distribution Company and Al Ain Distribution Company. Other new firms are the Abu Dhabi Company for Servicing Remote Areas, Abu Dhabi Transmission and Dispatch Company (Transco) , Abu Dhabi Water and Electricity Corporation, Al Wathba Central Services and Emirates CMS Power Company. Transco will be responsible for scheduling and dispatching, maintaining the integrity of the transmission networks (water and electricity) and administering the settlement system. All the companies will be subsidiaries of ADWEA and will be supervised by the Regulation and Supervision Bureau for Water and Electricity which will grant or withdraw licenses for operating companies, establish quality standards and develop the tariff structure.
The government is promising to eliminate government subsidies of up to 75 per cent at the moment.
The UAE claims to have nearly 100 billion barrels of proven oil reserves, or about 10 percent of total proven world oil reserves, most of it in the Emirate of Abu Dhabi, and 5.7 trillion cubic meters of proven gas reserves, which amounts to 4.6 percent of total world proven gas reserves, again, most of it in Abu Dhabi, which makes the UAE the fourth largest gas reserve country in the world after Russia, Iran and Qatar.
UAE oil production is at the level of the UAE's OPEC quota, 2.5 million barrels a day (b/d), with about 0.3 million b/d coming from Dubai and the rest from Abu Dhabi. While Dubai produces at maximum capacity, Abu Dhabi is nearing completion of a US$ 5 billion capacity expansion program that will raise capacity to 2.5 million b/d by early 1997.
Largely because of flat or declining oil prices, oil's share of GDP in the UAE has declined from 44.2 percent in 1992 to 33.2 in 1994. Despite this, there is considerable growth potential in this sector. In Abu Dhabi, the government is considering whether to expand capacity further and it may do so, depending on its assessment of future market trends. After years of consideration, Abu Dhabi decided to go ahead with two major downstream projects, petrochemicals and refinery expansion.
Abu Dhabi also is in the process of increasing income from its enormous gas reserves. Abu Dhabi was until recently the only producer and exporter of liquefied natural gas (LNG) in the region. In 1994, it doubled the capacity of its LNG plant on Das Island to five million tons per year. LNG accounts for about 5 percent of total UAE export earnings.
Several factors have contributed to the growth of the non-oil sector in recent years including government investments in electricity, water, and other infrastructure, development of financial services, and strong demand for re-exports. An open economic system, free movement of capital and financial stability have also contributed. Government support through provision of incentives and subsidies, along with a high level of government expenditure in housing, have also played an important role.
The construction sector in Dubai in particular has seen rapid growth.
The Dubai Port Authority's container traffic increased by 10 percent in 1995, from 1.88 million teu in 1994 to 2 million teu. Trans-shipment business also increased to 1.04 teu, a 9 percent rise compared with 1994. Local and re-export business now accounts for 50 percent of the total container volume handled by the DPA. Overall growth in 1995 is attributed to the strong import and export markets in Dubai which rose 13 percent and 21 percent, respectively.
Most of the incoming traffic is destined for re-export, although Dubai's growing population, expanding consumer market and construction booms are taking an increasing share of imports.
The ten year old Jebel Ali Free Zone has significantly reduced the UAE's dependence on trans-shipment. Nearly 1,000 companies from over seventy countries and major corporations such as Sony, Aiwa, Black & Decker, Nissan, Honda and Coleman are present in the zone. Recent investors include Japan's Shivaki and the US-based General Motors.
To attract even more investment, major upgrades are underway, including the addition of another 52,000 square meters of container stacking runway. By the year 2003, the DPA expects its two ports, Jebel Ali and Mina Rashid, will have thirty ship-to-shore cranes.
The local food processing industry continues to expand offexport opportunities for semi-processed agricultural products. Major growth sectors are beverages (juices and soft drinks), dairy products (ice cream and yogurt), snack foods and biscuits.
The UAE has a mixed economy, with the most productive assets owned by the government of the individual Emirates, but considerable scope is given to private enterprise. Its legal regime favors UAE nationals over foreigners. In both Abu Dhabi and Dubai, international oil companies maintain equity interests in their operations.
Some banks are privately owned. They represent one of the principal types of commercial establishment in which stock is sold to the public.
Foreign contractors or service businesses require UAE nationals sponsors, one for each Emirate in which they do business. Foreigners are not allowed to own land in Abu Dhabi or Dubai.
The government sector includes the accounts of the federal government as well as accounts of the seven individual Emirate governments. Only the federal budget, a small part of the total, is published.
The UAE enjoys a booming re-export trade. In 1995, 34 percent of all exports were re-exported. Traditional re-export markets are the Gulf Co-operation Council (GCC) states and Iran, but UAE traders have aggressively sought out new markets in such areas as Russia, the newly independent states of central Asia and in South Africa.
The legal system of the UAE is based on its constitution which has finally been approved by the Federal National Council in 1996, replacing the provisional documents which had been renewed every five years since the country's creation in 1971. The Constitution establishes the principal instruments of Federal authority as follows:
The Supreme Council of the Federation, composed of the seven sheikhs of the seven Emirates, has the power to enact legislation, establish policy, appoint persons to office and to assume supreme supervision of the Federation's affairs. Decisions should be approved by a majority of five, which must include the votes of the sheikhs of Abu-Dhabi and Dubai.
The President and Vice President of the Federation are elected by the Supreme Council from among its members and have overall responsibility for the administration of federal laws and affairs.
The Federal judiciary
The constitution provides a rather detailed list of citizens rights and liberties and lays down the rules of priority between federal and Emirate legislation. Under Article 151 of the constitution, federal law has precedence over legislation of the Emirates.
The Federal judicial system in the UAE consists of Federal Courts of First Instance, two Federal Courts of Appeal in Sharjah and Abu Dhabi and a Federal Supreme Court in Abu Dhabi, the latter composed of five judges including a President of the Court. The Supreme Court has both appellate and original jurisdiction. The individual Emirates retained their own Islamic Shari'a courts which exist parallel to the Federal Courts. Dubai, however, has not merged its courts with the federal judiciary and the rules for admission to the Dubai bar are different than those for admission to the federal bar.
Whereas the majority of advocates in the UAE were, and to a large extent still are expatriates, the UAE has now started to enforce Law No. 21 of 1991 under which only UAE nationals will be allowed to represent clients in local courts, and expatriate lawyers may only continue to serve as legal consultants.
Further, it is notable that the Federal Cabinet in the UAE has approved a draft treaty that would provide for the mutual enforcement of judgments as well as judicial corporation in other areas among the GCC member states. Under the treaty, judgments issued by a court in one of the GCC states in civil, commercial administrative or personal status matters would be enforceable in all other GCC countries.
Alternative Dispute Resolution and Arbitration
UAE courts usually enforce the intention of the parties to arbitrate disputes as expressed in a contractual arbitration clause. The courts, however, sometimes substitute clauses providing for arbitration outside of the UAE for local venue. UAE courts will often not enforce foreign judgments or honor contractual choice of law provisions.
Arbitration proceedings are usually carried out by the individual Emirates though their respective Chambers of Commerce and Industry which are quasi-state organizations. The Dubai Chamber of Commerce has published Rules of Commercial Conciliation and Arbitration which are used by its Commercial Conciliation and Arbitration Center.
In this context, it should also be noted that according to Dubai Law No.4 of 1997 (amending and clarifying a 1996 law), the government of Dubai must consent to being sued. According to a July 1992 Directive, however, no such consent is required if an arbitration clause in any contract to which the government is a party is invoked.
Business Forms and Structures
Under Federal Law No. 8, business organizations may take one of seven forms: 1) Public Shareholding Companies; 2) Private Shareholding Companies; 3) Limited Liability Companies; 4) General Partnerships; 5) Limited Partnerships; 6) Partnerships Limited by Shares; and 7) Shareholding Companies. Companies not taking one of these forms are not legally recognized, and persons contracting in their name will be jointly and severally liable for the obligations arising from such contracts. Exceptions apply only for companies located in a Free Trade Zone. There are also requirements determining minimal capital contributions, the number of directors and shareholders, and incorporation procedures. Provisions concerning mergers and dissolution or conversion of companies are also included in the same law. Each entity must be registered and licensed with the UAE Federal Ministry of Economy and Commerce and with the appropriate authority in the Emirate in which its office will be located.
Furthermore, the law sets forth the general rule that participation of UAE nationals should never be less than 51 percent in any commercial enterprise. Some business forms and structures are generally not available to foreign investors, as will be elaborated below.
Public Shareholding Companies
A minimum of 55 percent of the shares of a public shareholding company must be offered to the general public. The minimum amount of capital for a public shareholding company is DH 10 million, of which a minimum of 25 percent must be settled on subscription. A shareholder's liability is limited to the nominal value of his shares in the company's capital. The PSC must have at least ten founders, unless a government entity is involved, in which case the number of founders may be lower. Shares are registered in a share register and cannot be issued at a price lower than nominal value; all shares have equal rights. The Board of Directors of this type of company must have a minimum of three and no more than twelve directors. The chairman, as well as a majority of the board, must be UAE nationals.
In the event, a public shareholding company loses half its capital, its board of directors is required to call a general meeting of shareholders to consider the continuation or dissolution of the company. If thboard fails to call such meeting or if the meeting fails to reach a decision on the subject, any interested party may file a lawsuit seeking the dissolution of the company.
Private Shareholding Company
A private shareholding company must have a minimum of three shareholders. The minimum capital of a private shareholding company is DH 2 million. Shares may not be offered to the public. The private shareholding company's incorporating documents must preclude public offering of shares.
Limited Liability Company
A limited liability company can be formed by a minimum of two and a maximum of fifty persons. Shareholder liability is limited to the value of shares held in the company's capital. The minimum capital required to establish a limited liability company is DH 150,000 in Abu Dhabi and DH 300,000 in Dubai. Management is handled by no more than five designated managers, who are not necessarily members of the company. Non-UAE nationals may own up to 49 percent of an LLC.
The Companies Law provides that an LLC may engage in any lawful activity except insurance, banking and investment of money for others.
General partnerships are formed by two or more UAE nationals who are jointly and severally liable for its debts. This form is generally not available to non-nationals. Only the names of actual partners can be included in the company name, but the company may have a special trade name.
Interests of a partner can be transferred as stipulated in the partnership agreement or with the approval of all partners. The management may include one or more managers who are UAE nationals and who may or may not be partners in the company. The dissolution of a partnership may occur on the death, insanity, bankruptcy or withdrawal of one of the partners. The remaining partners, however, may unanimously decide to continue the partnership, provided that such decision is registered in the commercial register.
A limited partnership is composed of one or more general partners who are jointly and severally liable for all of its debts, and one or more limited partners who are liable for the limited partnerships debts only to the extent of his capital contribution. A limited partner may not participate in the management or have his name appear in the name of the partnership. All general partners must be UAE nationals.
Partnership Limited by Shares
A partnership limited by shares has both general partners with unlimited liability and partners whose liability is limited by their shares in the capital. General partners must be UAE nationals while participating partners may be non-nationals. The capital must be at least DH 500,000 and has to be divided into negotiable shares of equal value. Some formalities regarding the incorporation of a joint stock company are also applicable to a partnership limited by shares.
A joint venture agreement is not subject to registration in the Commercial Register.
A joint venture may be carried out only in the private name of one of the UAE national partners.
Structures Available to Foreign Investors
A foreign investor may chose to participate with up to 49 percent in a company formed in one of the structures open to foreign investors. Despite the requirement that the majority of shares must be held by UAE nationals, it is still believed by some to be the easiest solution to carry out business in the UAE. Other available methods are the establishment of a branch or the use of commercial agency agreements. Special attention should also be paid to the possibilities offered by the Free Trade Zones where businesses are exempt from most requirements applicable in the regular UAE territory.
A foreign company may establish a branch in the UAE but a local sponsor or agent is required who must be either a citizen of the UAE or a company wholly-owned by citizens of the UAE. A branch must be registered with the local chamber of commerce and the municipality. Since February 1990, branches of foreign companies (including those already in existence) are also required to register with the Ministry of Economy and Commerce.
Under Commercial Law No. 8 of 1984 and Ministerial Decision No. 69 of 1989, a branch office of a foreign company does not have a separate legal entity. It merely represents the mother company and carries out business under its name. A branch office is usually permitted to promote and to market the products of its parent and enter into transactions and offer service to customers in its name. The UAE agent will render the necessary services for obtaining of licenses, visas and other permits and run the business of the office without assuming any financial obligation.
In order to make use of and conduct commercial agency activities, a foreign business is required to appoint an agent (an UAE national or a company owned by UAE nationals ) for doing business in the UAE. Commercial agencies are governed by the Federal Commercial Agencies Law, Federal Law No. 18 of 1981, as amended by Law No. 14 of 1988. According this law, all commercial agency agreements have to be registered with the Federal Ministry of Economy and Commerce.
The Federal Commercial Agencies Law grants a commercial agent certain statutory rights which cannot be waived by contract. The most important are (1) any agent is entitled to territorial exclusivity in at least one Emirate and, accordingly, will receive infringement commissions on transactions concluded by the principle himself or by others within his territory; (2) the agent is entitled to prevent products subject to their agency from being imported into the UAE, if the agent is not the consignee ; and (3) it is not permissible for a principle to terminate an agency agreement without the agent's approval except for reasons accepted by the Commercial Agencies Committee of the Ministry of Economy and Commerce, even if the term of the agreement has been initially limited by agreement. In absence of a justifiable reason, the failure to renew an agreement may entitle the agent to compensation.
It is possible to appoint an agent with rights to the entire UAE or for each or more than one of the single Emirates. The agents may themselves appoint distributors or sub-agents.
According to the Court de Cassation (Federal Court of Appeal) in Abu Dhabi, any dispute arising out of commercial agencies must be submitted first to the Commercial Agencies Committee and any judgment of the courts given without such first submission will be null and void.
All of the Emirates regulate both foreign and domestic business activity by requiring that any office for the conduct of business located in an Emirate must be properly licensed by the municipal authorities where located. The following kinds of business activities involve different kinds of licenses which allow the licensed business to conduct business as provided below:
Representative Office License
Activity of a representative office is limited to business or sales promotion activities and may be used as regional headquarters or a liaison facility. It may not import goods, effectuate sales or make contractual commitments.
Trade licenses allow the holder to import, sell, export and conduct general business with regard to certain identified goods or product lines. General trade licenses, which allow the import and export of all types of products and unrestricted engagement in a general trading business are rarely issued.
An industry license is required for the establishment and conduct of industrial activity with regard to the specific kind of manufacturing, processing or other industrial activity to be undertaken.
This license authorizes various specified forms of service activity to be conducted.
Architects, engineers, business consultants, doctors, legal and accounting firms and other professionals and consultants are required to obtainprofessional licenses.
There are several kinds of construction licenses relating to different fields of construction activity. A general construction license, which authorizes the licensee to carry out all types of construction, including civil, mechanical, electrical, petroleum and other related activity, is also available.
New federal laws were enacted in 1992 granting protection for patents, trademarks and copyrights. However, since the UAE became a member of GATT, the established rules are being revised to comply with WTO (TRIPs) standards. The revised laws are expected to be implemented by January 2000. UAE has already signed the Paris Convention.
Once an application for the grant of a pais filed, it is examined with respect to compliance with formalities and patentability under the Patent Law including its novelty, inventiveness and industrial applicability. In the case of refusal, the applicant has the right to appeal to the Committee in the Patent Office. Accepted applications are published in the Official Gazette, and any interested party has the right to appeal to the Committee within sixty days as of the date of publication in the Official Gazette. In the absence of opposition, the letters-patent or the utility certificate is issued.
A patent is valid for fifteen years and renewable for a period of no more than five years. Patents granted for process inventions relating to drugs and pharmaceuticals are granted for a non-renewable period of ten years.
The right to a patent may be assigned or licensed. An assignment shall have no effect against third parties unless it has been recorded at the Patent Office and published in the Official Gazette.
Working of patents in the UAE is an official requirement. If the owner of a patented invention does not satisfy the stipulated working requirements within four years from the filing date or three years from the grant date of the patent, if the working has ceased for two consecutive years, the use does not cover the demands of the UAE, or the owner refuses to license it under contract on fair terms, then the patent will be subject to compulsory licensing under the provisions of the law. The corresponding periods for a utility model is three years as of the filing date and two years as of the grant. Importation of products made under the patent does not satisfy the use requirement.
Designs and Industrial Models
The examination procedure for designs and industrial models is same as that for patents. A design or industrial model registration is valid for five years and renewable for two additional consecutive five year periods. Annuities have to be paid within the final three months of the protection period, but late payment with a surcharge is possible within thirty days as of the elapse of the due date.
The international classification of goods and services is followed in the UAE.
Once a trademark application is filed, the application is examined as to its registrability. Trademark applications accepted by the Registrar are published in the Official Gazette. Also, publication upon acceptance is effected in two local, daily Arabic newspapers and the cuttings of the notices, as published in the newspapers, are to be submitted to the Trademark Office. Any interested party may file a notice of opposition to the registration of the trademark within thirty days from the date of last publication. The decision of the Registrar regarding the opposition may be appealed to the Committee in the Trademark Office, and the Committee's decision may be appealed to the competent court. In the absence of opposition, a trademark is registered and the relevant certificate of registration is issued.
A trademark registration is valid for ten years from the date of filing the application and renewable for similar periods.
The ownership of a registered trademark can be assigned with or without the commercial enterprise using the trademark. Unless an assignment has been recorded in the register and published in the Official Gazette, the assignment shall have no effect vis-a-vis third parties.
Any interested party may request the court to cancel a trademark registration if the owners fail to use such a trademark in the UAE for five consecutive years from the date of registration.
Copyright interests can be protected under the Copyright and Authorship Protection Law No. 40 for the year 1992.
Registration with the competent authority is optional, but a registration shall be regarded as the authoritative reference to the copyrighted information. Non-registration shall not entail infringing upon the author's right. A copyright registration is valid for the lifetime of the author plus twenty-five years after his death. The validity period for cinematographic films, works of applied art, works made by corporate bodies, works of art published under pen names, and works published for the first time after the authors death are protected for twenty-five years only. The validity period of photographic works is ten years only.
The UAE does not have any enforced federal income tax legislation for general business. An income tax decree has been enacted by each Emirate, but in practice, the enforcement of these decrees is restricted to foreign banks and to oil companies. This practice is not likely to change in the near future as the relevant mechanisms with which to implement the tax decrees have not yet been established. The decrees indicate, however, that if taxation were enforced, taxes could be imposed retroactively.
Foreign banks are taxed at 20 percent of their taxable income in the Emirates of Abu-Dhabi, Dubai and Sharjah. The tax is restricted to the taxable income which is earned or deemed to be earned in that particular Emirate. Oil Companies (which include any chargeable person that deals in oil or right to oil both off-shore and on-shore) pay a flat rate of 55 percent on their taxable income in Dubai and 50 percent in the other Emirates. In addition, they pay royalties on production.
Personal incomes, including all forms of salary and capital gains wherever arising, are not subject to taxation in any of the Emirates.
Under the terms of an agreement on customs tariffs with countries of the GCC, all Emirates are bound to levy a minimum customs duty of 10 percent on luxury goods and 4 percent on the C.I.F. value of all other goods imported, excluding certain items such as alcohol and cigarettes. Recently, the federal government has approved a tobacco tax rate of 50 percent.
In practice, however, exemptions are made for a wide range of goods. In cases where customs duties are charged, it is generally restricted to 1 percent.
Other Local Taxes
Municipal taxes are levied in most Emirates on annual rental paid at 5 percent for residential premises and 10 percent for commercial premises.
Other local taxes include a 5 percent tax on hotel services and entertainment.
Over the past few years, various municipalities in the UAE have developed a relatively large body of environmental regulations based on local orders, many of which contain strong enforcement provisions. Among the Emirates, Dubai has the most developed system of environmental regulations, requiring permits from the local municipality for activities relating to water usage (sewage/drainage, liquid waste) and to air pollution. The environmental standards imposed are closely monitored by the local municipality, which has the power to clean up at the polluter's expense, to enforce discontinuance of drainage or to cancel existing permits. Furthermore, the operator of a facility is required to perform monthly tests and to send the results to the municipality.
On a federal level, the UAE created in 1993 the Federal Environmental Authority (FEA), which has since prepared a draft of environmental protection legislation for a comprehensive federal law that is supposed to bring new cohesiveness to the current fragmented system of environmental protection. In addition to provisions regarding the general protection of the environment, the proposed law contains specific chapters on water, soil and air pollution, noise pollution, the protection and preservation of wildlife, protected areas, environmental disasters and the handling of hazardous materials and waste. It also calls for eliminating pollution from sources outside the UAE and for full compliance with UAE treaty obligations. Companies will be required to comply with its provisions within two years from the date of publication. The executive regulations are to be published six month after enactment of the draft law. Entities formed after the enactment will have to comply with its provisions in order to obtain a license; the licensing authorities will require environmental impact studies from applicants. Furthermore, environmental protection will generally have to be considered in all government decisions.
General enforcement of the law will be undertaken by the Ministry of Justice. Violators of the proposed provisions will have to compensate individual victims of environmental damage. It is not clear, however, whether the law allows a private cause of action for the victims or whether the Ministry will administer such claims. On the other hand, the law does state expressly that environment protection societies may institute civil litigation against an offender.
The UAE recently joined the United Nations Framework Convention on Climate Control and is a party to various international treaties regarding environmental protection, includithe 1969 Brussels Convention Relating to Intervention on the High Seas in Case of Oil Pollution Casualties and its 1973 Protocol; as well as the same convention relating to Civil Liability for Oil Pollution Damage; the 1971 Convention on the Establishment of an International Fund for Compensation in Oil Pollution Damage; the 1972 London Convention on the Prevention of Marine Pollution by Dumping from Ships and Aircraft (as amended); the Convention on International Trade in Endangered Species of Wild Fauna and Flora; Annex 16 on Environmental Protection of the 1944 Chicago Convention on International Civil Aviation, the Kuwait Regional Convention for Cooperation on the Protection of the Marine Environment from Pollution; the 1985 Vienna Convention for Protection of the Ozone Layer with its 1987 Montreal Protocol on Substances that Deplete the Ozone Layer; the 1986 IAEA Conventions on Early Notification of a Nuclear Accident and on Assistance in the Case of a Nuclear Accident or Radiological Emergency.