In recent years our practice has seen a notable rise in Chinese business activity in the UAE as China has increased its appetite for international investment. We would expect this trend to continue as the economy within the UAE has been forecasted to show a steady recovery in 2013, both in terms of GDP and property market which makes it an attractive investment hub for international prospective investors.
There are many driving factors for international companies wishing to do business in the UAE such as (i) zero tax (except in hydro carbon and foreign bank branches) (ii) relative legal transparency, (iii) low political risk (iv) currency pegged to the US dollar (v) free repatriation of profits (vi) freely transferrable currency (vii) no withholding taxes (viii) first class infrastructure and (ix) a growing economy with investment opportunities.
Also a source of liquidity for investment in China, the UAE is home to some of the world's largest sovereign wealth funds, located in Abu Dhabi and Dubai.
Synergies between the UAE & China
One of the strongest synergies between the UAE and China is in the oil sector. China is the second largest oil consumer in the world, and the UAE ranks 7th globally in oil production. We have seen the Chinese have recently bid for oil concessions in Abu Dhabi.
Ties between the UAE and China in the development of the UAE's construction sector have also considerably strengthened. Chinese Ministry of Commerce figures indicate that within the last two years, Chinese firms have won over US$4.8 billion worth of construction contracts in the UAE. This has prompted a rise in Chinese construction companies setting up in the UAE. For example, following an agreement signed between Aabar, Abu Dhabi sovereign fund and China State Construction Engineering Corporation (CSCEC), to develop US$2 billion of real estate projects, CSEC set up offices on the ground in the UAE. A further example is one of China's largest architectural firms Shanghai Xian Dai Architectural Design (Group) Co, opening a branch in Abu Dhabi and partnering with the Bin Abbood Group in order to gain a local advantage and bid for upcoming projects.
Offshore Renminbi trade in the UAE is another area that has seen growth. There has been an increased demand for Renminbi client account facilities with banks in the UAE. This is likely linked to a greater presence of Chinese businesses in the UAE.
Since 2012 several major Chinese banks have started operating within the UAE, such as ICBC (Industrial & Commercial Bank of China) with branches in Dubai and Abu Dhabi, BOC (Bank of China), ABC (Agricultural Bank of China) as well CDB (China Development Bank), providing project financing, trade financing, asset management, investment financing consultancy.
UAE Regulatory Background
For Chinese or foreign investors/companies setting up in the UAE, there are differing legal and regulatory requirements that apply. Depending upon the particular requirements in each case, and the activities to be carried out, it is possible to conduct business in the UAE by way of setting up any of the following entities:
(i) limited liability companies, (ii) joint stock companies (iii) foreign branches, (iv) representative offices, and (v) hybrid establishments and companies in the free zones.
While the main requirements for setting up a company in the UAE are set out within Federal Law No 8 of 1984 concerning Commercial Companies (the "Companies Law"), the formalities to be undertaken, and the relevant government departments involved vary between each Emirate. Furthermore, pursuant to the exemption set out in Article 2 of the Companies Law, it is possible for companies engaged in water desalination, and electricity, oil and gas production, hybrid entities to have bespoke memorandum and articles of association and carve out the application of provisions in the Companies Law. Also, the Companies Law does not apply to entities established in the free zones if any of the free zone concerned has special provisions regulating these companies.
The Companies Law provides in Article 314 that in order for foreign companies to practice their main activity, or establish offices, or set up a branch, they must obtain a license issued by the relevant Ministry upon approval from the relevant authority concerned with the type of business activities to be carried out.
Generally speaking, a trade license is required to be issued by the Department of Economic Development where the company will be located, and authorisation from the relevant authority depending on the activities to be carried out e.g. industrial, tourism, financial services etc. One of the limitations for foreign investors in establishing a local entity in the UAE under the Companies Law is that 51% of the company's shareholding capital must be owned by a UAE national. LLC and Joint Stock Companies The most common form of company under the Companies Law is a limited liability company ("LLC"). Useful for small joint ventures and partnership type arrangements, the LLC resembles a partnership in many ways. Notably it refers to partners and does not contemplate the issuance of share certificates. The number of parties may not be less than two and not exceed fifty. Minimum capital is AED 150,000 (US$ 40,871). Management is by one or more managers not exceeding five in number.
In considering Joint Stock companies, there are two types; (i) listed or public joint stock companies and (ii) private joint stock companies. The Private Joint Stock Company is commonly used as the preferred vehicle for partnerships or joint ventures between foreign sponsors and UAE governmental entities in the large infrastructure projects such as in the energy and water and power sectors. It is a working model for PPP's and PFI in the education and health sectors.
Foreign entities may establish themselves in the UAE by way of a branch or a representative office of an existing foreign company. The key benefit of opening a branch or a representative office is that it can be wholly owned by parent company.
In order to set up a branch of a foreign company, a UAE national agent must be appointed who effectively acts as a sponsor. The national agent has no ownership rights in the branch and is either a UAE individual or a company wholly owned by UAE nationals.
A branch is considered to have the same legal identity as its parent company, which will bear the liabilities and financial obligations of branch. The key restriction of opening a branch is that the types of activities that may be carried out in the UAE are restricted and generally it should only engage in activities carried out by its parent company.
A representative office is even further restricted than a branch in that it may only engage in marketing activity or administrative functions on behalf of its parent company such as forming client relationships and soliciting orders on behalf of its parent company.
Civil Code Consultancy
It is also possible to establish a local entity under the UAE Civil Code by way of a 'professional services company'. The activities would primarily involve professional skills and expertise such as consultancy services e.g. engineering, medicine or educational.
In order to set up, a local service agent would be required for sponsorship purposes but would not be involved in the operational side of the company. The professional services company would effectively allow for 100% ownership by the foreign parent company and it is not considered to be a separate legal entity. There are limitations upon the type of activities that may be carried out which are restricted to professional and non commercial.
Commercial Agency
The UAE Agency Law governs commercial agency relationships with covers a range of commercial activities e.g. agency, franchising, and distribution. Typically the principal (foreign company) is represented locally by the agent in terms of the sale/distribution/activities to be carried out. The commercial agency relationship generally serves to sell and distribute goods into the UAE.
DIFC
For Chinese and other foreign financial service providers, doing business in the Dubai International Financial Centre (DIFC) has become increasingly popular. The (DIFC) is a financial free zone and prominent international financial district. Its key geographical location between the east and west has made it an attractive financial centre for foreign investors and financiers wishing to carry out financial services. Like many free zones, the DIFC attracts foreign investors as it benefits from 100% foreign ownership of companies, no tax, no restriction on profit repatriation or capital convertibility.
The DIFC has its own regulators, legal structures, and internal common law based legal system which largely mirror internationally recognised standards. In order to qualify for registration in the DIFC applicants need to be either a financial services institution (such as banks, insurance companies, wealth management, or capital market entities) or a commercial firm (including professional services, management offices, retailers).
The DIFC has attracted major Chinese financial firms, who over the years have achieved significant growth in the region. There are a number of Chinese entities operating in the DIFC including; Agricultural Bank of China, Bank of China Middle East, Industrial and Commercial Bank of China (Middle East) Limited, Royal China Dubai LLC, PetroChina International (Middle East) Limited.
There are various categories of license in the DIFC which dictate the level of authorised activity that may be undertaken. There is a dual track application process in order to obtain licensing in the DIFC including (1) application to the DIFC Authority, and (2) application to the Dubai Financial Services Authority (the DFSA) who is the regulator for all financial services in the DIFC and who must be satisfied that the entity is fit and proper in terms of legal status. Key considerations and requirements within the application process include:
- Submission of a comprehensive business plan outlining among other things, proposed activities, who the management will be, proposed auditors, and demonstrating that there are adequate resources to carry out the proposed activities with 3 year financial projections.
- The company is required to have offices operating within the DIFC.
Free zones
There are various other industrial free zones in the UAE with set geographical locations and which have individual rules and regulations that govern them. Free zones were originally established to attract foreign investors and are considered 'offshore' UAE for the purposes of UAE Companies Law and other laws. Depending on the free zone, the activities permitted by a company may be general or industry specific e.g. Jebel Ali Free Zone, Media City or Internet City, Health City.
Our practice has also seen China specific activity in the Fujairah Free Zone, for instance one project involved an international Chinese Petrochemical Company acquiring a stake holding in Fujairah Oil Terminal FZC (FOT) which will operate oil storage facilities in the Free Zone.
The benefits to setting up in a free zone is that they allow for 100% foreign ownership, unlike entities that have been set up in the UAE proper which require a UAE national to own 51% of an entity. In addition to ownership flexibility, there is the ability for a foreign company to construct and to lease its own premises, and to acquire business visa and other privileges. Free zones also benefit from zero tax and allow for repatriation of profit and capital.
New Companies Law - Stop Press
A new Companies Law is anticipated to be promulgated in the New Year. A further article on the key changes to the company legal regime will follow.
Author: Alan Rodgers
a.rodgers@hadefpartners.com
Author: Yasmene Aweti
y.aweti@hadefpartners.com
© Hadef & Partners 2013
