Recent legal developments – United Arab Emirates

10th May 2023

In recent years, the countries in the Arabian Gulf Cooperation Council (GCC), have been going through a process of investor liberalisation, attracting foreign investors wanting to establish a business presence between the East and West and gain a foothold in the GCC market. The United Arab Emirates (UAE) in particular has been seen as a key market. This has created opportunities for UK companies wanting to open up new markets for exports, especially against the current economic backdrop.

Businesses have traditionally been attracted to the GCC market due to tax reasons, but there has also been some reluctance to fully commit to the region. Such reasons include the administrative issues previously faced when setting up businesses and the nature of its developing and sometimes uncertain legal and regulatory framework.

Different countries in the GCC have been adopting different business liberalisation strategies at differing paces. Here we focus on the UAE, which has gone through a steady process of making itself business-friendly while attempting to be seen as a stable economy.

The UAE is a federal civil law jurisdiction and certain laws apply at federal level while others apply at an emirate-specific level. The creation of free-zones has proved to be a successful way of liberalising the market, allowing each zone to establish its own set of rules. Two free-zones, the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Markets even have their own legal system and courts, based on Common Law.

From a company incorporation perspective, free-zones have, over the years, been a popular means of establishing a business presence in the UAE offering 100% foreign ownership of companies and tax efficient benefits for foreign investors. There are, however, restrictions on trading outside of a free-zone and there are limitations associated with such companies.

If a foreign company wanted to incorporate a limited company outside of a free-zone, 51% of its shares needed to be held by a UAE national or company – or a local agent needs to be appointed for setting up a branch.

A change to the UAE Companies Law in 2022 has meant that in most industries, a foreign company can now own 100% of the shares of a non-free zone UAE limited company, although there are still exceptions for activities considered to have a “strategic impact”.

These include security and defence activities and activities of a military nature, banks, money exchange, finance companies, insurance activities and telecommunications. It is now administratively more straightforward to establish a presence in the UAE, although certain industries, such as banking, insurance and investment, are subject to additional regulation.

The Companies Law has also (among other things) updated provisions relating to corporate governance and minority protection and has also introduced special purpose acquisition companies and special purpose vehicles.

A new labour law came into effect in the UAE in February 2022 which introduced significant new changes and radically overhauled the previous law to bring it up to date with modern working practices.

The new Commercial Transactions Law came into effect on 2 January 2023 which has been considered as a fundamental overhaul of the previous Commercial Transactions Law. The new law, amongst other things, recognised and introduced the concept of a virtual commercial business and includes provisions which recognise electronic contracts and transactions.

In keeping pace with international developments, a data protection law was introduced in 2021 and a virtual assets law has also recently been introduced in Dubai. The Virtual Assets Regulatory Authority (VARA), an independent regulator, has been established in Dubai to regulate cryptocurrencies, non-fungible tokens (NFTs) and other virtual assets.

All entities planning to offer crypto-related services in Dubai must seek authorisation from VARA.  DIFC, through the Dubai Financial Services Authority has separately issued a Crypto Token Regime. On 23 March, the UAE’s Central Bank announced the launch of its Digital Dirham strategy.

There are a number of different initiatives afoot at federal, emirate and free-zone levels to further ease the administrative burdens of doing business in the UAE and make it a competitive and attractive market. UK companies, especially exporters, would be right to consider the UAE and the wider GCC market as more attractive than previously, and it is likely that this will continue.

Despite this, the rules and laws can still be complex, and care should still be taken when entering into agreements with parties based in the UAE and setting up business there. It is recommended that proper due diligence is carried out and legal advice is taken accordingly. HCR has a dedicated international hub focussing on the GCC market.

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