The Important Aspects of Business Practice in UAE and GCC - Essay Example

Business Practice in UAE and GCC Name: Lecturer: Course: Date: Table of Contents Table of Contents 2 1. Introduction 3 2. Investment environment 3 3. Legal environment 4 3.1 Incorporation of a legal entity 5 3.2 Registration of a representative office of the business 5 3.3 Creating a free-zone entity 6 3.4 Entry into agency relationship 6 4. Economic environment 7 5. Social environment 9 6. Political environment 10 7. Major Locations for Business 10 8. Business structures 11 9. Foreign trade 11 10. Threats, Barriers, and risks 12 Conclusion 13 Works Cited 14 1. Introduction The United Arab Emirates is a federation of seven emirates, including Dubai, Abu Dhabi, Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah, and Fujairah. The UAE is situated within the Middle East. It borders the Arabian Gulf and the Gulf of Oman (PricewaterhouseCoopers 44). Current market trends in the country present abundant opportunities for foreign investors to tap into export and import of commodities. However, having good knowledge concerning UAE’s legal, economic, social, technological environment is considered as a key to successfully planning for a business in UAE. Consequently, planning for a business in UAE requires knowledge of the investment climate, forms of business operations, the taxation policies, and the legal environment. This paper draws a comprehensive plan with environmental consideration for starting a business in UAE (PricewaterhouseCoopers 18). 2. Investment environment Identify a profitable sector: In planning a business in UAE, considering the investment environment makes it possible to identify the sectors of economy that are profitable. UAE offers an excellent investment climate. Since the 1960s, UAE has exploited its oil and gas reserves, hence enabling the seven emirates to attain significant economic growth (Ernst & Young 6). The major economic activities and businesses that thrive in the country are those dealing in the development of modern infrastructure, such as telecommunications, airports, roads, as well as construction of commercial and residential buildings, or hotels, hospitals and schools (PricewaterhouseCoopers 14). The main feature of the country’s business and economic environment include: Highly development communication system. Free-trade zones that ensures easy business registration and effective operating facilities. An organised infrastructure that provides important utilities to the main centres A well-organised financials sector with limited exchange-control regulations. Business-friendly social environment that has modern medical, educational and recreational facilities (Ernst & Young 6). 3. Legal environment Identify relevant legal procedures: In planning to start a business in UAE, reviewing the legal environment is important as it ensures good understandings of the taxes and legal structure for starting and regulating businesses. Foreign investors operating in the country have to comply with these laws. The country also has a transparent governance system, which attracts foreign investment into the country (PricewaterhouseCoopers). In regards to corporate income tax, while UAE currently has no taxation, each of the seven emirates has set up corporate tax legislation that applies to businesses established in the country. Practically however, these laws have not been applied. Taxes are at present imposes on foreign gas, generating companies as for each particular government special consideration agreement. Hence, there exists no general exemption in the country. This also implies that there are fewer barriers to entry, hence increasing competition because of many entrants. UAE has no regulations that restrict business from transferring funds into or out of the country. The only restriction is that Israeli currency cannot be purchased or sold to the country (PricewaterhouseCoopers). The rest of the currencies can be freely traded at prices determined by the market. Similarly, debts, personal savings, equity capital, royalties, branch profits and technical and management fees may be freely remitted abroad. Instead, the UAE government had focused on providing free-market economy that has less regulatory restrictions (Latham & Watkins 1). To start business in UAE, establishing formal legal presence is critical for any foreign investor. This may be through an agent or directly using a range of means such as: Registration of a representative office of the business Entry into agency relationship Incorporation of a legal entity Creating a free-zone entity 3.1 Incorporation of a legal entity In UAE, the locally created business entities have to get a number of licenses before they are allowed to register (Latham & Watkins 1). These include: A trading licence obtainable from the Department of Economic Development of the emirate where the business will operate. In some case, authorisation from appropriate government agency concerning the type of business to be engaged in. Creation of entities incorporate locally under the United Arab Emirates Civil Code, or in compliance with the Federal Law No. 8 of 1984 Concerning Commercial Companies. The Civil Code entities may take one of the three forms, such as the speculative venture partnership, professional services firms and lastly, Islamic Sharia-compliant arrangements such as mudaraba (Latham & Watkins 1-4). 3.2 Registration of a representative office of the business As provided for by Article 313 of UAE Companies Law, foreign investors may open representative offices in UAE. The office may be wholly-owned by the foreign investors. Still, Article 23(1) of the Commercial Code demands that non-UAE nationals that engage in commercial forms within the country to associate with a UAE citizen owning some 51 percent of the company’s shares (Latham & Watkins 1-4). Therefore, representative offices or branch that are wholly-owned by the foreign investors may only undertake businesses that are non-commercial in nature, such as activities promoting the skills and the expertise of the individuals who take the business, including provision of medical, consultancy and services (Ernst & Young 6). 3.3 Creating a free-zone entity The key benefit of a free-zone entity is that it can be wholly owned by a foreigner. Such free-zone entities are also allowed particular supplementary benefits (PricewaterhouseCoopers 38). The free-zone entity essentially selects one of the three types, such as a free-zone company, representative office of the foreign firm and lastly, a free-zone establishment. No minimum capital is required for the representative. However, in the free zones, a free-zone establishment and free-zone company are essentially needed to have a minimum capital of AED 500,000 (Latham & Watkins 1-4). 3.4 Entry into agency relationship For foreign investors who look to start a business within the UAE and still would not want to maintain physical presence within the country, they may enter into a commercial agency relationship with a citizen of the country or a wholly owned entity (PricewaterhouseCoopers 38). Commercial agents may also be used when looking to undertake a large-scale importation of goods into the country. In the case of commercial agency, the foreign investors and the commercial agents may decide the terms of the commission to be paid or the duration of their business relationship. When the commercial agent has registered the contract with the Ministry of Economy and Commerce, the commercial agent can acquire a range of protections granted under the Commercial Agencies Law (Federal Law No. 18 of 1981) (Latham & Watkins 1-4). 4. Economic environment Review the economic climate: In planning for a business in UAE, understanding the economic environment makes it possible to understand the exiting competitors, consumer demand and future growth opportunities. The United Arab Emirates has an open economy that has a considerably high annual trade surplus and high per capita income. The major financial hubs include Dubai and Abu Dhabi, which have enabled UAE to maintain economic pre-eminence within the GCC (Ernst & Young 9). The efforts aimed at ensuring diversification in trade, tourism, logistics and manufacturing have cut down the GDP that has generally depended on oil and gas output to reach 25 percent. UAE Dirham (Dh) is the unit of currency. Since the 1980, it has been pegged to the US dollar by the government at an exchange rate of nearly 3.67 UAE Dirhams to one US dollar (Ernst & Young 7). The country has a high standard of living, which implies high consumption of industrial products. Indeed, since oil was discovered in the country 3 decades ago, the country has transformed from a poverty-stricken region into a modern-state with high standards of living (Ernst & Young 7). The UAE has federal laws that related to free zones. Each Emirate is permitted to set up free zones for industry-specific or general activities. The objective of the free zones is to promote foreign direct investment in the country. On the other hand, the free zone entities are not specifically required to have UAE nationals as the proprietors (PricewaterhouseCoopers 38). This is in contrast to a majority of the companies established in the UAE that are outside of these free zones where the UAE nationals are demanded to own some 51 percent of the shares in a company. Free zones are permitted to ratify own legislations is certain areas. The country’s free-trade zones offer 100 percent taxes and foreign ownership in order to attract foreign investments. The 2009-2010 Global Financial Crisis affected the country’s economy, leading to reduced prices of assets, which made the UAE market to be unattractive for foreign investment. However, the UAE government has tried to cover for the crisis through increased spending and increased liquidity within the banking sector. According to Ernst & Young (7), Dubai market was worst hit leading to depression in the real estate sector. Later, the Dubai government set aside US$20bn bond to cover the debt obligations. At present, the country’s economy is recovering from the crisis and is witnessing picking up in trade and high public spending. Due to this, UAE is witnessing increased investments from foreign companies. UAE is also known for having a high number of equity investors and shareholders drawn from across the globe. This implies that small businesses have an opportunity to attract investors. Since the oil prices will be high in the future, the country’s decision to diversify the economy by promoting banking services, tourism and high-tech industries implies that it will have some protection from fluctuating oil prices. In spite of the 2009 Global Financial Crisis, the banking sector and tourism has had attractive long-term growth potential because of the high foreign and domestic investment (Ernst & Young 9-12). 5. Social environment Determine the cultural distance: In planning for a business in UAE, understanding the social environment makes it possible to take advantage of the existing social environment to create economic opportunities and value propositions. UAE has a reputation for having being among the most liberal trade regimes in the GCC. UAE is a multi-ethnic country due to the high number of immigrants in the country. Consequently, the UAE government has showed commitment to ensuring racial and ethnic inclusion. The country has a high number of expatriate workers at most levels of the economy. According to estimates by Ernst & Young (2012), the expatriates account for some 80 percent of the total workforce ((PricewaterhouseCoopers 4). Additionally, the popularity of Abu Dhabi and Dubai as leading global business and cultural hub has empowered UAE to create great economic opportunities and value propositions that have continued to attract foreign direct investments. The country has managed to attract investors from across the globe. Additionally, the country has many foreign workers at various levels of the economy. It therefore has a diversified labour market because of the high number of immigrants drawn from across the globe. The country is also increasingly making its economy diversified in order to reduce overreliance on oil and gas, which has been vulnerable to fluctuation of oil prices. Indeed, over the last decade, the UAE government has invested hugely in various areas employments in the fields cement manufacturing, ship building, production of aluminium, tourism, exportation and telecommunication. UAE is effectively connected to the rests of GCC and the world because of its successful airline industry, mainly Etihad. UAE is known for being the most connected country in the Middle East due to the high use of technology. This implies that the country has among the highest number of technologically skilled population in GCC. This creates opportunity for investors in the ICT industry. 6. Political environment Understand the political implications of investing in UAE: UAE is also located in a region that is highly politically unstable due to the recent cases of Arab Spring in neighbouring countries. This has affected its reputation as a safe place to conduct business. In fact, it is possible that concerns regarding the political instability of the region and the high number of militant groups may affect the perception of investors. The country’s currency is also pegged to the dollar. This implies that UAE has less control over the monetary policy. This also means that UAE has reduced capacity to address inflation (Ernst & Young 37). Politically instability of North Africa and the Middle East due to the Arab Spring that started in 2011 appears to have worked to the advantage of UAE, as investors from other regions have relocated to the country. Indeed, tourism and capital flows have increased in this regards. 7. Major Locations for Business Identifying the right locations for business is important during the planning process since a business has to be strategically situated near the customers and away from the competitors. In this regards, Abu Dhabi and Dubai are identified the two major business centres in the country. Abu Dhabi has the greatest oil reserve, which has enabled it to account for nearly 90 percent of the country’s total oil output. It has a developed market for a wide range of smalls-scale and medium-scale manufacturing industries that make processed foodstuff, building materials, plastic products, and beverages (Ernst & Young 6). On the other hand, Dubai has large cultural mix and therefore a home to a large number of foreign workers. It is also UAE’s commercial hub and serves as the entre port to the Middle East. It is more economically diversified, and unlike Abu Dhabi, it depends on non-oil activities such as entertainment centres, manufacturing activities, and shopping mall that support a greater part of its Gross Domestic Product (GDP). 8. Business structures To conduct a business in UAE, the right business organisation or structure is needed. UAE’s Federal Commercial Company Law No. 8 of 1984 recognises several types of business organisations that can operate within UAE. These include private shareholding, general partnership, public shareholding, limited liability company, joint ventures and partnership limited by shares. Additionally, sole proprietorship and branches of foreign companies are also recognised structures of business organisations (Ernst & Young 19-25). 9. Foreign trade Understanding the recommended forms of foreign trade is important in considering, which forms of entry an investors can use. The country has continued to depend substantially exportation of oil and gas. Each day, the UAE generates some 2.396 million bbl, which account for nearly 50 percent of the total exports each year. Additional exports include refined petroleum products and gold, as well as dried fish, aluminium, and dates (PricewaterhouseCoopers 38). The country’s leading imports are mainly manufactures products, transportation equipment, machinery, food and chemicals. Much of the imports are consumer goods, which have increases economic activities in non-oil sector due to the increases demand from the expanding population (Ernst & Young 18). In fact, importing into the free zones is duty-free to the foreign investors. Duties may however be imposed when the imports are re-sold afterwards within the UAE. Similarly, there are no restrictions on exports except for commodities of historical value that are subject to authorisation from the suitable government authority. Still, all the commodities that have been exported or re-exported from the country have to possess the required documentation from the Ministry of Economy. 10. Threats, Barriers, and risks The UAE government offers high subsidies for agriculture and utilities. This has led to continued fiscal deficits. The country has several ongoing construction projects, which have been delayed. Additionally, the property market has crashed threatening future development. For the first time in the country’s history, the US credit rating has been downgraded from AAA to AA plus. This had high impacts on the US currency. In spite of this, the country has continued to peg its currency on US dollar and hence the costs of imports that do not use US dollar tend to witness fluctuation based on the fluctuation of the US dollar exchange rate (Ernst & Young 14). UAE is not English-speaking country, despite the fact that English is the common business language. Additionally, foreign investors looking to undertake business outside a free-zone must have a local partner, who owns some 51 percent of the business. Additionally, the various laws such as individual emirate law, the federal laws, Sharia laws, and free zone laws may be complex and too confusing for foreigners to follow. Another challenge includes the requirement that foreign investors need a local sponsor who owns 51 percent of the business, unless in the free zones. Earnings from export are however highly affected by the fluctuation of the US dollar, which sometimes reduces the purchasing power of consumers in the country (Ernst & Young 14). Conclusion In starting a business in UAE, having an effective plan allows a business to gain an insight into the investment climate, how to form business operations, the existing taxation policies, and the legal environment. These help in providing clarity on how a business should be transformed into success. Understanding the recommended forms of foreign trade is important in considering, which forms of entry an investors can use. UAE offers an excellent investment climate. The major economic activities and businesses that thrive in the country are those dealing in the development of modern infrastructure such as telecommunications, airports, roads, as well as construction of commercial and residential buildings, or hotels, hospitals and schools. The main feature of the country’s business and economic environment include highly development communication system, a near absence of taxation, free-trade zones that ensures easy business registration and effective operating facilities, an organised infrastructure that provides important utilities to the main centres, well-organised financials sector with limited exchange-control regulations and lastly, business-friendly social environment that has modern medical, educational and recreational facilities. Works Cited Ernst & Young. "Doing business in United Arab Emirates," Ernst & Young, 2012. 16 Nov 2014, Latham & Watkins. "Doing Business in the United Arab Emirates." Latham & Watkins, 2011. 17 Nov 2014, PricewaterhouseCoopers. "Doing business in the UAE." PWC, 2012. 16 Nov 2014, Read More