Federal Law in the UAE - Case Study Example

?Federal Law in the UAE The United Arab Emirates (UAE) was established as a Federation in 1971, among seven emirates, including Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaima, Sharjah, and Umm Al Quwain. The Federation is one of the larger Gulf countries populated by 2.6 million people, and since its establishment has been able to build its economy on its oil production, and simultaneously its reputation as a free trade area (Gulf-Law.com, 2011). As such, it has attracted the business of numerous multinationals and trading firms, for which reason the study of its Federal Law is warranted as far as it affects international business. This report is on those aspects of the UAE Federal Law which most concerns the study of international business. The UAE Legal System The legal system of the United Arab Emirates is founded upon the Constitution as approved by the Federal National Council in 1996. The Constitution replaced the provisional documents which had been periodically renewed since the UAE was established in 1971 (Info-Prod Research, 1999). The Constitution functions as the basic law of the land, specifying the purpose of the establishment of the federation, its components and objectives, and the public rights, responsibilities, and freedoms protected in the federation. It also establishes the structure of the federal government, provides for armed and security forces, and defines the legislative, executive, and international jurisdictions that govern the relationship between the federation and the member emirates (Tarbuck & Lester, 2009; Khedr & Alnuaimi, 2010). There are five federal institutions constitutionally provided for. These are the Federal Supreme Council (FSC – executive), the President of the Union and the Vice-President, the Council of Ministers of the Union, the Federal National Council (FNC – legislative), and the Judiciary of the Union. The Federal Supreme Council is the highest constitutional authority in the UAE, having the highest legislative and executive body in the federation. Its function is to establish general policies and sanction federal legislation, over which the rules of Abu Dhabi and Dubai (the two largest emirates in the union) have veto power. The powers of the central government are defined by the constitution; all other powers not addressed therein are implicitly governed by the emirates (Khedr & Alnuaimi, 2010). The legislative body, the Federal National Council, is a unicameral body comprised of 40 members, 20 of whom are elected by 7,000 notables who represent different tribes and social groups, and the remaining 20 are appointed by the rulers of the Emirates upon their discretion. Abu Dhabi and Dubai appoint eight members each, Sharjah and Ra’s al Khaymah six each, and four members each for Ajman, Umm al Oaywayn, and Al Fujayrah. Foundations of UAE Law The core principles of UAE law are drawn from Sharia, the fundamental Islamic law. However, most of the legislation enacted in the country are a combination of Islamic and European civil law concepts. The blend is not that far-fetched, since both of these systems are influenced by the Egyptian legal code that was established in the late 19th to early 20th centuries. There is apparently a strong leaning on the French legal concepts in the UAE as is shared in the European countries, in comparison to the distinctly different UK common law (Khedr & Alnuaimi, 2010). Federal Commercial Company Law – Forms of Business Entities Prior to 1984, there was no federal commercial company law, thus each Emirate formulated their own practices and procedures governing the establishment of business organizations within its own jurisdiction. The need was felt for a codified commercial legislation to address the concerns of international business in the country; this led to the promulgation of the Federal Commercial Company Law No. 8 of 1984, which was fully implemented by early 1993. This Law specifies that it is a requirement that UAE nations own at least 51 per cent of all public and private shareholding companies, as well as limited liability companies. It is not unusual, however, for most public and private shareholding companies, particularly those in the insurance and banking industries, to be wholly owned by UAE nationals (PKF, 2009). There are several categories of business organization in the UAE which are recognized by law. These are the public and private shareholding companies, limited liability companies, general and limited partnerships and partnership limited by shares, the joint venture company, the branch office of a foreign company, representative offices of foreign companies, and sole proprietorships. Public and private shareholding companies: Public and private shareholding companies are primarily suited to large operations or projects, having a minimum capital requirement of AED 10 million (approx.. US$2.73 million) in the case of public companies, and AED 2 million (US$ 0.55 million) for private companies. It is mandatory for the chairman and majority of the corporate directors to be nationals of the UAE. Furthermore, there are constraints placed on profit distribution for shareholding companies in comparison to the case of limited liability. A further stipulation of the law is that companies whose principal business is that of banking, insurance, or financial services must take the form of public shareholding companies; however, in the case of Dubai, foreign banks, insurance and financial companies may establish its presence as a branch or representative office (PKF, 2009). Limited liability company: Because the terms for public and private shareholding companies are more restrictive and entail greater capital requirements, it has become more popular for businesses in the UAE to take the form of a Limited Liability Company (LLC). A LLC can be formed by not less than two and not more than fifty persons, whose liability is limited, as the company form suggests, to their respective shares in the total capital of the company. By law, the minimum share capital is AED 150,000, although in Dubai the minimum capital is AED 300,000 contributed either in cash or in kind. As earlier mentioned, foreign equity in the company must not be more than 49 per cent of total equity; however, the terms of profit and loss distribution may be prescribed by the parties. The management responsibility over the LLC may, however, be vested in the foreign or national partners or a third party, as may be agreed upon by the partners. The LLC has been favoured as providing the most suitable structure for organizations seeking a long-term presence in the UAE market (PKF, 2009). General and limited partnerships: In contrast to LLCs, there are the general and limited partnerships whose partners are jointly and severally liable for the partnership’s obligations. In the case of general partnerships, the joint and several liability is shared among all the partners; in the case of limited partnerships, at least one general partner assumes joint and several liability, while at least one other limited partner is liable only to the extent of their contribution to the capital of the partnership. In both cases, all general partners must be UAE nationals one or all of whom may manage the business, while limited partners in the case of limited partnerships may be foreigners, but in no case must such limited partner participate in the management or act in the name of the partnership. Generally, the death, insanity, bankruptcy, or withdrawal of one of the partners will result in dissolution in general partnerships, but not for limited partnerships, although there are exception in both cases. In the case of a general partnership, however, the partnership may continue if the remaining partners unanimously vote to do so. On the other hand, a limited partnership may be so dissolved if the partnership agreement so provides (PKF, 2009). Joint venture company: A joint venture company is founded upon a contractual agreement between a foreign party and a local party which is licensed to engage in the activity. In practice, joint ventures are best resorted to when a local company and a foreign counterpart are working together on a particular project. As with shareholding companies, at least 51 per cent of the joint venture company must be held by UAE nationals, although profit and loss distribution may be prescribed. The joint venture company needs no registration, nor is there a need for the agreement to be published. The local partner bears all the liability, while the foreign partner may deal with third parties under the name of the local partner. However, if the agreement is publicized, then the local partner need not bear the liabilities incurred by the foreign partner (PKF, 2009). Branch office of a foreign company: As noticed from the forgoing business forms, foreign firms could not wholly own a company engaged in business in the UAE. However, it is provided that foreign companies may gain the full benefit of 100% ownership by opening a branch office in the union. Legally, a branch office is regarded as part of the parent company, and shares in the latter’s legal identity and its name. Nevertheless, the law requires that even branch offices must have a UAE national as service agent, which may be a natural person or a company which is wholly owned by UAE nationals. The local agent does not participate in the branch’s operations, but assists in matters such as the acquisition of visas, labour cards, and so forth. The restriction for branch offices is that they may only engage in activities that are similar to thos of its parent company (PKF, 2009). Representative Offices of Foreign Companies: This form of business is distinct from the branch office in that a representative office may only promote the parent company’s activities or facilitate in its contacts, but not engage in its business or conduct the sale or production itself. As with branch offices, however, representative offices must appoint a UAE national as a local service agent (PKF, 2009). Sole Proprietorships: For professional firms that engage in professional or artisan activities, sole proprietorships or civil companies wholly foreign owned may be allowed, although staff members employed are limited and a UAE national appointed must be appointed as service agent (PKF, 2009). Requirements for establishing a business Businesses that seek to operate in the UAE must register with the municipality, or the Economic Department, and the Chamber of Commerce of the Emirate (or Emirates) where the business activities are conducted, as well as with the Ministry of Economy and Commerce of the union (PKF, 2009). Approval from specific federal ministries and agencies are necessary for companies which intend to operate their business in the following industries: Banks, financial institutions and exchange companies shall secure the approval of the Central Bank; Insurance companies and related businesses shall seek prior approval from the Commissioner of Insurance, Ministry of Economy and Commerce; Manufacturing businesses shall first be approved by the Ministry of Finance and Industry Medicinal products shall be approved by the Ministry of Health; Printing, publishing and broadcasting activities requires approval by the Ministry of Information and Culture; and Educational activities shall be governed by the Ministry of Education (PKF, 2009). Taxation Law Corporate taxation is governed by the decrees of the government of each Emirate. Generally, there is no corporate tax payable by companies doing business in the UAE, with the exception of banks (with a tax rate of 20 per cent on taxable income) and oil companies (with a tax rate of 55 per cent on taxable income sourced in the UAE. Furthermore, to encourage cross-border transactions, the UAE is signatory to several tax treaties, with Canada, China, Egypt, France, Germany, India, Pakistan, Poland, Turkey and New Zealand (PKF, 2009, p. 173). Federal Labour Law The law on labour and employment in the UAE is principally embodied in Federal Law No. 8 of 1980 on Regulating Labour Relations, as amended. The normal maximum working hours are eight hours per day or forty-eight hours per week, with the exception of businesses in retail trade, hotels, restaurants, and similar establishments, where working hours may be increased to 9 hours per day. Pursuant to Islamic practice, Friday is the weekly rest day. There are no trade unions in the UAE, thus strikes and lockouts are forbidden. Any dispute between employer and employee is adjudicated by the Ministry of Labour and Social Affairs, then elevated on appeal to the courts. The law also provides for pensions and social security benefits to the worker (PK, 2009, p. 169). UAE employment law also sets out preferences for the hiring of UAE nationals, and requires that for some administrative positions, a UAE national must be hired (Latham & Watkins, 2011, p. 6). Dispute Resolution UAE law provides for dispute resolution methods for commercial disputes, most common of which are arbitration and, failing that, litigation. There is increasing preference for arbitration as method of choice for settling disputes; the country is a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, more popularly known as the New York Convention (Ahmed & Angell, 2011). The emirates, except for Dubai and Ras Al Kaimah, are included in a federal judicial system which consists of Courts of First Instance (presided over by three judges), Courts of Appeal (presided over also by three judges), and the Court of Cassation (presided over by five judges), for each emirate. The judges in the courts which hear the commercial disputes are not required to have specialist knowledge of commercial matters. Dubai and Ras Al Kaimah have opted to have independent judicial systems, and Res Al Kaimah has no Court of Cassation. All court proceedings are in Arabic, therefore all documents files in non-Arabic are required to be translated into Arabic by a licensed translator of the Ministry of Justice. Recently, legislative and judicial power has been devolved to the Dubai International Financial Centre (DIFC). As such, the DIFC has its own body of laws and its own judicial authority and courts, independent from the Federal legal and judicial systems. New Investment Laws As of 2010, the UAE economy ministry has embarked on the promulgation of 12 sets of commercial reform laws, with the intention of modernising and reinforcing the legal system. The new laws are intended to address those concerns due to commercial regulation and arbitration, in the course of which it is hoped to boost transparency, efficiency and investor confidence in the UAE business sector, ultimately spurring the economy. It was observed that in 2009, foreign direct investment (FDI) inflows fell by 71 per cent, and while part of this was due to the economic downturn, an aggravating cause was the corporate scandals which involved Dubai World, a government-related enterprise implicated in charges and investigations for embezzlement and corruption. The prevailing governance scheme then discouraged the publication of information on corporate debt and the degree to which the government is willing to support a highly leveraged undertaking the details of which operations are generally undisclosed. Prior to the reforms on corporate governance, there had been a near absence of information on the scale of corporate debt in Dubai, a situation which the new laws are expected to address, together with dissemination of more information by the government, and enhancement of the rights of foreign investors (BMI, 2010, p. 19). Bibliography Ahmed, B. & Angell, A. (2011) “United Arab Emirates” PLC Cross-border Dispute Resolution Handbook 2010/11. Dubai: Practical Law Company. Business Monitor International (2010) “UAE: New Investment Laws to Boost Business.” Emerging Markets Monitor. 6 September 2010. Gulf-Law.com (2011) “United Arab Emierates: UAE Law.” Accessed 27 May 2012 from http://gulf-law.com/uae_law.html Info-Prod Research (1999) “United Arab Emirates.” Ramat Gan: Info-Prod Research (Middle East) Ltd. Accessed 27 May 2012 from http://www.infoprod.co.il/country/uae2a.htm Khedr, A.A. & Alnuaimi, B. (2010) “A Guide to United Arab Emirates Legal System.” GlobaLex. New York, NY: Hauser Global Law School Program, New York University School of Law. Latham & Watkins, (2011) Doing Business in the United Arab Emirates. January 2011. Dubai: Latham & Watkins, LLP. PKF Accountants and Business Advisers (2009) Doing Business in the UAE: A Business and Tax Profile. PKF International Limited. Accessed 27 May 2012 from http://www.pkf.com/publications/doing-business-in/pkf-doing-business-in-the-uae Tarbuck, A & Lester, C (2009) Dubai’s Legal System: Creating a Legal and Regulatory Framework for a Modern Society. Dubai Media City, Dubai: Motivate Publishing Appendix Companies Law Entities Latham & Watkins, 2011, p. 11 Read More