Transparency of the Regulatory System
As indicated elsewhere in this report, the regulatory and legal framework in the UAE is generally more favorable for local investors than for foreign investors.
The Commercial Companies Law requires all companies to apply international accounting standards and practices when preparing their accounts, generally International Financial Reporting Standards (IFRS). The UAE has never had local generally accepted accounting principles.
Legislation is only published when it has been enacted into law and is not available for public comment before that, although the press will occasionally report on some details of high-profile legislation. Final bills are published in an official register, usually only in Arabic, although there are private companies that specialize in translating laws into English. Regulators are not required to publish proposed regulations before enactment, but they share them either publicly or with stakeholders on a case-by-case basis.
International Regulatory Considerations
The UAE is a member of the GCC, along with Bahrain, Kuwait, Oman, Qatar, and Saudi Arabia. It maintains regulatory autonomy, but does coordinate efforts with other GCC members through the GCC Standardization Organization (GSO). Although not a member of the GCC, Yemen also participates in the GSO, with the same rights and obligations as GCC member states. During 2012-2015 the UAE made 207 notifications to the WTO Committee on Technical Barriers to Trade under Article 10.6 of the TBT Agreement. Of these, 28 were joint notifications made along with the other GCC states plus Yemen, according to the 2016 WTO Trade Policy Review of the UAE.
Legal System and Judicial Independence
French and Egyptian legal systems heavily influence the UAE legal structure, but its foundation is in Islamic (Shari’a) law. In the constitution, Islam is identified as the state religion, as well as the principal source of law. The legal system of the country is generally divided between off shore free trade zones, which use a British-based system of common law, and domestic law cases, which are governed by Shari’a – the majority of which has been codified into black letter law. The mechanism for enforcing ownership of property through either court system is generally considered to be both predictable and fair. As is the case with civil law systems, common law principles, such as adopting previous court judgments as legal precedents, are generally not recognized in the UAE – although lower courts typically apply higher court judgments. Judgments of foreign civil courts are typically recognized and enforceable under the local courts.
In April 2015, Dubai International Financial Center (DIFC) courts announced a wills and probate registry, making it the first jurisdiction in the region where a non-Muslim can register a will under internationally recognized common law principles. The United States District Court for the Southern District of New York signed a memorandum with the DIFC courts that provides companies operating in Dubai and New York with procedures for the mutual enforcement of money judgments. A properly executed last will and testament will take precedence over Shari’a law, however, and is recommended by local attorneys as the best way for expatriates to ensure that the default inheritance laws of the UAE are not applied unless so desired.
The constitution stipulates that each emirate can decide whether to set up its own judicial system (local courts) or use federal courts (courts administered by the federal government) exclusively for cases involving both federal and non-federal cases. The Federal Judicial Authority has jurisdiction for all cases involving a “federal person,” with the Federal Supreme Court in Abu Dhabi, the highest court at the federal-level, having exclusive jurisdiction in seven types of cases: disputes between emirates, disputes between an emirate and the federal government, cases involving national security, interpretation of the constitution, questions over the constitutionality of a law, and cases involving the actions of appointed ministers and senior officials while performing their official duties. Although the federal constitution permits each emirate to have its own judicial authority, all emirates except Dubai, Ras Al Khaimah, and Abu Dhabi have incorporated their local judicial systems into the Federal Judicial Authority. In doing so, the federal government administers the courts in Ajman, Fujairah, Um al Quwain, and Sharjah, including the vetting and hiring of judges there, and payment of salaries. Judges in these courts apply both local and federal law as warranted by the case. Dubai, Ras Al Khaimah, and Abu Dhabi emirates, on the other hand, administer their own local courts, hiring, vetting, and paying their own judges and attorneys. A slight anomaly, however, is that Abu Dhabi is the only emirate that operates both local (the Abu Dhabi Judicial Department) and federal courts in parallel. The local courts in Dubai, Ras al Khaimah, and Abu Dhabi have jurisdiction over all matters that the constitution does not specifically reserve for the federal system.
Laws and Regulations on Foreign Direct Investment
There are four major federal laws affecting foreign investment in the UAE: the Federal Companies Law, the Commercial Agencies Law, the Industry Law, and the Government Tenders Law.
The Federal Commercial Companies Law (Law No. 02, 2015) was issued in April 2015 and applies to commercial companies operating in the UAE. The new law, with which all companies had to come into compliance before July 1, 2016, provides a stronger, more up to date basis for corporate regulation. Companies established in the UAE are currently required to have a minimum of 51 percent UAE national ownership. Profits and management control may be apportioned differently and often are negotiated at fixed amounts. Branch offices of foreign companies are required to have a national agent with 100 percent UAE national ownership, unless the foreign company has established its office pursuant to an agreement with the federal or an emirate-level government. The new commercial law allows companies to offer between 30 and 70 percent of shares upon undertaking an initial public offering (IPO) and eliminates the requirement to issue new shares at the time of the IPO. The law also eases the process for forming a limited liability company by requiring between 1 to 75 shareholders (the prior requirement was between 2 to 50 shareholders). Public joint stock company are required to have 51 percent GCC ownership at the time of listing, and UAE nationals must chair and be the majority of board members of any public joint stock company. A provision to allow 100 percent foreign ownership outside of free zones requires Cabinet approval on a case-by-case basis. For example, in 2015, a prominent American technology company secured permission to open stores outside free zones without any local partners, having secured permission to do so on an exceptional basis via a decree from the Ministry of Economy.
The Commercial Agencies Law’s provisions are collectively set out in Federal Law No. 18 of 1981 on the Organization of Commercial Agencies as amended by Federal Law No. 14 of 1988 (the Agency Law), and apply to all registered commercial agents. Federal Law No. 18 of 1993 (Commercial) and Federal Law No. 5 of 1985 (Civil Code) govern unregistered commercial agencies. The Commercial Agencies Law requires that foreign principals distribute their products in the UAE only through exclusive commercial agents who are either UAE nationals or companies wholly owned by UAE nationals. The foreign principal can appoint one agent for the entire UAE or for a particular emirate or group of emirates. The Ministry of Economy handles registration of commercial agents. It remains difficult, if not impossible, to sell in UAE markets without a local agent. Only UAE nationals or companies wholly owned by UAE nationals can register with the Ministry of Economy as local agents.
The Federal Industry Law stipulates that industrial projects must have 51 percent UAE national ownership. The law also requires that projects either be managed by a UAE national or have a board of directors with a majority of UAE nationals. Exemptions from the law are provided for projects related to extraction and refining of oil, natural gas, and other raw materials. Additionally, projects with a small capital investment or projects governed by special laws or agreements are exempt from the industry law.
To obtain an investor number from the Abu Dhabi Securities Exchange, go to: http://www.adx.ae/FormsAndApplications/InvestorNumberApplication.pdf
To obtain an investor number for trading on the Dubai Exchanges, go to: http://www.nasdaqdubai.com/assets/docs/NIN-Form.pdf
Competition and Anti-Trust Laws
The Ministry of Economy reviews transactions for competition-related concerns.
Expropriation and Compensation
The Mission is not aware of foreign investors involved in any expropriations in the UAE for at least the last five years. There are no set federal rules governing compensation if expropriations were to occur, and individual emirates would likely treat expropriations differently. In practice, authorities would be unlikely to expropriate unless there were a compelling development or public interest need to do so, and in such cases compensation would likely be generous in order to maintain foreign investor confidence.
ICSID Convention and New York Convention
The United Arab Emirates is a contracting state to the International Centre for the Settlement of Investment Disputes (ICSID convention) and a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral awards (1958 New York Convention).
Investor-State Dispute Settlement
The Mission is aware of several substantial investment disputes during the past few years involving U.S. or other foreign investors and government and/or local businesses. There have also been several contractor/payment disputes, with the government as well as local businesses. Some observers have characterized dispute resolution as difficult and uncertain.
Disputes generally are resolved by direct negotiation and settlement between the parties themselves, recourse to the legal system, or arbitration. Small, medium, and some larger enterprises continue to fear being frozen out of the UAE market for escalating payment issues through civil or arbitral courts, particularly when politically influential local parties are involved. Some firms may feel compelled to exit the UAE market as they are unable to sustain the pursuit of legal or dispute resolution mechanisms that can add months or years to the dispute resolution process. Arbitration may commence by petition to the UAE federal courts on the basis of mutual consent (a written arbitration agreement), independently (by nomination of arbitrators), or through a referral to an appointing authority without recourse to judicial proceedings. There have been no confirmed reports of government interference in the court system that could affect foreign investors, but there is a widespread perception that domestic courts are likely to find in the favor of Emirati nationals over foreigners.
International Commercial Arbitration and Foreign Courts
The UAEG’s accession to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards became effective in November 2006. An arbitration award issued in the UAE is now enforceable in all 138 states that have acceded to the Convention, and any award issued in another member state is directly enforceable in the UAE. The Convention supersedes all incompatible legislation and rulings in the UAE. The Mission does not yet have any experience with U.S. firms attempting to use arbitration under the UN convention on the recognition and enforcement of foreign arbitral awards. Concerns have been raised about delays and other obstacles encountered by firms seeking to enforce their arbitration awards in the UAE despite the recognition of progress in compliance with this convention.
A new bankruptcy law, Federal Decree Law No. 9 of 2016, came into effect in December 2016. The law covers companies governed by the Commercial Companies Law, most free zone companies, sole proprietorships, and civil companies conducting professional business. It allows creditors that are owed AED 100,000 (USD 27,225) to file insolvency proceedings against a debtor, thirty business days after notification in writing to the debtor.
The law decriminalized “bankruptcy by default,” requiring companies in default more than 30 days to initiate insolvency procedures rather than face fines and potential imprisonment, as under the old law. Non-payment of debt, for example through “bounced checks,” remains a criminal offense in many cases.