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 rather than foreign investors.
The Commercial Companies Law requires all companies to apply international accounting standards and practices, generally International Financial Reporting Standards (IFRS). The UAE does not have local generally accepted accounting principles.
Legislation is only published when it has been enacted into law and is not formally available for public comment beforehand, although the press will occasionally report details of high-profile legislation. Final bills are published in an official register, usually only in Arabic, although there are private companies that translate 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 coordinates 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. In 2017, the UAE conducted 58 notifications to the WTO committee, including on restricting the use of hazardous materials in electronic devices, and on a guide for the control of imported foods.
Legal System and Judicial Independence
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 the British-based system of common law used in offshore free trade zones, and domestic law governed by Shari’a – the majority of which has been codified. The mechanism for enforcing ownership of property through either court system is generally considered to be 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.
The Dubai International Financial Center (DIFC) and Ras Al Khaimah International Corporate Centre maintain a wills and probate registry, allowing non-Muslims to 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 financial judgments.
The UAE constitution stipulates that each emirate can decide whether to set up its own judicial system (local courts) to adjudicate local cases, or use federal courts exclusively. 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. The federal government administers the courts in Ajman, Fujairah, Umm al Quwain, and Sharjah, including the vetting and hiring of judges, and payment of salaries. Judges in these courts apply both local and federal law, as warranted. Dubai, Ras Al Khaimah, and Abu Dhabi, on the other hand, administer their own local courts, hiring, vetting, and paying their own judges and attorneys. 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 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. 2, 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 2016, provides a stronger, more current basis for corporate regulation. Federal Law No.19 of 2018 eased restrictions on foreign ownership of companies incorporated “onshore”. The new law allows foreigners to own up to 100 per cent of the share capital in UAE companies operating in certain sectors, subject to licensing requirements. The sectors covered by the new law will be set out in future legislation.
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 emirate-level government. Existing commercial law allows companies to offer between 30 and 70 percent of shares in 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 companies are required to have 51 percent GCC ownership at the time of listing, and UAE nationals must chair and comprise the majority of board members of any public joint stock company. A provision to allow 100 percent foreign ownership outside free zones requires Cabinet approval on a case-by-case basis. For example, in 2015, Apple opened stores outside free zones without 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 select hydrocarbon projects governed by special laws or agreements are exempt from the industry law.
To register with the Abu Dhabi Securities Exchange, go to: https://www.adx.ae/English/Pages/Members/BecomeAMember/default.aspx
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 Competition Regulation Committee under the Ministry of Economy reviews transactions for competition-related concerns.
Expropriation and Compensation
Mission UAE is not aware of foreign investors involved in any expropriations in the UAE in the recent past. 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 to maintain foreign investor confidence.
ICSID Convention and New York Convention
The UAE is a contracting state to the International Center 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
Mission UAE is aware of several substantial investment and commercial disputes over 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 with local businesses. Some observers have characterized dispute resolution as difficult and uncertain. Disputes are generally 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-connected local parties are involved. Some firms might 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 UAE government’s accession to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention) 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. Mission UAE is not aware of any U.S. firms attempting to use arbitration under the UN convention on the recognition and enforcement of foreign arbitral awards. While recognizing progress in compliance with this convention, some market watchers have raised concerns about delays and other obstacles encountered by firms seeking to enforce their arbitration awards in the UAE.
In June 2018, Federal Law No. 6 of 2018 on Arbitration came into force. It repealed and replaced Articles 203 to 218 of Federal Law No 11 of 1992. The Federal Law on Arbitration is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration. Prior to this legislation, there was no federal law governing arbitration in the UAE. The new law is expected to bolster confidence in the UAE’s arbitration regime.
A new bankruptcy law, Federal Decree Law No. 9 of 2016, came into effect in December 2016 and was used for the first time in February 2019. The law covers companies governed by the Commercial Companies Law, most free trade zone companies, sole proprietorships, and civil companies conducting professional business. It allows creditors that are owed USD 27,225 or more, to file insolvency proceedings against a debtor 30 business days after notification in writing to the debtor.
The law decriminalized “bankruptcy by default,” requiring companies and their owners in default more than 30 days to initiate insolvency procedures rather than face fines and potential imprisonment. However, observers allege that the law offers little protection to individual investors, and non-payment of debt generally remains a criminal offense.
In April, 2017, the UAE Federal Government’s Al Etihad Credit Bureau began issuing credit scores to UAE citizens and residents, according to local media reports. The bureau has been issuing credit reports to foreigners living in the UAE since 2014.