Investment Climate

Openness to Foreign Investment
Investment laws and regulations are evolving in the United Arab Emirates (UAE) and are expected to become more conducive to foreign investment. At present, the regulatory and legal framework favors local over foreign investors. Because investment regulations vary from emirate to emirate, it is recommended that potential investors consult a local attorney to obtain the most current investment information at an early stage of planning.

The UAE is opening up its trade sectors in line with the UAE's World Trade Organization (WTO) obligations, and is drafting a landmark law on foreign direct investment that should be approved later. The law reportedly will include new tax exemptions and other incentives. The government already has taken steps to cut red tape for foreign investors, and now exempts investors from obtaining a Ministry of Labor card in addition to an Immigration Department visa. Investors no longer need to appear in person to inquire about the status of business applications in Abu Dhabi. A new automated service, offered in Arabic and English, allows investors to receive information about their business licenses over the phone.

Regulation of the establishment and conduct of business in the UAE is shared at the federal and emirate levels. In general, foreign companies (except companies from GCC countries) that undertake business activities in the UAE or make their products available in the UAE have entered into a joint venture with UAE nationals for the establishment of limited liability companies, appointed commercial agents, or set up branch offices. Except for companies located in the free zones, at least 51 percent of a business establishment must be owned by a UAE national. A business engaged in importing and distributing a product must be either 100 percent UAE-owned agency/distributorship or a 51/49 percent (UAE/foreign) limited liability company. Subsidies for manufacturing firms are available only to those companies with at least 51 percent local ownership.

There is no income tax in the UAE. Foreign banks pay 20 percent tax on their profits. There are no consumption taxes, and the GCC states formally implemented a single import tariff of 5 percent on most goods January 1, 2003.

Conversion and Transfer Policies
There are no restrictions or delays on the import or export of either the UAE Dirham or foreign currencies by foreigners or UAE nationals, with the exception of Ithe currencies of those countries subject to Arab league boycott and United Nations sanctions. The UAE government passed comprehensive anti-money laundering legislation following the attacks of September 11, 2001, which imposed strict documentary requirements on large wire transfers. Travelers entering or leaving the UAE must now declare currency amounts of more than 50,000 dirhams (approximately US $13,700) as part of these new measures.

Since November 1980, the Dirham, though formally pegged to the IMF's Special Drawing Rights (SDR) at the rate of 4.76190 Dirhams / SDR (with a margin of fluctuation) has remained fixed against the US Dollar. The exchange rate is 3.67 UAE Dirhams per one US Dollar.

Performance Requirements/Incentives
The UAE maintains non-tariff barriers to investment in the form of restrictive agency, sponsorship, and distributorship requirements. In order to do business in the UAE outside one of the free zones, a foreign business in most cases must have a UAE national sponsor, agent or distributor. Once chosen, sponsors, agents, or distributors have exclusive rights. They cannot be replaced without their agreement. Government tendering is not conducted according to international standards, and re-tendering is the norm. To bid on federal projects, a supplier or contractor must be either a UAE national or a company in which UAE nationals own at least 51 percent of the capital. Federal tenders must be accompanied by a bid bond in the form of an unconditional bank guarantee for 5 percent of the value of the bid.

Incentives are given to foreign investors in the free zones. Outside the free zones, no incentives are given, although the ability to purchase property as freehold in certain favored projects in Abu Dhabi, Dubai and other southern Emirates. Promises that foreign owners of such property would be granted residence permits as long as they remained in possession of title -- would appear to be incentives aimed at attracting foreign investment.

Visas, residence permits, and work permits are required of all foreigners in the UAE except nationals from GCC countries.

Right To Private Ownership and Establishment
There are no restrictions on the right of private entities to establish and own business enterprises and engage in all forms of remunerative activity.

Protection of Property Rights
As part and parcel of its development into a regional trading center, UAE has made the protection of intellectual property a priority in recent years. New copyright, trademark and patent laws, passed in 2002, provide high levels of protection for intellectual property.

UAE repealed previous copyright, trademark, and patent laws and issued improved legislation in 2002 in harmony with international standards and exceeding the UAE's TRIPs obligations. The new copyright law, enacted in July 2002, is the product of a prolonged dialog between the UAE government and international organizations such as WIPO and the WTO. It grants protections to authors of creative works and expands the categories of protected works, to include computer programs, software, databases, and other digital works. Efforts to combat computer software piracy in the UAE have been successful. According to 2001 industry estimates, the rate of software piracy in the UAE is the lowest in the Middle East. The UAE is recognized as the regional leader in fighting computer software piracy.

The UAE's new Trademark Law, also issued in July 2002, confirms that the UAE will follow the International Classification System and that one trademark can be registered in a number of classes. The new law provides that the owner of the registration shall enjoy exclusive rights to the use of the trademark as registered and can prevent others from using an identical or similar mark on similar, identical or related products and services if it causes confusion among consumers.

UAE published the official and final version in November 2002 of the long-awaited Patent Law. Specifically, the Patent Law provides for -- in accordance with the UAE's TRIPs obligations -- national treatment for IP owners in other WTO Member States, both product and process patent protection, and enforcement of IPR whereby civil and criminal procedures and remedies may be employed.

Transparency of the Regulatory System
The fundamental instrument by which all of the emirates regulate business activity is the requirement that any place of business must acquire and maintain a proper license. The procedures for obtaining a license vary from emirate to emirate, but are straightforward and publicly available.

A license is not required unless a place of business is set up in the UAE. In other words, foreign businesses exporting to the UAE but without a regular or continuing business presence in the UAE do not need a license. Licenses available include trade licenses, industrial licenses, service licenses, professional licenses, and construction licenses.

Several federal regulations govern business activities in the UAE outside free trade zones. Activities within the free zones are governed by special bylaws.

The Federal Companies Law applies to all commercial companies established in the UAE and to branch offices of foreign companies operating in the UAE. The following provisions are of particular importance to foreign investors:

  1. Companies established in the UAE are required to have a minimum of 51 percent UAE national ownership. However, profits may be apportioned differently.

  2. Branch offices of foreign companies are required to have a national agent unless the foreign company has established its office pursuant to an agreement with the federal or an emirate government.

  3. All general partnership interest must be owned by UAE nationals.

  4. Foreign shareholders may hold up to a 49 percent interest in limited liability companies.

The Commercial Agencies Law requires that foreign principals distribute their products in the UAE only through exclusive commercial agents that 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 law provides that an agent may be terminated only by mutual agreement of the foreign principal and the local agent, notwithstanding the expiration of the term of the agency agreement.

The Federal Industry Law stipulates that industrial projects must have 51 percent UAE national ownership. Exemptions from the law are provided for projects relating to extraction and refining of oil, natural gas, and other raw materials. Additionally, projects with a small capital investment or special projects governed by special laws or agreements are exempt from the industry law.

The Government Tenders Law stipulates that a supplier, contractor, or tenderer with respect to federal projects must either be a UAE national or a company in which UAE nationals own at least 51 percent of the share capital. Foreign companies wishing to bid for a federal project must, therefore, enter into a joint venture or agency arrangement with a UAE national or company. Federal tenders must accompany a bid bond in the form of an unconditional bank guarantee for 5 percent of the value of the bid.

Foreign Trade Zones/Free Ports
The UAE Free Zones today are home to approximately 5,000 companies with a total investment estimated at more than US $4 billion. Presently, 13 free trade zones operate in the UAE, and more are in the developmental stage. Overall, these free zones form a vital component of the local economy, and serve as major re-export centers to the Gulf region.

Since UAE tariffs are low and not levied against many imports, the chief attraction of the free zones is the waiver of the requirement for majority local ownership. In the free zones, foreigners may own up to 100 percent of the equity in an enterprise. All free zones provide 100 percent import and export tax exemption, 100 percent exemption from commercial levies, 100 percent repatriation of capital and profits, multi-year leases, easy access to sea and airports, buildings for lease, energy connections, and assistance in labor recruitment. In addition, the free zone authorities provide significant support services, such as sponsorship, worker housing, dining facilities, recruitment, and security for a fee.

By far the largest and most successful of the free zones is the Jebel Ali Free Zone (JAFZ) in Dubai, located 20 kilometers south of Dubai city adjacent to the Jebel Ali Port. Over 2,200 companies representing 80 countries have set up shop in the JAFZ, including numerous Fortune 500 firms.

The JAFZ managing authority authorizes three types of licenses -- a general license, a specific license, and a national industrial license. The licenses are valid while a company holds a current lease from the free zone authority and are renewable annually as long as the lease is in force. The special license is issued to companies incorporated, or otherwise legally established, within the free zone or outside the UAE. In such cases, no other license is required, and the ownership of the company may be 100 percent foreign. The license is issued for any activity permitted by the free zone authority, including manufacturing. A company with a special license can operate only in the JAFZ or outside the UAE, but business can be undertaken and sales made in the UAE through or to a company holding a valid Dubai Economic Department license. A company with a special license, however, can itself purchase goods or services from within the UAE.

A variety of innovative free zones in Dubai have been established since 2000, most notably the TECOM (Technology, Electronic Commerce and Media) free zone. TECOM houses both Internet City and Media City, two subdivisions which cater, respectively, to the IT and media sectors. TECOM offers a high bandwidth, state-of-the-art IT infrastructure. Current tenants of TECOM include prominent names such as Oracle, Reuters, CNN, Hewlett Packard and Microsoft. Other Dubai free zones planned include Health Care City, specializing in medical products and services, and the Mohammed Bin Rashid Technology Park, which aims to promote scientific research and development, and to transfer technology throughout the region.

Foreign Direct Investment Statistics
The Abu Dhabi Chamber of Commerce and Industry notes that the leading sectors for investment in the UAE in 2002 were (in order of magnitude of investment): oil and gas-field machinery and services, power and water, computer/peripherals, medical equipment and supplies, airport development and ground equipment, telecommunications, and franchising.

There are no restrictions or incentives with regard to the export of capital and outward direct investment, and UAE investment abroad is significant. It is conservatively estimated that the Abu Dhabi Investment Authority (ADIA) manages an approximate US $150 billion in government assets in overseas markets.