While risks remain elsewhere in the Middle East, foreign investors continue to be drawn to the increasingly investor-friendly environment of the United Arab Emirates 

Language and cultural differences can be the least of a foreign investor's troubles when doing business in the Middle East. Other challenges range from high levels of corruption to political risk, even civil war.

Thankfully, none of these problems exist in the UAE. The Emirates' longstanding reputation as a safe haven and oasis of growth has already been strengthened by the flight of capital following the Arab Spring. And foreign investment will only increase following the recent award of Expo2020, MSCI's upgrading of the UAE from "frontier" to "emerging" market status from May 2014 and the prospect of a relaxation of sanctions against Iran. While some legal challenges remain, they can usually be successfully navigated. 

Foreign ownership restrictions

One key issue for foreign investors is the limit on foreign ownership of UAE LLCs (the most common form of company), which is capped at 49%. This has led to a system of sponsorship, with foreign investors making arrangements with local partners that are to an extent based on a relationship of trust.

Management fee agreements can be used and the memorandum of association can allow the non-UAE shareholder to receive 80% of the profits (or even higher in Abu Dhabi), control the board, appoint the management, and block resolutions. The local majority owner can also assign its economic interests to the foreign investor and grant a power of attorney allowing the foreign investor to exercise the local owner's voting rights.

A word of caution, however: while these arrangements are extremely common, they are of questionable enforceability. Risks include the possibility of the local partner reneging on its agreement to pass on dividends or revoking its power of attorney. If the local partner is an individual, his death could result in complicated discussions with his heirs.
However, the sponsorship system tends to work well in practice and the level of risk can be reduced by using as local partner a corporate service provider whose business depends on complying with such arrangements.
Until early 2013 it was expected that the new Commercial Companies Law would open the door to a relaxation of foreign ownership restrictions. It is now anticipated that this change will be introduced by a separate foreign investment law, the timescale for which is as yet unclear. Meanwhile, some companies that had lower foreign ownership limits have recently raised them to 49% to take advantage of as much foreign investment as possible.

Free zones

One way to avoid the foreign ownership restrictions altogether is to set up business inside one of the UAE's dozens of free zones. Here, companies can be 100% foreign owned, receive long-term no-tax guarantees and be free from certain UAE law restrictions. The Dubai International Financial Centre has a common law regime based on English law, with a separate court system and – unlike courts elsewhere in the UAE – a system of binding precedent. It is expected that the new Global Marketplace Abu Dhabi will follow a similar format.

Locating in a free zone is not always a panacea, however. Companies licensed to operate inside a free zone face restrictions on their activities outside the free zone, so may need to appoint a commercial agent to operate within the UAE. In some free zones, the separate rules applied by the free zone authority can be opaque and result in uncertainty.

Challenges and changes

The UAE insolvency regime is piecemeal, not debtor-friendly and has been criticised for restricting growth. Due to the absence of large corporate insolvencies and the tendency towards informal commercial solutions outside the legal framework, it is also largely untested. In the coming years, however, a new insolvency law is expected to introduce a specialist insolvency tribunal and a more debtor-oriented and rescue-focused insolvency regime.

A new competition law came into force in early 2013. Similar to EU rules on restrictive agreements and abuse of market dominance, it also introduces a merger control regime requiring suspensory filings. Implementing regulations are not yet published, so market share thresholds and the precise scope of various exceptions remain unclear.

UAE law recognises the principle of freedom of contract but UAE courts can disapply foreign laws on public policy grounds. However, the UAE is party to the New York Convention and arbitration is an increasingly popular method of dispute resolution. English-language arbitration in the Dubai International Financial Centre under London Court of International Arbitration rules offers UK investors a familiar and reliable option.

Best for business

One of the many attractions of the UAE for foreign investors is the absence of foreign exchange controls or restrictions on repatriation of capital. In addition, there are no personal taxes and only certain oil companies and banks must pay corporate taxes. Nor is there any stamp duty, although filing fees apply to certain transactions. There is no sign that the rumoured introduction of VAT across the GCC is imminent.

The UAE's anti-bribery laws have been in place for over 20 years and are being enforced increasingly vigorously. Indeed, the UAE ranks highest of any Middle East country on Transparency International's Corruption Perceptions Index – at 26th, it is level with Austria and above all of Eastern Europe and most of Latin America.

It's little wonder, therefore, that the UAE is increasingly recognised as the hub for doing business in the Middle East and beyond.

Chris Macbeth (pictured) is a counsel based in the Abu Dhabi office of Cleary Gottlieb Steen & Hamilton.

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