In recent years,many European retailers have sought to launch operations in lucrative markets in theMiddle East. In the July 2007 edition of this briefing, we examined some of the issues which retailersmay wish to consider in establishing “cross-border” joint ventures to enable themto exploit opportunities offshore. This article looks at some of the specific issues associated with doing business in the United Arab Emirates.
Foreigners wishing to conduct retail activities in the UAEmust set up a UAE incorporated Limited Liability Company (LLC). By law, each LLCmust have at least 51%of its shares held by UAE nationals or entities wholly owned by UAE nationals. As “non voting shares” are not permissible under UAE law, it has not been possible for foreigners to obtain shareholder control of a LLC.
Foreign investors have sought to avoid the effects of this restriction by arranging for a partnership with a UAE national who would be “silent” in return for a fee. However, on 15 November 2007 the “Federal Law 17 of 2004 on the Combating of Commercial Concealment” (Law) came into effect which prohibits such side-agreements and arrangements. The Law prohibits “enabling a foreigner, whether natural or artificial, to carry on any economic or professional activity not allowed to be carried on by him, whether for his own account or with the participation of a third party, in accordance with the law and decisions in force in the UAE, or to enable the foreigner to evade his obligations”. Importantly, it does not appear that the Law is restricted to prospective agreements and, accordingly, arrangements for silent partners that are currently already in place have also become illegal. The possible penalties include fines (up to approximately US$30,000 per offence), revocation of licence, imprisonment (two years maximum) and deportation.
It was expected that at the same time that the Law came into effect, the foreign ownership restrictions would be relaxed so that foreigners could own up to 95%of a UAE LLC. This has not yet occurred. Accordingly, numerous arrangements throughout the UAE are now illegal. Foreigners involved in such arrangementsmust therefore consider how to restructure them. A similar effectmight be achievable by, for example, giving management rights to the foreign investor, having a profit split of 80:20 in favour of the foreign investor and having a high voting threshold that needs to be reached in favour of any resolution before it is passed.