The United Arab Emirates’ (UAE’s) rapid economic growth, strategic location, and unwavering commitment to state-of-the-art facilities with advanced technologies have cemented itself as a global trade hub on the world map. The inflow of foreign company setup requirements and individual shareholders from all around the world indeed attracts capital into the country, which often goes unsupervised.
The UAE’s recent removal from the Financial Action Task Force (FATF) gray list has strengthened its position as a robust and secure legal environment for businesses. Compliance regulation has upgraded itself to protect corporations and businesses, specifically those operating with foreign entities, from transparent and strict regulations and smooth business operations. This has been implemented by the government to ensure adherence to the law and maintain order, resulting in strong anti-money laundering measures in the country.
Understanding the Legal Landscape
Formed in 1971, the UAE is a constitution of seven emirates, namely Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah, and Fujairah. The legal system is considered quite complex in the UAE, being influenced by not only Islamic Shari’a laws but also civil and common law.
When it comes to the judicial system, there’s a different story all together. While the federal court (or supreme court) reigns supreme and has its seat in Abu Dhabi, the individual emirates have their own judicial system consisting of Courts of First Instance, Courts of Appeal, and Courts of Cassation (local).
In addition to the federal and local courts, Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) are the financial free zones in the country that have their own courts, set up and modeled on the principles of common law jurisdiction.
Foreign Investments and Their Restrictions
Corporate entities in the UAE were governed by the previous Commercial Companies Law No. 2 of 2015, where every foreign investor had to set up business with a local partner who would own 51% of shares in a mainland company. Keeping the dynamic nature of this country in mind, the new Commercial Companies Law No. 3 of 2021 has relaxed this foreign investment rule by placing the responsibility on the Department of Economic Development (DED) of each emirate to determine the percentage of involvement. The DED then took up the task and made a list of activities that permitted 100% foreign ownership in each of the emirates. This foreign relaxation rule saw a boost in foreign investments in the country. Naturally, this encouraged more of the businesses in the European countries to set up shop in the UAE.
Cabinet Decision 55 of 2021 on the Determination of the List of Strategic Impact Activities introduced an exception to the usual 100% foreign ownership rule. This resolution grants authority to a third party to determine the required level of local partnership for specific sectors. This resolution identifies specific activities deemed strategically important and subject to stricter regulations. These include:
- Security and defence activities and activities of a military nature
- Banks, money exchange, finance companies, and insurance activities
- Printing currencies
- Telecommunications
- Hajj and Umrah services
- Quranic memorisation centres
- Fisheries-related services
For each activity, a designated UAE authority will act as the regulatory body. For example, the Ministry of Defence and the Ministry of Interior are the relevant regulatory authorities for activities in the security and defence sectors. This ensures appropriate oversight and safeguards these crucial sectors.
It is also important to note that citizens and companies from the Gulf Cooperation Council (GCC) are not subject to these foreign investment restrictions.
Compliance
All businesses established in the UAE must fulfill certain mandatory corporate compliance requirements to ensure local laws and regulations are strictly followed. These requirements are aimed at providing public transparency and accountability, preventing fraud, corruption, and money laundering, and protecting the interests of stakeholders.
1. Economic Substance Regulations (ESR)
One of the compliance requirements in the UAE is the ESR Report. This is a mandate for all companies conducting relevant activity in the UAE to file a report proving that their company has economic substance. Maintaining a physical office, employing a sufficient workforce, and adhering to strict accounting and record-keeping practices demonstrate a company’s transparency and commitment to due diligence.
The relevant activities include:
- Banking business
- Insurance business
- Investment fund management business
- Lease: finance business
- Headquarters business
- Shipping business
- Holding company business
- Intellectual property business (“IP”)
- Distribution and service centre business
2. FATCA and CRS
The UAE has been a United States Foreign Account Tax Compliance Act (FATCA) partner since 2015. An intergovernmental agreement was also signed with the United States to set out guidelines for the application of FATCA. The UAE has four different regulators responsible for the authorisation and supervision of banks, insurers, and other financial institutions. These are:
- Central Bank of the UAE
- Securities and Commodities Authority (SCA)
- Dubai Financial Services Authority (DFSA), which is the regulator of the Dubai International Financial Centre (DIFC)
- The Financial Services Regulatory Authority (FSRA), which is the regulator of the Abu Dhabi Global Market (ADGM)
There are two regulators in the “on-shore” UAE:
- The Central Bank of the UAE regulates banks, finance companies, payment service providers, and insurance companies.
- The Emirates Securities and Commodities Authority (ESCA) regulates markets, listed companies, and securities brokers.
Every sector is required to follow certain compliance requirements according to the business activities carried out or based on the category it falls into. Mandatory corporate compliance requirements are an essential aspect of doing business in the UAE. Compliance with these requirements ensures that businesses operate in a transparent and accountable manner, protects the interests of stakeholders, and helps prevent fraud, corruption, and money laundering.
Conclusion
The legal and compliance landscape in the UAE is commonly considered as complex, but with Gatestone Group’s guidance and expertise, a smooth journey awaits. We can help you navigate company formation, secure necessary licenses, ensure compliance, and mitigate risk.
Whether you are a startup entrepreneur or a well-established company, Gatestone Group can provide the tailored legal support you need to thrive in the UAE. Contact us today to schedule a free consultation and discuss how our expertise can help you achieve your business goals in Dubai and the UAE via email at [email protected] or call +971 4 450 1023 or +971 52 410 0849.
Disclaimer: While we strive to keep this information current, legal regulations in the UAE are subject to change. The information provided is based on public sources as of June 2024. Despite our careful data collection, there may be errors or omissions. This article is for general information only and should not replace professional advice. For the most up-to-date information and to avoid any potential issues, we strongly recommend contacting Gatestone Group.
