Tim Elliot: Welcome to Lawgical, the Gulf Region’s first and still the only legal podcast from the Dubai-based law firm, HPL Yamalova & Plewka. I’m Tim Elliot. I’m here at the firm’s offices on floor 18 of Reef Tower in Jumeirah Lakes Towers with the Managing Partner, Ludmila Yamalova. It as always, great to see you.
Ludmila Yamalova: A pleasure to see you.
Tim Elliot: In this edition of Lawgical, what it means, what it takes to do business in the U.A.E., the most basic of considerations if you’re going to start your new venture. We’ll start at the beginning. Now, in the U.A.E., it is a hub of so many different fields of activity. There is so much you can do here. Entrepreneurial activity is certainly actively encouraged, it’s fair to say. It’s becoming easier than ever, I guess, to set up a business, to employ staff, and hopefully to succeed in business here in the U.A.E. Ludmila, I wanted to start off by just kind of rolling back the years a little bit and talking about the history, what we’ve seen in the very recent past as to how business rules have, I guess the word is, evolved.
Ludmila Yamalova: You are correct about the U.A.E. embracing the spirit of entrepreneurship and encouraging small businesses and new business ventures. That being said, there are a few legal nuances that are important to highlight that have existed over the years and have continued to evolve. Particularly within the last year or so, there have been a few more developments that have affected this particular legal infrastructure, if you will, for running a business in the U.A.E.
In general terms, there are two categories of issues to remember with regard to running a business in the U.A.E.
- One is any kind of business activity, doing any kind of business, ultimately requires having a proper trade license. I can granulate that a little more shortly, but what that means is that, let’s say if I wanted to start baking cookies and selling cookies to my community, technically speaking, I’m not allowed to do so without a proper trade license. That is one category of legal issues. I will run through the list of what it means to set up a trade license.
- The other part to the equation is the immigration status. Similarly, in order for me to do any kind of employment or do any sort of business here, I need to have a proper residence visa and that residence visa has to be an employment type visa. In other words, if I’m here, let’s say, on a student visa, technically speaking, I cannot run a business. I cannot work. Or if I am on a residence visa, an employment visa, for example, to work at a coffee shop, I cannot run an engineering lab. The visa and the business that you are doing or the responsibilities you are involved in have to also correlate.
Those are the two categories: (1) Having the proper trade license and (2) Having a proper visa.
That is basically any kind of entrepreneurial activity or an established business that you may want to either join or start up. Those are the two elements that are always important to keep in mind.
With regard to setting up a business, there isn’t really a minimum threshold upon which you need to have your own license, or you need to have your own company. According to the law, any business activity that ultimately has some kind of a commercial element, i.e., receiving money, paying money, or accepting money, then requires a license. What that means is that in order for you to do any kind of business activity, you need to apply to the relevant authority to apply for a trade license. In the U.A.E. that is the term that has become quite commonly, that is the trade license.
A trade license is issued by a relevant authority when they say that. The authority could be any of the economic authorities under whose umbrella you wish to set up.
Generally, there are two types of companies you can set up.
- One is in the mainland and under the authority of the mainland. The mainland is the authority that licenses companies on the mainland. It is usually referred to as DED or Department of Economic Development. Every emirate has its own DED. There is a Dubai Department of Economic Development (DED). There is Abu Dhabi and so on and so forth. That is the authority that licenses all the companies on the mainland.
- Then we also have a number of free zones, and all the free zones are separate authorities. Those free zones have their own authorities that license their companies that are set up under them. For example, there is a DIFC, the Dubai International Financial Center Authority. There is the DMCC, the Dubai Multi Commodity Center. There is TECOM. There is Silicon Oasis. There is JAFZA, or the Jebel Ali Free Zone. Each of those authorities is a separate authority that will issue you the license.
As a business, you need to first determine where you want to be set up and start with which emirate first, and then in each emirate you have the option of the mainland and you have the option of the free zone.
Once you go through the nature of your business, you may make a decision to set up within the free zone because that allows you the greatest flexibility in terms of ownership structure. The free zone, among other things, the main advantage or benefit of the free zone is that you are not required to have a local partner to set up a business in the free zone. But it may be, depending on your business, you may not be allowed, or it may not be in your interest, to set up in the free zone.
For example, if you’re in trading, you cannot be in the free zone, or if you are in a particular industry where being in the free zone does not quite suit you, you may want to be in the mainland. There are a number of reasons why you may not want to be, or could not be, in the free zone. Then you would have to set up in the mainland.
In the mainland, the typical business that is set up under the DED is what’s often referred to as an LLC, which is a limited liability company. For all companies that are set up as a limited liability company under DED, there is a requirement of having a local partner who must be a U.A.E. national and must hold at least 51% of the shares of the company. That being said, certain businesses do not require an LLC structure.
For example, if you want to open a restaurant, you can open it as a sole establishment, and that means that you would own that restaurant 100% in your name and for that you do not require a local partner. You can do it under the DED license without having to go to the free zone, however, the nature of your business will be called a sole establishment which does not give you the limited liability of a limited liability company which basically means that you will be personally liable for anything that happens with the company. In other words, there isn’t really a separate identity between the company, let’s say the restaurant, and you, Tim Elliot, if you were the owner of the company.
Once you go through the list of what it is that you want your business to be and then you determine which licensing authority you may want to apply to for a license, then that starts the process.
As part of the application in this day, most free zones require that to have a license you also have an office. That is a requirement, having an office. There are a few flexibilities, but for the most part you’re required to have a physical office. That is another component that a lot of businesses coming into the U.A.E. for the first time may not be aware of, but that is a cost that is attached to having a business here. Having a license comes with the obligation of having an office, and it has to be that company’s own office. In other words, the company cannot move in and just rent a little corner or a little desk from another office and call it its office. The office actually has to be registered in the name of the company. There are a few options. There are certain free zones that allow companies to have a flexi-desk as an office, which is not a physical office, but basically, it’s limited use of a desk or an office somewhere and it is usually referred to as a flexi-desk. There is that option. That is what goes into the application of applying for a trade license.
Now, perhaps in the last year, there have been a few requirements that perhaps might have existed for some of these licensing authorities, but not for others, have now become more and more standardized.
- One is the requirement of actually a physical office. More and more authorities are moving away from the option of having a flexi-desk, and they want companies to actually have their own physical office which is a higher expense than a flexi-desk.
- The other component that is also attached to doing business legally in the U.A.E. is having a bank account. That is, to have a trade license, as part of the application, in addition to having a physical office you also need to apply for a local bank account. Banks in particular, in response to a number of developments that have been happening in Europe and around the world, are becoming more stringent with regard to their application and their acceptance of an application for a bank account opening from local businesses. The one particular change that has been happening recently is that banks are much more reluctant to open bank accounts for a business that only has a flexi-desk. Increasingly, banks are requiring for businesses to have a physical address on the basis of if you’re a true business, if you’re an actual business, then you should want to have a physical office, if you are a real business that’s operating in the U.A.E.
Those are the two recent developments: (1) The bank requiring the rent of a physical office, and then (2) More authorities requiring for companies to have a bank account as part of the opening of a company, because in the past not all authorities required opening of a bank account, and more and more authorities are moving away from offering the flexi-desk option for companies.
Tim Elliot: Of course, the fact that you need a very specific visa in order to reside in the U.A.E. the importance of that can’t be overstated.
Ludmila Yamalova: Once you have a license that entitles you to either apply for your own visa or to now use the company to hire other employees to work for you legally. To do that, let’s say if it’s me opening up a company in the free zone, now I as a shareholder of the company will be entitled to have my own residence visa, and on that visa now I can sponsor my family and additionally I can now hire employees and sponsor them under my company. That, in brief, is the framework for setting up a business in the U.A.E. and running a business in the U.A.E. That particular framework applies to any kind of business, be it a multinational coming into this country or an entrepreneur setting up a new idea and wanting to test it in the market.
Tim Elliot: That’s really, Ludmila, the nuts and bolts of how you establish a company. You have to have that physical presence, that physical location. You have to have the requisite visa, the residence visa in place. Your choice of free zone or mainland or even an offshore entity, that’s a minefield there, and that’s something I think we need to take in three specific podcasts, and we’ll do that soon, but let’s say you want to start your cooking baking initiative and you want to start it here in Dubai. You’re looking at, for the sake of argument, the free zones. We’ve seen, in the last 15 to 20 years here in the U.A.E., free zones pop up. There are lots of different places offering lots of different activities. Let’s just run through where you may start a cookie baking initiative, as an example, what some of the activities that are permitted from a free zone here in the emirates.
Ludmila Yamalova: Sure. A cookie business is a good example because that’s a type of business that if I wanted to set up on the mainland, I could do it in my own name under the sole proprietorship without having to bring in a local partner. Theoretically, I could do that, but I would not want to do it because a cookie business under a sole proprietorship license would not shield me from liability. I would basically attach my personal identity to the company, which means in the event there is ever a dispute and the company is sued, I would be sued in my personal capacity as well because there is no separation. So I would not want to do that necessarily, in particular in a cookie business because what if somebody claims that they got sick because of my cookie? There could be a lawsuit that will follow for damages which could be quite substantial. Obviously, I am thinking of the worst-case scenario, but is setting up a business you should go through that list of questions and eventualities, and so I would want to have a separate legal identity for my cookie business. Therefore, I would want to choose a free zone.
Now which free zone? There are many free zones and ultimately when you’re starting out in the business, obviously, cost is an important factor. It is an important consideration. There are a number of free zones that have much lower costs, and these free zones often are located in other emirates. For example, in Ras Al Khaimah, Umm Al Quwain and Fujairah, there are certain free zone options that offer much more competitive rates, if you will, for setting up a license and perhaps somewhat less stringent requirements in terms of physical space and perhaps more affordable office rent. So, there are other free zones that are located across the U.A.E., not just in Dubai, that could, at least from a commercial standpoint, be more interesting to set up a cookie business in. Obviously, I am just testing the market for now, so I don’t want to invest too much in setting up a business before I’ve tested it. That being said, if I am making cookies that means I’m producing something and I want, especially in the cookie business, you want the cookies to be fresh presumably, so therefore, now the location becomes important. If I were to set up in Fujairah and I want to sell my cookies in Dubai, that’s not really feasible. Similarly, if I’m setting up in RAK, Ras Al Khaimah, again, it’s far from Dubai and therefore, if I’m setting up a license, if I have a license from RAK, technically speaking, legally speaking, I have to be operating in RAK, so therefore my kitchen would be in Ras Al Khaimah and how would I be transporting cookies from Ras Al Khaimah to Dubai? The reason I make the distinction is because there are a number of businesses that will set up a license in one emirate, or in one free zone, but will actually operate in a different free zone. Technically speaking, that is not allowed. If I have a RAK license in a certain free zone, I have to be operating there so I have to be making my cookies there. Again, it’s going back to my cookie business, I would want to sell my cookies fresh, so therefore, the geographical location of the free zone is important to me because I would want to be operating in Dubai. Then I would look at the free zones in Dubai.
Once again, I would go through the consideration of the cost. Which one of the free zones available to me is more affordable at this point in time? There are different free zones available. When we are talking about affordability, one of the other factors we will look at is renting, obviously retail. Which of these free zones, in addition to the licensing fee, has more affordable options for renting that retail space from which I will be operating? So, there are a number of factors. In some free zones, for example, the license fees on the face of them may seem lower than license fees somewhere else, but the office space or the retail that I would have to rent in order to open my kitchen are a lot higher or the retail options are a lot more limited than the different free zones. You really need to look at the full universe, or its totality, of the different costs that are involved in deciding which free zone is more commercially affordable than the other. For a cookie business I need a kitchen. That means I need to have a retail space, not just a commercial space. I can’t make cookies, I cannot have a kitchen in an office location, so it has to be special real estate that is designed as retail which allows me to have a kitchen with all the appropriate ventilation and other regulatory requirements. Again, not all free zones have those kinds of choices. As you look, which of the free zones have retail options? You probably wouldn’t want to start with a very large retail, so you’d ask where is the retail space that is small enough for me to start my business and perhaps doesn’t require as much of a capital investment upfront in terms of the fit out. It would really be on that basis. You would have to go through that set of questions, location, cost, availability of office, of retail, and the type of capital investment that it would require for me to invest, to be able to start operating.
Then obviously, you have to look at what do you do with this cookie store. Now you have your license. You have your space. You have your kitchen set up. Now you’re making the cookies. What are you going to do with these cookies? Are you going to sell them from the shop, or are you going to be doing delivery? If you’re selling them from your shop, then obviously you need to take into account the demographic of that neighborhood and the foot traffic perhaps because you would expect people to come and either walk into your shop or drive and pick up your cookies if you were selling them from the shop. That also has to come into the equation. If however, you were doing deliveries, then it’s less relevant to have the relevant parking situation or the foot traffic if you can do deliveries, but then you also need to obtain additional approvals from relevant municipalities and government agencies in terms of deliveries because if you’re delivering outside of a free zone there is another process that you need to follow for those kind of deliveries. Therefore, you also look at the free zone in terms of, if I were only operating within the free zone, is there enough of a demographic customer base for me here within this free zone so that I can operate exclusively within the free zone, at least to start with without having to export, if you will, my cookies from outside of the free zone onto the mainland or into other free zones?
Tim Elliot: That’s interesting because when you work from a free zone and you distribute or sell on the mainland, you are in effect exporting, aren’t you? Plus, I suppose, in your case, Ludmila’s Cookies specifically here, and I’m thinking the peanut butter chocolate chip would probably be the best one, just speculating, there are also municipality aspects in terms of food safety, etc. All of these things are regulated and regulated heavily because this is a hot country here in the U.A.E.
Ludmila Yamalova: For sure and not only are they regulated heavily, sometimes there are multiple layers of regulation. For example, if you set up in the free zone, the free zone itself has its own government regulations and government authorities or people responsible for regulating such businesses within the free zone. But then on top of that, as you mention, there is also another municipality, the Dubai General Municipality and the various health and safety officials that are not necessarily resident in the free zone from who you need to obtain approvals and not just one-time approvals, but ongoing approvals. You have the free zone regulators and then you have above the free zone, the greater Dubai municipality regulators.
Tim Elliot: I guess we’re going off topic, concentrating on Ludmila’s Cookies, but it does set an interesting talking point. It is a base to start from. Let’s finish up. You mentioned capital investment earlier on. You can come here to the U.A.E. and set up with very little money or a lot of money. You can do it with your own money or borrowed money. It’s not as easy to get funding from banks here in the U.A.E. as it may be in other jurisdictions. It is possible. But what about raising capital here in the emirates? I’m not going to hold you down to a specific truth in any way here, but just your thoughts on where we are now when it comes to funding startups or new businesses.
Ludmila Yamalova: In short, raising capital in the U.A.E. is still a developing concept and that’s obviously because it’s a fairly new country and a lot of businesses have set up over the years and have not maybe done so well, so the financial institutions are generally cautious for all good reasons. Perhaps in the past it was much easier to raise capital from banks, but after a few economic fluctuations, the banks at present are not very forthcoming in giving funding to startups. Banks are still operating and encouraging of giving funding to established companies. But in most cases, they require for the company to have been in existence for at least three years, if not five years, before they will do any kind of funding. Generally speaking, the traditional bank loans that may exist and may be available for startups in other countries are not really available here. Therefore, you would have to move outside of the banking financing option into some of the more private financing companies, private equity funds, and other financial companies. In that particular space, those are quite interesting because it’s evolving quite rapidly and the regulations that exist to license those kinds of financial institutions are also becoming more and more stringent, so it’s not so easy for someone to come up and set up a fund here. That space is quite highly regulated, again, on the back of the recent history we went through here where a lot of these financial institutions were not properly regulated. Again, for good reasons, the financial institutions like that, that would normally offer alternative funding, for new institutions it is difficult to come here and difficult to get a license, therefore you have more limited options that exist here on the ground now. But even then, most of them require some kind of guarantee and some kind of comfort or confidence that your business is worthwhile to invest. Private equity and private financial companies are an option as an alternative, but they are still not as easily available as perhaps they may be in other countries. It’s not a sure thing. It’s not so easy. Therefore, whoever has to set up a business, it is important to bear that in mind because the options for funding are more limited.
Now then you can also rely on the old-fashioned borrow money from friends and bring in partners. From what we have seen, that has been one area that has been more present or more available to businesses and, in most cases, there are still a lot of people here with significant wealth that live here. We have seen a number of clients over the years that are able to find those kinds of sources of funding and are funded usually that way, either through these private funding sources or by bringing in these kinds of partners into the equation.
Tim Elliot: Ludmila Yamalova is the managing partner of Dubai based law firm, Yamalova & Plewka. I appreciate your time. Thank you.
Ludmila Yamalova: Always a pleasure. Thank you.
Tim Elliot: Once again, Ludmila’s Cookies, hopefully coming soon. What we’re going to do, in the next probably three podcasts, is cover set up of companies on a mainland basis, on a free zone basis, and an offshore basis. Check back soon for more.
That’s it for another edition of the Lawgical podcast. As always, there’s a lot more we could have covered here. But if you have a specific question you would like to answer, get in touch via Lylawyers.com or any of our social channels. We’ll try to answer it in a future edition of Lawgical. Plus, for a legal consultation, Lylawyers.com is the best place to start. Just hit the Contact button.