Application of Ancillary Laws on the UAE Free Zones

 In Insights

Amongst the GCC, the UAE has taken the lead in developing free zones and has been remarkably successful in attracting foreign investment. In fact, nearly all new foreign investment in the UAE gravitates to the free zones.

The proliferation of Free Zones in the United Arab Emirates witnesses the emergence of two parallel, yet distinct and divergent business environments.  The “onshore” (the rest of the UAE) environment remains subject to national laws and regulations, regarding foreign ownership; whereas the free zones or the “offshore” environment, offers complete freedom of ownership to foreign investors.

As the proliferation of free zones continues, with sixteen (16) free zones as of this writing, three segments within the free zone environment is also emerging.  Initially, free zones were typified by proximity to a port or airport, however, over the last few years a new phenomenon has emerged which is not linked to a port or an airport but designed to appeal to specialized or service industries (an “urban free zone”).

The port-based free zones are working to attract investors who will route their shipments through the respective ports. The airport free zones have a comparable target market among users of air cargo. The urban free zones, on the other hand, by allowing freedom of movement within the onshore environment are, in effect, competing with the onshore environment. There are already signs of a movement of established foreign companies from the onshore environment to the urban free zones.  The net result is the convergence of the free zone environment with the onshore environment, whether that was the intended result or not. Having said that, by law, the free zone environment still remains distinctly different from the onshore environment and is still subject to the restrictions imposed on free zone entities.  A free zone (including the urban free zones) is considered a foreign entity and conducting business onshore is subject to the UAE laws regarding foreign investment and commercial transactions.

Generally, the differences between the free zone and the onshore environments in the UAE are as follows:

  • In a free zone, foreign investors can own 100% of their business and are not obliged to have a local sponsor or service agent. Onshore, most types of business must be majority-owned (51%) by UAE nationals or must have a local service agent.
  • In a free zone, all shipments of goods are exempt from Customs duty with no time limits. Onshore, most imports are subject to duty unless held in duty-free storage areas, which are subject to time limits.
  • In a free zone, investors are not subject to municipal taxes on rental of industrial or office space. Onshore, rentals may be subject to municipal taxes.
  • In a free zone, there is typically a centralized service which handles government relations on behalf of investors. Onshore, an investor usually has to deal directly with a multiplicity of government agencies at both federal, emirate and municipal levels.

In most other respects, the offshore and onshore environments in the UAE are the same. For example, there is no corporate or personal direct taxation; there are no constraints on repatriation of capital or profits; and in most cases there are no explicit controls on the pricing of goods, services, labor or materials.  

Further, the application of ancillary laws on the Free Zones merits consideration for the foreign investors due to the fact that by virtue of being in the UAE, the entities located in the Free Zones are also subject to certain UAE Laws.   At the same time, by virtue of the fact that Free Zones entities are considered foreign entities, the application of the UAE and GCC Laws on foreign entities applies to the Free Zones.  This article seeks to explore the impact of ancillary laws on the Free Zones in the UAE.


CONDUCTING BUSINESS IN THE UAE

The Free Zones were established to serve as a central business hub for entities desiring to conduct business in the region (Middle East, Europe, Asia), not specifically the UAE.  It should be noted that Free Zone entities are intended to operate within the relevant Free Zone and are not licensed to operate within the rest of the UAE.  This applies to port-based free zones, airport free zones and urban free zones.  Thus, goods imported by a Free Zone entity will be subject to customs duties when taken out of the Free Zone into the rest of the UAE and the Free Zone entity will not be permitted to set-up offices or branches in the UAE outside the Free Zone under the Free Zone License. Therefore, in order to conduct business transactions and activities in the UAE, a Free Zone entity must comply with the UAE Laws on foreign investment and trade within the UAE.  Below is a summary of the options for a Free Zone entity.

Direct Trade:

International manufacturers and exporters may conduct business with the UAE by concluding transactions directly with importers and traders who are already established in the market.  Imports into Dubai can only be undertaken by those importers who have the appropriate trade license. This relationship is distinct from a Commercial Agency, as there is no long term contractual arrangement and the products are sold to the distributor who may then resell the products into the market or utilize the products for his own enterprise (in the case of raw materials or components).  This type of arrangement is more suitable for low volume trade. However, for an on-going business relationship, overseas companies may want to consider a more permanent form of representation such as commercial agencies.

Commercial Agencies:

A foreign company wishing to supply goods and services from abroad, but without establishing a physical presence in Dubai, may find it advantageous to appoint a commercial agent. The main provision of the UAE Federal Commercial Agencies Law No. 18 of 1981 as amended by Law No.14 of 1988 (the “Commercial Agencies Law”) is that an agent must be a UAE national, or a company 100% owned by UAE nationals.The Commercial Agencies Law regulates and governs the appointment of commercial agents, sales representatives, and distributors in the UAE. This law defines a commercial agency as any arrangement whereby a foreign company is represented by an agent to “distribute, sell, offer, or provide goods or services within the UAE for a commission or profit”.

The Commercial Code (Federal Law No. 18 of 1993) augments the Commercial Agencies Law and establishes the regulatory framework for the various types of commercial agencies permitted under the law. The most common type of agency is the contracts agency, whereby the agent undertakes “on a permanent basis and in a specific area of activity, the instigation and negotiation of the conclusion of deals, to the advantage of the principal and in return for payment”. (Article 217 of the Commercial Code). Distributor contracts are treated like contracts agencies when they involve one agent as the sole distributor. (Article 227 of the Commercial Code).

The primary requirements and characteristics of commercial agencies are:

  1. Commercial agents must be UAE nationals or companies incorporated in the UAEand owned entirely by UAE nationals.
  2. Commercial agents must be registered with the UAE Ministry of Economy and Commerce to engage in commercial agency activities.
  3. The agency agreement must be registered in order for the agent to avail himself of the protections afforded under the law and to have the agency relationship recognized under UAE law.
  4. Commercial agents are entitled to an exclusive territory encompassing at least one Emirate for the specified products (Article 5(1) of the Commercial Agencies Law).
  5. Unless otherwise agreed, commercial agents are entitled to receive commissions on sales of the products in their designated territory irrespective of whether such sales are made by or through the agent (Article 7 of the Commercial Agencies Law).
  6. Commercial agents are entitled to prevent products subject to their agency from being imported into the UAE if the agent is not the consignee.
  7. Commercial agents are entitled to receive compensation from the principal if the agency is terminated without substantial justification or if the agency is not renewed by the foreign principal, and the agent may be able to preclude the foreign party from appointing a replacement agent in such circumstance.

It is important to note that although the term of the agreement may be limited to a specified period, it is not permissible for a principal to terminate an agency agreement without the agent’s approval, except for reasons seen as valid by the Commercial Agencies Committee of the Ministry of Economy and Commerce. In the absence of any justifiable reason, the failure to renew an agreement may entail compensation to the former agent. Clearly, therefore, great care should be taken in the initial selection of an agent.  

The Commercial Agencies Law provides for compensation of the agents terminated without due cause only if the agency agreement has been registered with the Ministry of Economy and Commerce (MOEC). Many UAE commercial agents will insist on a registered arrangement in order to avail themselves of the protection of the Commercial Agencies Law. Notwithstanding whether the agency agreement is registered and therefore subject to the protections provided in the Commercial Agencies Law, foreign entities should note that the Commercial Code also may affect the relative rights and duties of the parties as noted above.

In summary, foreign parties should consider carefully the application of the Commercial Agencies Law and the Commercial Code in drafting any agreement to engage a UAE party to perform any type of marketing, sales or other “commercial” activity in the UAE.  Principals may seek the services of a sole agent in the UAE or may appoint a commercial agent in each emirate or for each product. In practice, many overseas companies appoint several agents to cover different defined areas of the country. A commercial agent is entitled to territorial exclusivity and, as such, will receive infringement commissions on transactions concluded by the principal himself or through others within the agent’s area of activity.   In certain cases, an agent with rights to the entire UAE may appoint distributors in the other Emirates or enter into joint ventures or partnerships with a national of a neighboring Emirate.

Limited Liability Companies:

The most frequently adopted method of establishing a business in Dubai by foreign investors is to form a limited liability company (LLC) ranging from Dhs. 150,000 to Dhs. 300,000 share capital (depending on the Emirate in which the incorporation shall be undertaken). A LLC must have at least two and not more than fifty partners. Each partner is liable to the extent of his share capital. The company is prohibited from issuing negotiable share certificates, carrying on the business of insurance, banking, investment of funds on behalf of third party, resorting to public subscription for raising its capital and accepting deposits or taking loans from the public. The words “Limited Liability Company must be added to the company’s name.

Share Capital; Shareholding; Each Emirate has adopted its own requirement for theminimum share capital of a limited liability company.  In Dubai, the minimum share capital must be Dhs. 300,000 divided into equal shares of a minimum value of Dhs. 1,000 per share; In Abu Dhabi, the minimum share capital is Dhs. 150,000 divided into equal shares of a minimum value of Dhs. 1,000. At the time of incorporation the value of all the shares must be paid in full. 51% of the share capital must be owned by UAE nationals.

Management; The management may be fully vested in the foreign partner or in a third party to be solely appointed and removed by the foreign partner. The number of the appointed managers should not exceed five, who may be appointed under the

Memorandum of Association or by a separate agreement. In practice, the UAE national may give the foreign partner a power of attorney to manage the company and vote on his behalf in the General Assembly (meetings of all the partners).

Accounting; It is mandatory to appoint an Auditor on an annual basis. The Auditor must be licensed and appointed by the General Assembly, usually at the Annual General Meeting. The company must allocate 10% of its net profits each year to a statutory reserve. Such deposits may be suspended when the reserve reaches an amount equal to 50% or more of the company’s capital.

Profits and Losses; It is possible to stipulate in the Memorandum of Association that profits and losses be shared in different proportions than the partners share holdings, allowing the UAE national partner’s profit sharing to be reduced to 20%.

Branch or Representative Offices:

A very popular way for foreign companies to benefit from a 100% foreign ownership is to establish a branch or a representative office in the UAE. Registration of a branch or a representative office is governed by the UAE Commercial Companies Law.

The branch or the representative office must have the same name of the foreign company. However, the words “Branch/ Rep office” must be added after the name, as it is legally regarded as part of the foreign company and does not have a separate legal identity from that of the foreign company.

The branch or the representative office is required to appoint a UAE national as a local sponsor (the “Local Services Agent”). The Local Services Agent, however, will neither acquire any rights or interests in the business of the branch nor interface in the substantive management of the branch. A service agency should not be confused with a commercial agency discussed above. The service agent is not permitted to own equity in or participate in the substantive management of the representative or branch office. The Local Services Agent will merely provide services on matters that concern local government authorities (i.e., processing the branch’s registration and licensing renewal requirements, processing visas and work permits for the branch’s personnel). In return, the Local Services Agent usually receives a fixed annual fee to be agreed upon between the parties.

The primary difference between a representative office and a branch office is that a representative office theoretically is limited to gathering information and soliciting orders and projects to be performed by the company’s head office. In this regard, representative offices also are limited in the number of employees they may sponsor (typically three or four). In essence, a representative office merely serves as an administrative and marketing center for the foreign company. By contrast, a branch office is a full-fledged business, permitted to perform contracts or conduct other activities as specified in its license.  The branch may only be engaged in activities similar to those of the foreign company. However, some activities may require specific approval form the concerned authorities in the relevant Emirate.

Due to the interaction between the UAE federal government and the government of the particular Emirate in which the branch office is to be located (e.g., Abu Dhabi or Dubai), it should be noted that registration entails submitting a number of applications and obtaining a number of approvals from several government departments. After the application is approved by the government of the Emirate where the branch is to be established, the approval of the federal government approval is then required.


GCC CUSTOMS LAW

The GCC Customs Law governs trade between the GCC Countries, eliminating taxes, rules and procedures which restrict trade among the GCC Countries and to implement unified customs duties and commercial rules outside the GCC.  The GCC Customs Law has an important consideration for free zone entities conducting trade activities within the GCC as while the entity is technically in the UAE, its activities are treated like those of a foreign company and as such the company is not privy to the advantages and tax exemptions granted to companies located outside the free zones.

Pursuant to Article 78 of the GCC Customs Law, all foreign goods of whatever kind or origin may be brought into the free zones and duty-free shops, and taken out from them to outside the country or to other free zones and duty free shops, without being subject to customs duties or taxes.  Subject to export restrictions and customs procedures applicable to re-exportation, the foreign goods re-exported from inside the country may be admitted into the free zones and duty free shops.  Goods in the free zones and duty free shops shall not be subject to any restriction in respect to the period they can remain therein.

Pursuant to Article 80 of the GCC Customs Law, the following goods may not be admitted into the free zones and duty free shops.  Flammable goods, excluding the fuels necessary for the operation allowed by the authority supervising free zones and duty free shops under the conditions prescribed by the competent authorities; radioactive materials; arms, ammunition and explosives, of any kind, except those licensed by the competent authorities; goods infringing the laws relating to commercial and industrial property rights and copyright protection in respect of which resolutions have been issued by the competent authorities; all kinds of narcotic drugs and derivatives thereof; good originated in an economically boycotted country; and good prohibited from entering the country (a list of such goods is available in each state).

It is important to note that Pursuant to Article 85 of the GCC Customs Law, goods taken out from the free zones into the customs office shall be treated as foreign goods even if incorporating local raw materials or articles on which the customs duties and taxes have been collected prior to their admission into the free zones.  Further, pursuant to Article 88 of the GCC Customs Law, goods imported from the free zones and duty free shops into or out of the country shall be treated as foreign goods and therefore subject to import duties.


UAE Exemptions:

Pursuant to Law No. 2 of 1993, relating to factories in the Jebel Ali Free Zone, the products of national factories in the Jebel Ali Free Zone wholly or a minimum of 51% owned by UAE or GCC Nationals shall be considered national products which cannot be imported.  As such no custom duties shall be levied in respect thereof when such products leave the Jebel Ali Free Zone provided that such factories are licensed by the Ministry of Finance & Industry.  The aforementioned national factories are subject to the laws and regulations that apply in respect to factories outside the Free Zone in the Emirate of Dubai and Law No. 2 of 1986 in respect of business in the Jebel Ali Free Zone shall not apply in relation to the products of such national factories.  Accordingly, and after being properly registered and licensed with the Jebel Ali Free Zone Authority, such factories can submit applications to the Ministry of Finance & Industry in the UAE to have their products receive the designation of “national origin” and be accordingly exempted.


UAE CUSTOMS LAW

The UAE Customs Law applies on all products imported to the UAE from the Free Zones.

Product Restrictions:

Goods which have been manufactured in Israel are prohibited. All printed matter, films and tapes must be cleared by the Ministry of Information. Pornographic material, ivory/rhino horns, cannabis, alcoholic beverages, fire-arms, fire works, narcotics and opium are also strictly prohibited. Local government authorization is required for alcoholic beverages, fire-arms, fireworks and sparklers, ammunition, explosives, narcotics and medical drugs, agricultural pesticides, pork/pork products and wireless transmitters.

Import Requirements:

Imports into the UAE can only be undertaken by those importers who have the appropriate trade license. Imports by the public sector should be guaranteed by the government in Abu Dhabi, although this is rarely needed for the private sector.  Most imports into the UAE (except those of low pecuniary value) require a commercial invoice and an Arab Chamber of Commerce Certificate of Origin.  The commercial invoice must be the supplier’s invoice and may not originate from agents or representatives or importers.  It should be a supplier’s certified statement of origin. Standard trade documentation, including certificates of origin bearing the name and address of the producing firm, bills of lading, packing list and various government/Embassy attestations must be presented for all imports and exports.  The commercial invoice and certificate of origin must be authenticated by the Consulate of the United Arab Emirates in the country or origin.

Customs Duties:

Customs duties are levied on the CIF value or ad valorem or specific to the goods concerned. Some goods, including all transit cargo, are exempt from duty (e.g.foodstuffs, medicines and public sector imports). The customs authorities may call for a cash or bank guarantee as security, refundable to the owner of the goods, on their re-export outside the UAE. The duty on alcoholic beverages is 80% and 50% on tobacco products.  The duty is 4% for all other goods excepting foodstuffs and

government and oil company-destined goods.  Goods may be imported duty free and stored in any of the free zones in the UAE.  Subsequently, goods which are then transferred to the UAE from these zones, are subject to minimal duty payments currently of 4% depending on the product e.g. cigarettes attract 75% duty.  Import duty is not usually levied on samples imported into Dubai and the Northern Emirates.  

However, for goods of higher value such as jewelry, prior permission to import and arrangements for free entry must be made with the Director of Customs, preferably through a local sponsor or agent.


UAE SHIPPING LAW

The UAE Federal Law No. 26 of 1981 (known as the UAE “Maritime Code”) governs and regulates all shipping practices in the UAE.  The law is applicable to all the Emirates, including the Free Zones and is based on international law and maritime principles set out in various International Conventions.  

Carrier Liability for Loss or Damage:

Pursuant Article 275 of the Maritime Code, the carrier is responsible for loss or damage sustained by the goods during the period from the time he takes delivery of the goods at the port of loading to the time he delivers the same to the person having the right to them at the port of discharge unless it is proved that the said damage or destruction arose out of one of the following causes:

  1. Unseaworthiness of the ship, but on condition that the carrier proves that he discharged the obligations set out in Article 272 which provides that the “carrier must before setting sail and upon the commencement of a voyage use the necessary care to put the vessel in a seaworthy condition and to fit it out, man it and provision it properly;
  2. Errors of navigation or in the management of the vessel on the part of the captain, crew, pilots and other maritime workers;
  3. Fire, unless the same arose out of the act or default of the carrier, perils of the sea or other navigable waters or danger or accidents thereof;
  4. Act of god;
  5. Perils of war;
  6.  Any detention or constraint by a power, state or people or judicial arrest;
  7. Quarantine restrictions;
  8. Any strikes or layoffs or any other obstacle such as to prevent continuance of the work in whole or in part;
  9. Civil unrest and commotion;
  10. Any act or omission on the part of the shipper or owner of the goods or his agent or representative;
  11. Shortfall in bulk or weight or any other shortfall arising out of a latent defect or from the particular nature of the goods or any defect inherent therein;
  12. Insufficiency of package;
  13. Insufficiency or imperfection of distinguishing marks for the goods;
  14. Rescue or attempted rescue of persons or property at sea;
  15. Latent defects no discoverable by ordinary examination;
  16. Any deviation from course in the course of rescuing or attempting to rescue persons or property at sea or any other deviation for reasonable causes;
  17. Any other cause which does not arise of the default of the carrier or those working under him or his representative (The burden of proof shall be upon the person alleging such cause to show that no default of such persons was instrumental in causing the loss or damage.) It is permissible for the shipper to prove that the loss or damage arose out of the default of the carrier or the default of those working under him in a manner unconnected with the navigation or management of the vessel.

Limitation of Liability on Carrier:

The UAE Law generally exempts the carrier from any liability resulting from the fault or omission of the shipper or any third party.  However, the UAE courts normally do not uphold the words “Shipper’s Load, Stow and Count”, or “Said to Contain” printed on the front of the Bill of Lading and will hold the carrier liable for the damage to the contents of a container or for loss following short landing of the contents of a container which was delivered sealed to the carrier.  This is the case even if the seal was intact on delivery to the consignee, and is based on the argument that the carrier, in issuing a clean Bill of Lading, guarantees the contents of the container as described in that Bill of Lading.  

Pursuant to Article 276 of the Maritime Code, the liability of the carrier in all circumstances for loss or damage suffered by the goods shall be limited to a sum not exceeding ten thousand Dirhams (Dhs. 10,000) for each package or unit taken as a basis in computing the freight, or a sum not exceeding thirty Dirhams (Dhs. 30) per kilogram per gross weight of the goods, whichever is the higher unit.  If packages or units are grouped in cases, boxes or other container and the Bill of Lading states the number of packages or units contained in each container, then each one shall be deemed to be a package or unit in connection with the fixing of the upper limit of liability and if the container is not owned or provided by the carrier and it is lost or destroyed it is deemed to be an independent package or unit.

The carrier cannot limit his liability as against the shipper if the shipper has provided particulars, before the loading takes place, of the nature and value of the goods and the particular importance attaching to the preservation thereof, and such particulars are set out on the Bill of Lading.  The said particulars are deemed to be proof of the accuracy of the value set out by the shipper of the goods, however the carrier is entitled to prove the contrary.  In no case is the carrier responsible for loss or damage sustained by the goods if the shipper has deliberately stated false particulars on the Bill of Lading relating to the nature or value of the goods.  It is important to note that pursuant to Article 280 of the Maritime Code, any agreement to exempt the carrier from liability or negligence for damage to the cargo or to reduce any liability for the same will be null and void against the consignee/endorse as holder of the original Bill of Lading.   There is an exception to Article 280, however, under special circumstances in the case of coastal shipments or special cargo, provided the exemption is not contrary to the public order; it is not related to the care which must be exercised by the employees or agents of the carrier, a Bill of Lading is not issued and an agreement in writing on a non-negotiable receipt with an endorsement of the particulars thereof.

In cases where damage was caused by bad stowage and packaging, and the stowage and packaging can be shown to have been carried out by the shipper, some courts in the UAE may find the carrier not liable for the damage caused by poor stowage and packaging.

Time Bar for Bringing Action:

A maritime claim pursuant to a contract of carriage will be time barred after one year from the date on which the goods were delivered or ought to have been delivered.  The time of delivery is when the goods pass through the port gates.  Time stops running on the date an action is officially filed before a UAE Court.

Right to take Delivery of Cargo:

A consignee or endorsee who holds the original Bill of Lading will be entitled to take delivery of the cargo as the port of discharge.  If the cargo is delivered to a party whodoes not present an original Bill of Lading, the carrier may be liable to the true owner of the cargo in contract and third parties in tort for the value of the cargo and/or damages.  If the consignee fails to come forward despite a notice give by the carrier to take delivery of the cargo, the carrier may put the cargo in the custody of a third party or into the custody of the local court after obtaining a court order for the same.  

The carrier may also apply to the court to obtain an order to sell the cargo for the payment of any costs or freight payable in connection therewith.

Delivery Delays:

The carrier will be deemed to have made delay in delivering the goods if he does not deliver the goods at the time agreed, and in the absence of such an agreement, if he does not deliver them at the time at which an ordinary carrier would deliver them in similar circumstances.  The carrier is responsible for delay in delivering the goods unless it is proved that the delay arises out of on of the cause set out in Article 275 (described above).  

Disputes:

There is not separate Admiralty court in the UAE.  Cases are heard before the civil courts.  Cases are conducted in the Arabic language and arguments are carried out by the exchange of written pleadings and submission of documents by either party before the case is reserved for judgment.  


UAE LABOR LAW

Administered by the Federal Ministry of Labor and Social Affairs, Labor Law in the UAE is loosely based on the International Labor Organization’s model. UAE Law No. 8 of 1980, as amended by Law No. 12 of 1986 (the “Labor Law”) governs most aspects of employer/employee relations, such as hours of work, leave, termination rights, medical benefits and repatriation. The Labor Law is protective of employees in general and supercedes conflicting contractual provisions agreed under another jurisdiction, unless they are beneficial to the employee.  It is important to note this also applies to the Free Zones.

The Arabic language is the official language to be used in all employment contracts, records, files, statements etc. Where a foreign language is used by the employer in addition to the Arabic, the Arabic version shall prevail. The Ministry issues a model form of labor contract in Arabic which is widely used, but other forms of contract are enforceable, provided they comply with the Labor Law.

Trade unions do not exist. In the case of a dispute between employer and employee, or in interpretation of the Labor Law, the Ministry of Labor and Social Affairs will initially act as an adjudicator, in an effort to resolve matters. If a party wishes to appeal any such decision it can take its case to court. Strikes and lock outs are forbidden.

The Ministry of Labor and Social Affairs (the Ministry) is the main body responsible for the regulation of manpower recruitment. The Ministry is also responsible for issues regarding health and safety of employees. In addition, the Ministry plays a substantial role in settling labor differences between employers and employees. It should be noted that all labor disputes must initially be submitted to the Labour Dept at the Ministry for amicable settlement. If either party is not satisfied with the recommendations of the Labour Dept, it shall transfer the dispute to the competent court. In any event the right of the employee to claim any due entitlement according to the Law shall lapse after one year from the date such entitlement became due if a legal action is not taken within such one-year period.

Type of Employment Contracts:

Employment contract may either be for a limited period (a fixed term not to exceed four years) or unlimited period.  However, an employment contract is considered unlimited if it is not made in writing; it is concluded for unlimited period; it is made for a limited period and the parties continue to perform it after its expiry without a written agreement to renew the same and specifying a termination date for such renewal; and it is made for the execution of a specific work for which no period is fixed and the contract continues after completion of the work agreed upon.

Probation Period:

An employee may be engaged on probation for a period not exceeding six months. However, it is not permitted to engage an employee on probation for more than once for the same employer. If an employee is under probation period, he/she may be dismissed for any reason within the probation period without receiving any notice or gratuity from the employer. When an employee has completed his probation period successfully, the probation period is counted towards his/her overall period of service.

Remuneration:

The Law distinguishes between basic remuneration and total remuneration. The basic remuneration is simply the remuneration specified in the employment contract excluding any benefit or allowances whatsoever. The total remuneration includes the basic remuneration in addition to all allowances paid to the employee.

The legal significance between the two is that an employee’s end of service gratuity is calculated on the basic remuneration. It should be noted that the non-payment of an employees’ remuneration may constitute a ground for the employee to terminate his employment contract for a valid reason.

Working Hours and Holidays:

The normal maximum working hours are eight per day or 48 per week. However, these hours may be increased to nine hours daily for people working in the retail trade, hotels, restaurants and other such establishments. Similarly, daily working hours may be reduced for difficult or dangerous jobs. It should be noted that such working hours do not apply to (i) persons in high positions of a managerial or supervisory nature; and (ii) the crew of naval ships and maritime employees.  No Employees shall be required to work for more that five consecutive hours without breaks amounting in aggregate to not less than one hour. Breaks shall not be counted in the daily working hours. Many businesses work on a two shift system (for example, 8am – 1pm and 4pm – 7pm). As in all Muslim countries, Friday is the weekly day of rest.

In practice, commercial and professional firms work 40-45 hours a week and government ministries about 35. Overtime is used extensively and additional pay is required for manual and lower ranking staff. The weekend for office workers has traditionally been Thursday afternoon and Friday, but a number of organizations have changed over to a five day week with Friday and Saturday as the weekend. During the Muslim holy month of Ramadan, normal working hours are reduced by two hours per day.

There are 10 days of public holidays (paid) in any year. The employee’s annual leave is two days for every month if his service is more than six months and less than a year. In every completed year of service after the first, an employee is entitled to 30 days annual paid leave. This is in addition to public holidays, maternity leave for women and sick leave. Women employees are entitled to 45 days maternity leave with full pay provided they have served a minimum of one year’s continuous service. If a shorter period of service has been served, female employees are entitled to 45 days leave with half pay.  Official and weekly holidays, maternity and sick leave which fall during the annual leave constitute part of the annual leave. An employee is entitled to his total remuneration during the annual leave.  If an employee is dismissed or leaves the work after giving required notice period, he/she is entitled to his remuneration for the annual leave which he/she has not taken.

Lawful Termination of Employment:

An employment contract may be terminated in any one of the following circumstances:

  • If both parties agree in writing to terminate the contract;
  • If the contract is for a limited period and the specified term has expired unless the contract has been implicitly or explicitly renewed; or
  • If the contract is for an unlimited period and either party desired, for valid reasons, to terminate the contract, provided that the appropriate notice period is observed by the respective party.

Termination with Notice:

If the contract of employment is for an unlimited period, either party may terminate the contract for a valid reason provided that a 30 day notice is observed by either party.

It should be noted that the contract of employment will continue during the course of the notice period. If either party fails to comply with the appropriate notice period, the party in breach shall be liable to pay to the other party a compensation “in lieu of notice”. The “in lieu of notice” is calculated as the amount equal to the employee’s last received total remuneration.

Termination by Employers without Notice (Article 120):

An employer may dismiss an employee without notice in any of the following circumstances:

  1. If the employee has adopted false identity or nationality or has submitted forged certificates or documents.
  2. If the employee is dismissed during the probationary period.
  3. If the employee has committed a mistake and has resulted in substantial loss for the employer, provided that the employer notifies the Labour Department within 48 hours of his becoming aware of the incident.
  4. If the employee has violated instructions for work or work place safety, provided that (i) such instructions were displayed in a prominent place; and (ii) the employee has been informed of them orally if the employee is illiterate.
  5. If the employee failed to carry out his duties as stipulated in the employment contract and continued to do so despite receiving a written warning to terminate his/her employment.
  6. If the employees discloses a secret of the employer.
  7. If the employee is convicted of a crime involving honour, honesty or public morals.
  8. If the employee is found drunk or under the influence of drugs during working hours.
  9. If the employee commits a physical assault on his employer or manager or one of his colleagues during work.
  10. If the employee is absent from work, without a valid reason for more than 20 non-consecutive days in one year or for more than seven consecutive days.

If the employment contract is for a limited period and the employer terminates it for any reason other than those indicated above, the employer will be liable to compensate the employee for such unjustified termination. The maximum amount of compensation payable must not exceed the total of three months salary or the salary for the remaining period in the contract whichever is the lesser unless the contract provides otherwise.

Termination by Employees Without Notice (Article 121):

An employee may terminate the employment contract without notice if the employer has not fulfilled his obligations towards the employee as provided for in the contract of employment or in the Labour Law or if the employee is assaulted by the employer or any of the employer’s  representative.  In such cases, the employer will be liable to compensate the employee for any damages suffered by the employee as a result of the termination.

End of Service Gratuity (Severance Pay):

An employee who has completed a period of one year of continuous service shall be entitled to end of service gratuity calculated as follows:

  • 21 days’ basic remuneration for every year of the first five years of service.
  • 30 days’ basic remuneration for every year thereafter, provided that the gratuity does not exceed two years wages in total.

Gratuity is calculated according to the last basic remuneration paid to the employee and is payable on the termination or the expiry of the contract of employment. The employee will be entitled to gratuity for any fraction of a year of service.

Employees Who Resign:

An employee working under limited period contract who resigns before the end of his contract period shall not be entitled to gratuity unless his period of continuous service exceeds five years.

An employee working under unlimited period contract who resigns shall be entitled to gratuity to be calculated as follows:

  • 1 – 3 years service: one third of the amount mentioned above (21 days).
  • 3 – 5 years service: two thirds of the amount mentioned above (21 days).
  • More than 5 years service: full gratuity.

Employees Dismissed under Articles 120 & 121:

No gratuity is payable to the following employees:

  • Those dismissed for one of the reasons stated under Article 120 of the Labour Law, or those who leave their employment to avoid being dismissed for the same reasons;
  • Those working under unlimited term contracts who terminate their employment voluntarily without providing the appropriate notice for reasons other than those stipulated under Article 121.
  • Those working under limited period contracts who terminate their employment contracts voluntarily without giving the appropriate notice, and their period of continuous service is less than five years. In such cases they are liable to pay their employers compensation amounting to a month and a half of the basic wages or the wages for the remainder of the contract, whichever is less unless there is a provision in the contract of employment to the contrary.

Accidents at Work:

The Labour Law contains detailed provisions in relation to employers’ obligation to compensate employees who sustain injuries or occupational diseases during working hours.

It should be noted that employers must report directly to the police, the Free Zone Authority and the Labour Department all accidents or occupational diseases to their employees at work.


CIVIL CODE

Entities in the Free Zones are subject to the UAE Civil Code and of particular interest is the UAE Civil Code application on contracts.  The key rule in the Civil Code is that contracts must be interpreted in accordance with the intentions of the parties (Article 257); and intentions and meanings must prevail over words and the construction of sentences (Article 258).  Therefore, where there is an express provision in the

contract, a judge must not imply any clause or condition varying that expression (Article 259).  Further, where the wording of a contract is quite clear on a particular point, the court must not distort such obvious meaning on the pretext of discovering the parties’ intentions (Article 265).  However, when there is an ambiguity – or when the judge believes that certain passages in the contract do not in fact match the clear intentions of the parties, then the court must investigate the true mutual understanding or agreement of the parties, irrespective of the literal meaning of the words used in the contract.  This investigation must be carried out in light of the particular transaction and according to the principles of honesty and trust between the contracting parties and existing customs (Article 265(2).

The UAE Civil Code lays down two other key interpretation rules.  First, a custom that is applicable among merchants has the same force as an express agreement.  Second, a debtor should be given the benefit of the doubt. Pursuant to Article 265 of the Civil Code, the contract must be performed in good faith and according to its terms.  In addition, the contracting parties must do all those things that are considered

necessarily incidental to the performance of the contract according to the rules of law, usage and fairness.  The notion of fairness also covers the need to do everything possible to mitigate the consequences of any breach of contract.


COPYRIGHT LAW

The UAE Free Zones are subject to the Copyright Law, Law Number 7 of 2002 on Copyright and Related Rights (the “Copyright Law”), which came into force on 14 July 2002. The new Copyright Law, which supersedes and repeals the 1992 Law, provides greater protection for rights holders.

The Copyright Law provides an exhaustive list of protected works which includes literary works, computer software and applications, databases, lectures and sermons, drama, musical and audiovisual works, architectural plans, artistic and photographic works, applied art, geographical maps and derivative works of art.

The Copyright Law provides protection of moral rights and economic rights.  In terms of moral rights these include the right to acknowledge authorship when their works are published for the first time and to object to any distortion, mutilation or other modification of their work which might be prejudicial to the integrity of the work or reputation of the author or performing artist, and the right to cease the distribution of the work. With respect to economic rights, these include the right to assign all or part of their rights to commercial exploitation to a third party, which may be in return for receiving a consideration. 

Registration:
A Copyright Register is maintained by the UAE Ministry of Information and Culture, which is also responsible for laying down rules for regulating the deposit of works and registration thereof.  Significantly, failure to register copyright of a work or any assignment or license thereof does not prejudice the protection of the rights conferred under the Copyright Law.

Duration:
Under the Copyright Law, the economic rights of authors are protected for their lifetime and for fifty years thereafter starting from the year immediately following their death. Authors of collective works and works published anonymously or under a pseudonym, performing artists and producers are entitled to fifty years protection. Performing artists and producers are entitled to fifty years protection. Applied arts are only entitled to twenty-five years protection and broadcasting authorities twenty years.

Infringement, Enforcement and penalties:
The Copyright Law provides for provisional measures to prevent or limit infringements including court orders to provide a full report describing the work, a suspension on the publication, exhibition or reproduction of the work, as well as attachment of a potentially offending work. Applicants have fifteen days following the issue of the order to present the substance of the dispute to the competent court. In addition, the Customs Authority may of its own accord or following a request from rights holders or their successors impound infringing works for not more than twenty days.

Infringements include any infringement of the moral and/or economic rights of the rights holder, including placing a work in the public domain, reproducing, selling and rental, illegal producing or importing, downloading unlicensed software and applications, and failing to mention the author’s name.

Pursuant to the Copyright Law, the Courts may impose penalties for infringements including fines ranging from AED10,000 to AED500,000 as well as a prison sentence of no less than two months Repeat offenders will receive a prison term of no less than nine months, and a fine of no less than AED 200,000.

In addition, the courts can also determine whether the infringing works should be destroyed or confiscated, as well as the destruction of the equipment and tools used to make the offending works, and the closure, for not more than six months, of the establishment where the infringement was committed.

Mutual recognition: 
The UAE is obliged under TRIPS to adhere to the principle of national treatment, which provides that no Member shall accord to the nationals of other Members no less favorable treatment than it accords to its own nationals with regard to the protection of intellectual property, subject to certain defined exceptions.


TRADEMARK LAW

In 1992, the UAE Federal Government issued Trademark Law No. 37 of 1992 which was later amended by Law No. 8 of 2002.  The UAE Trademark Law, as amended, regulates the registration of trademarks in the UAE and the UAE Free Zones are also subject to the rules and regulations of the Trademark Law.

Procedure:

Trademarks registration is commenced by submission of an application to the Trademark Section of the Ministry of Economy and Commerce. The application forms are pre-printed and must be completed in Arabic. The trademark application must be

filed by the trademark owner directly or by his authorized agent or lawyer in the UAE.  After examination of the application and resolution of any outstanding inquiries, the Ministry will issue a preliminary approval for the registration which is published in the UAE Trademark Bulletin.  The trademark must also be published in two Arabic newspapers circulated in the UAE.  If there are no challenges to the trademark, the mark is accepted and the relevant UAE Authorities are notified of the registration.  A trademark registration certificate is then issued to the applicant.

Trademark Registrations Permitted:

The Trademark Law recognizes certain terms which may be considered as trademarks, which include language terms that have no meaning in relation to the goods or services with which they are associated and which are meant to distinguish the goods/services in question from others; and language terms which have by virtue of their use over time attained distinctiveness and distinguishability in connection with the goods or services with which they are associated; in addition,

Protection of Trademarks in the UAE:

Police departments in each Emirate are equipped with Commercial Crimes Departments who will raid and send samples to their laboratories to examine counterfeit goods and to provide detailed reports on the differences and similarities between genuine and counterfeit trademarks.

A trademark owner may also take action through the civil courts for damages suffered as a result of the trademark infringement.  Prior to or during such an action, the owner may obtain a preliminary attachment order to seize the counterfeit goods and prevent their sale into the market.  Damages as compensation awards are rarely granted by the courts, however, other remedies are granted.  The courts more often grant orders requiring the offending parties to terminate their production of the counterfeit goods and to publish the judgment in local newspapers as a means of altering the public of the offenses.  Repeat offenders may also have their trade license suspended for a period of time.


LITIGATION

Any matters of dispute in the Free Zones, including contractual disputes and shareholder disputes must be resolved by litigation through the UAE Courts (unless another jurisdiction is validly selected or an arbitration clause has been included in the contractual agreements, memorandum of association, shareholders agreements, etc)

The UAE is a civil law jurisdiction and accordingly the primary source of law is a statutory code.  The UAE legal system has been primarily influenced by the Egyptian legal system which is based on French and Roman law as well as Islamic Shari’a law.

The Federal Law of Civil Procedure (Law No. 11 of 1992) governs civil proceeding in the UAE.  The Civil Procedures Law seta out in detail the law and procedure for conducting civil cases before the UAE Courts, whether federal or local.  Judges in the federal and local courts apply the provision of the Civil Procedures law as well as Islamic Shari’a law.  There is not system of case reporting and judges are under no obligation to take previous decisions of the court into consideration as in a common

law jurisdiction.  However, Supreme Court decisions are persuasive and when repeated by the Supreme Court can serve as guidelines for future decisions rather.

Matters related of civil and commercial issues are heard by the civil courts. Matters related to family law including divorce, inheritance and succession, alimony and custody of children are reserved for the Shari’a Courts.  There is no law in the UAE governing inheritance, succession, divorce or custody of children in the UAE, therefore said matters are heard by the Shari’a courts.  

Jurisdiction of Courts:

The UAE courts have jurisdiction over a dispute provided said dispute satisfies certain conditions, including: defendant domiciled in the UAE; the case relates to assets in the UAE or an inheritance in the UAE; the action relates to an obligation which was concluded, executed or which was agreed to be executed in the UAE or a contract which was meant to be authenticated in the UAE, or to an incident which took place in the UAE or to an insolvency which has been declared in the UAE or by the UAE courts; the action relates to personal status and the claimant is a UAE national or anexpatriate who is domiciled in the UAE if the defendant does not have a know address abroad of if the local law is applicable to the matter.


ARBITRATION

Pursuant to the UAE Civil Procedure Law, the parties to an agreement may agree to refer a dispute relating to said agreement to arbitration.  Such an agreement must be in writing and in a clear text in the agreement.  It is important to note, however, that the courts will not enforce an arbitration clause which is printed as a standard clause in the general conditions of a form application or policy or on the back of an invoice or delivery note. In the absence of any governing rules or procedures for the appointment of arbitrators or the arbitration forum in the agreement or in the applicable Free Zone regulations, the court will appoint the arbitrators.  

There are two arbitration centers in the UAE- Dubai (Dubai International Arbitration Centre) and Abu Dhabi (Abu Dhabi Commercial Conciliation and Arbitration Centre).  The UAE does not have an arbitration law, however, the Civil Procedures law addresses arbitrations, validity of the arbitration award and the appointment of arbitrators.  Each Centre has its own rules and regulations for the administration of arbitration matters.  

Enforcement of Arbitration Awards:

Once the arbitration award has been ratified by the Courts, it will be valid for execution.  Execution of the arbitration award will go through the normal execution of the judgment in accordance with the process set out in the UAE Civil Procedures Law through the Court Execution Department.  

Enforcement of Foreign Judgments:

The UAE Civil Procedures Law addresses the enforcement of foreign arbitration awards in the UAE.  The UAE is not a signatory to the New York or Geneva Conventions for recognition and enforcement of foreign arbitration awards.  However, the UAE has ratified the GCC treaties for the enforcement of judgments delivered by the GCC courts and arbitration awards delivered by the GCC Countries and has also entered into a bilateral agreement with France (Paris Bilateral Agreement).  However, the UAE judiciary is still reluctant to enforce foreign arbitration awards.

Emergency and Injunctive Relief:

Despite the fact that a matter has been referred to arbitration, the UAE Courts still retain jurisdiction to hear applications filed for emergency or injunctive relief and in certain cases will issue orders for attachment of assets.

“Although every effort has been made to ensure the accuracy of the information included in this document, however, laws, business conditions and government regulations are subject to change, and accordingly, an updated advice should be further obtained before acting upon the information presented in this document.”

 

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