Cross-border JVs and compliance with UAE law

With the greatly increased inflow of business to the UAE, it is useful to review the legal framework, which governs foreign companies seeking to do business in the UAE.

Generally, a foreign company is permitted to engage in business in the UAE only after obtaining a licence from the competent authorities, in compliance with the provisions of Articles 314 and 315 of the UAE Federal Law No. 08 of 1984 (Companies Law).

The general provisions of the Companies Law mandate that all forms of companies under the law, except JVs, shall comply with certain requirements, which mainly relate to the company's memorandum and registration of the company in the commercial register.

Article 56 of the Companies Law defines a "joint venture" as a company concluded between two or more persons to share the profits or losses of one or more commercial businesses being performed by one of the persons in his name. A JV company is not required to have a memorandum (which is a document that sets out the rules and procedures for a company) and the rights and obligations of joint venture partners are regulated by a joint venture contract, which they negotiate and sign. A JV is prohibited from issuing shares or negotiable instruments. Further, third parties who deal with a joint venture do not have a right of recourse to the JV itself, but only towards the particular party with whom they had dealt with.

A common question that arises is whether the reference to "joint venture" in the Companies Law is limited to a JV formed by two or more companies, each of which is licensed to engage in business in the UAE.

It is common knowledge that there are some foreign companies not licensed to engage in business in the UAE, but are working on projects by forming JVs with local companies. This arrangement is more widely practised in the construction sector. It might be that the competent local authorities are showing a certain degree of tolerance in permitting these arrangements to continue. Whether it is tolerance or benign permission, there also appears to be certain limitations to this practice, which include: that the services should relate to a particular project; the services should be limited for a specified period and the foreign entity's name should not be present in any official documents. Also, the foreign entity shall not be permitted to advertise its presence in the project in the UAE.

Though this practice appears quite widespread, it poses a myriad of questions on the legal and regulatory fronts. A few of which are noted below.

As per Article 314 of the Companies Law, with the exception of foreign companies licensed to practice activities in the free zones of the UAE, foreign companies are not permitted to practice their main activity or establish offices or branches except after obtaining a licence issued by the Ministry upon acquiring the approval of the competent authority in the emirate concerned.

As per Article 315 of the Companies Law, foreign companies, their offices or branches referred to in Article 314 are prohibited from commencing their activities in the UAE, except after registration in the Commercial Register.

Article 316 of the Companies Law refers to penal sanctions and stipulates that if a foreign company or an office or branch subsidiary practices activities except in compliance with the Article 315, all the persons who performed this activity shall be personally and jointly liable for their actions.

Note that the stipulations on JV embedded in Part IV of the Companies Law [Articles 56 to 63] are not independent in nature. They have to be read along with Article 5 of the Companies Law, which notes that any company incorporated in the UAE must take one of the forms mentioned therein, and that includes a joint venture. The stipulations contained in Part I through Part VIII of the Companies Law are general provisions on companies in the UAE. On the contrary, the stipulations provided under Part XI of the Companies Law on foreign companies [Articles 313 to 316], are very specific in nature.

If a foreign firm executes services in the UAE without being licensed to carry out its activities here, it may risk serious repercussions from the authorities.

The author is senior lawyer with Habib Al Mulla & Company Abu Dhabi Practice. The views expressed are his own

 

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