Posted Dec 08, 2007
Hi there cybouae,
Sorry, I didn't intend to be so critical with my earlier posting, and was merely trying to get you to look deeper before "jumping in"; I have started on a longer posting on "starting a business in the UAE", but have not quiet completed it yet.
But for what it's worth take a look.
The low down on starting a business in the UAE/ Dubai
This is a quick, simple guide, and is not meant to explain or even detail all aspects of UAE company law or even all the types of business structures that are available under the law!
There are three main (more commonly used) ways of starting a business in the UAE.
1. A joint venture between yourself/ or the company you represent and a local (UAE National) sponsor.
2. Start a business in one of the numerous Free Zones
3. Government sponsorship.
Let’s start with the least likely option for most businesses and it is the easiest to cover.
Government sponsorship is difficult to get and is normally project related where the expected revenue for the country (or strategic product) is measured in tens of millions (if not billions) of Dollars. E.g. Offset fund projects, defence, oil, gas or mineral related projects.
Establishing an LLC. A Limited Liability Company is the most common form of business “partnership” in the UAE. The basics are as follows: You need to have a local (UAE National partner), the partner owns the controlling shares of the company 51%. You can have up to 50 other members in an LLC as long as the share value of the combined (non-national) partners does not exceed 49%. All LLC’s are incorporated within the terms of the UAE Commercial Company Law, and are administered in accordance with those regulations (directors, shareholders, board meetings and voting). A minimum, combined share capital of 300,000 AED is required to register the business with the Department of Economic Development as well as the Dubai Chamber of Commerce & Industry.
Now the practicalities of the issue; in some instances the UAE partner will refuse to put any of the share-capital into the business, and requires the investor to provide all funding as an act of “good will”. The local partner is legally entitled to 51% of all profits, unless another legally binding contract is entered into which re-apportions the distribution of profits. You can find local sponsors who will simply ask a one-off “fee” for their participation in the business (where you buy their sponsorship); however in recent years the government has tightened up on this and sometimes demands to see what participation the local sponsor actually has in the company.
The involvement of the sponsor in the actual business once established depends on the sponsor, some are happy to act simply as “silent partners”, where other prefer a more hands-on approach.
The size and nature of the business determines how many residency visas’s and labour cards the company is able to issue. As the business grows this is re-evaluated by the government (Labour & Immigration Departments).
The nature of the business also determines what other trade licenses are required. For example a restaurant needs to be licensed by the Dubai Municipality, and must conform to specific regulations regarding sanitation, food preparation, food storage etc. Certification from this Ministry of Health may also be required, and food workers have to undergo yearly medical tests for communicable diseases. The regulations differ from business type to business type and should be checked prior to entering into or opening a particular business.
Other issues in starting a business which should be considered:
• Licensing of Brand names, registration of trademarks or propriety information
• Municipal signage regulations as well as the annual fees for signage
• Sales, what and what’s not permissible. For example you may not use the word “Sale” without permission from the Municipality, and that all “sales” are strictly regulated and that you have to pay a fee for the “privilege” of having one!
• What promotions are acceptable during Dubai Shopping Festival and Summer Surprises (and at what costs)
• Are there any existing “agency” agreements for some of the products you want to supply?
• Vehicle advertising, what is permissible and what are the costs
• What vehicles can and cannot be used e.g. open vehicles may not be used to transport labour etc.
• Visa and residency fees of employees
• Official records required under the Labour and Company Business Laws
• “Emiratization” policy, what positions in the company must be filled by UAE nationals
• Labour quota systems. These are refined from time to time and determine the expatriate national quota of staff on your payroll
• The Labour category system for company’s and how this affects what charges/ tariffs you pay to the Government
• Labour cards and labour inspections
• Municipal inspections
• Insurance, Storage/ warehousing (as well as the costs)
Starting in a Free Zone (FZ)
There are a number of “free zones”, or free trade zones within the UAE (and the emirate of Dubai). Essentially these are zones in which foreign businesses can establish without having to have the sponsorship of a UAE national, which means they can be 100% foreign owned. In essence these are tax free business nodes within the UAE. There are various types of businesses run in these FZ’s: production/ manufacture, re-packaging and distribution (or even re-export), consultancies, printing and publishing, media and in some cases simply regional corporate offices. The FZ’s are administered by the relevant Free Zone Authority, which in effect is a mini-municipal structure. The income for the FZ Authority is derived from office rentals, levies, storage revenue (warehousing), registration fees etc. All products in the FZ are exempt from import duties until the time they move out of the FZ. As the Government of Dubai derives revenue from imports (basically 5%), these transactions are strictly supervised and monitored. The 5% tax must be paid before good can be removed from the FZ. Obviously if you are running a consultancy from an FZ there is only intellectual capital being moved so, no revenue (for the Government) is derived other than the administrative fees (listed above) which go to the FZ Authority.
Of course there is a catch. The annual registration, office fees etc., are very high, but more favourable to some businesses than paying over 50% of your profits every year!
Most of the Middle East works on an Agency system. Here a local company, or in some cases an individual has approached a large well recognised brand (vehicles, electronics etc. etc.) and have agreed to distribute the products of the supplier/ manufacturer through the region. These agreements are binding, resulting in the incredible wealth of some private citizens who basically have the monopoly on distributing a particular brand or brands in the UAE (or GCC region).
This results in the very odd situation where for example you may have the agreement to import a range of vehicles, but the tyres supplied on the vehicle could subject to penalty or payment of royalties to another local company who may have the agency for the particular brand of tyres supplied as standard on the vehicle.
There are also some instances where a company will take on competitive manufactures brands simply to “kill” or neglect the product and prevent it from competing with their own brands! This does not happen often any more due to tighter controls by the government.
Business in the UAE needs to be placed in context. Business is not new, neither is the wealth that oil and trade has brought the region.
Foreign business men have been trying (both successfully and unsuccessfully) to bring products and services to the region for more than five decades. The chances are if you have a product which you think will revolutionise the Middle East of the UAE, someone already had the idea years before you! In many instances if the product is not represented in the local market there is a reason.
Personally, I used to get at least one sales/ trade enquiry (to supply) per month for a particular type of product, that each person though was the best thing since sliced bread and that they wanted to market it in the UAE. Besides having to explain the market demographics to the would-be supplier (as well as explaining that they were not the first to think of the idea), I would also have to explain to them that while I felt the product had merit, the Dubai Municipality had determined that the product was environmentally un-sound and would not license it for distribution.
Market demographics are very important. I’m going to generalise here, but you need to consider that the average “local/ UAE national” is far wealthier than his/ her expatriate contemporaries; however expatriates out number UAE nationals in a ratio of 5 to 1. In this ratio, however 3 out of the 5 of all expatriate workers are labour, this in effect means they will not be buying any expensive products from an up market furniture store (as most of their earning are repatriated). The permanent population of the UAE is also very small, by western standards. With the total population of the UAE (expatriates included) being less than that of greater London.
A matter of taste
One must bear in mind that “western and eastern” taste in food, furniture, motor vehicles, clothes etc. differs, and in some instances differs drastically and something which you may find personally appealing has no appeal what-so-ever to someone else. Because Dubai is such a multi-cultural/ cosmopolitan city and because it is a very good example of west meeting middle-east these disparities are very apparent and should be taken cognisance of when conducting market research.
The physical environment
The physical and climatic conditions in the UAE are harsh to say the least. During summer the day temperature can reach 50 degrees centigrade and the humidity levels up to 90% - not to mention the dust!. During mid-summer the night temperatures hover at about 35 degrees! Many products that are brought into the UAE have been specifically manufactured for European or eastern European conditions (where the climatic conditions are vastly different); this can sometimes lead to a very expensive and ill-suited purchase for a consumer – learning curves are to be expected, but ill-suited products can result in a poor brand reputation!
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