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UAE risk: Legal & regulatory risk(RiskWire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentB28B28Legal & regulatory riskC58C58Note: E=most risky; 100=most risky.SUMMARY The legal and regulatory environment will continue to favour domestic investors over their international counterparts. The judicial system is slow and legal action against local companies will continue to be ineffectual. Foreigners will continue to be barred from owning most property in the UAE, although there will be some easing of these rules, particularly in Dubai, and the regulations are already more liberal than in some other Gulf states. Intellectual property rights are generally respected, and, although specific abuses exist, these are likely to be corrected during the forecast period. No statutes exist against expropriation; in practice, however, the risk will continue to be small. SCENARIOS The legal system is inadequate for dealing with the increasingly sophisticated local economy (High Risk) The UAEs commercial legal system is widely acknowledged as inadequate. The UAE is not party to any major international arbitration treaty, although arbitration in a fellow Gulf Co-operation Council (GCC) member state is recognised. In practice, UAE courts will not recognise judgements passed in courts in Europe or the US. Furthermore, the domestic commercial legal system has a reputation for favouring local parties over international parties in the event of a dispute. In the short-term, this is unlikely to improve significantly despite the fact that a number of prominent UAE and international law firms are lobbying government at a federal and emirate level to change the system. The government reverses moves to liberalise the regulatory system (Low Risk) Dubai in particular has made great efforts to liberalise the regulatory environment in a bid to stimulate foreign and domestic investment. While this has threatened the positions of some traditional, local businesses, it is clear that the process has benefited the economy as a whole. Dubai is committed to continuing, not reversing, this process. Other emirates have made more tentative steps towards liberalisation, but are generally moving in the same direction. The federal government is generally more conservative, but Dubai has shown that in practice, this does not present a serious barrier to reform. Concerns over regulatory standards at Dubai International Financial Centre (DIFC) slow efforts to encourage foreign participation in the emirate (Low Risk) Dubais ambitions to establish itself as an international financial hub suffered a setback, after the Dubai International Financial Centre (DIFC) dismissed its two leading regulators in a dispute over corporate governance standards at the Dubai Financial Services Authority (DFSA, an independent regulatory body that is supposed to oversee the DIFC's operations). DIFC officials had recognised that Dubai has a reputation (rightly or wrongly) for weak financial regulation and that they would have to convince leading international financial institutions that the DIFC would not tolerate such practices within its jurisdiction. The DIFC therefore created the DFSA to draft international-standard regulations and hired a team of respected international regulators to run the regulatory body. The DFSA has a highly-respected supervising board and the Dubai authorities have confirmed their commitment to ensuring that regulatory standards at DIFC are maintained. This has led to a large number of regional and international banks joining DIFC since it became operational in 2004--a trend that has been accelerated by the oil driven strength of regional economic growth over the period, which has substantially increased international interest in the DIFC project. BACKGROUND (Background material is updated twice yearly. Last update: April 3rd, 2006) Enforceability of Contracts Contractual arrangements are generally secure in the UAE, although there are some risks. For small and medium-scale projects, contracts fall under the local judicial system. The UAE is a federation of seven emirates, and the legal process differs among them. Federal law holds across the country, but many emirates, notably Dubai, enjoy a reasonable degree of autonomy. In Dubai, the country's commercial hub, cases are heard by Dubai Courts, not the federal courts. In theory, local and overseas firms enjoy equal rights. In practice, local firms are reputed to be favoured. For these reasons, most lawyers advise foreign companies against pursuing legal action against local companies. Contracts for very large-scale projects, such as infrastructure and major construction projects, invariably stipulate arbitration in a Western court. Given the UAE's historical and political links with the United Kingdom, this is usually London. The quality of the civil service varies enormously. In some of the poorer Northern Emirates it can be extremely backward. Even in Dubai and Abu Dhabi, inefficiency and bureaucracy can make official dealings painfully slow. However, this is by no means always true. Processes are improving all the time, especially in Dubai. Many of the UAE's 11 free trade zones, such as the Jebel Ali Free Zone, enjoy excellent reputations for cutting through red tape, offering a one-stop-shop service for investors. Bribery is extremely rare. Independence of the Judiciary In 1983, a full federal judicial system was created in the UAE by law. The three levels of the federal court system include primary courts, appeals courts, and the Supreme Court. Although Dubai and Ras al-Khayma maintain their own judicial systems, all other emirates have ceded civil, criminal and administrative jurisdiction from the local to the federal level. However, sharia (Islamic law) courts are maintained in each emirate. The five judges of the Supreme Court are appointed and dismissed by the Supreme Council, the highest federal authority comprised of the hereditary rulers of the seven emirates. The Supreme Court, at the request of individual emirates, adjudicate between the emirates or between the emirates and the federal government, and decide on the constitutionality of federal laws. In practice, the status of federal laws often requires the passage of enabling legislation in the individual emirates. The commercial legal process can be slow and cumbersome, although it is improving. Dispute settlement through the courts is renowned for being a drawn-out process that lacks transparency. Most business people operating in the UAE believe that dispute settlement depends more on the relative power and influence of the UAE national sponsors of the businesses involved than it does on the merits of a particular case. At present, the UAE has no dedicated arbitration code, and has yet to sign the New York convention on arbitration. However, in May 2004 the UAE drafted a new federal commercial arbitration law. Additionally, the Dubai Chamber of Commerce and Industry (DCCI) launched the Dubai International Arbitration Centre (DIAC) in May 2003. The DIAC is a specialised centre that provides conciliation and arbitration services to local, regional and international businesses. Foreign Investment: Discriminatory Practices Foreign direct investment (FDI) is actively encouraged throughout the UAE, and has been for many years. Figures from the United Nations Council on Trade and Development (UNCTAD) show that flow of FDI in UAE increased from US$30m in 2003 to US$840m in 2004. Figures suggest that the UAE failed to realise its potential as a destination for FDI. UNCTAD produces an index of inward FDI potential and an index of inward FDI performance. UAE ranked 104 out of 140 economies in the performance index in 2004 and was ranked 22 in the potential index in 2003. Significantly, Abu Dhabi has always allowed international oil companies to maintain a stake in its oil industry, even during the purge of the 1970s when most of its neighbours fully nationalised their oil sectors. In recent years, Abu Dhabi has taken a lead in encouraging foreign investment in its power and water sector, offering 40% stakes in a number of billion-dollar projects. Abu Dhabi also has a thriving offset programme. Dubai has embraced foreign investment most warmly-spurred on by its lack of significant hydrocarbon reserves. However, there are restrictions on the activities of foreign companies. These can vary enormously within the UAE. There is no formal foreign investment law; rather, articles in a variety of laws lay out the rules in a piecemeal fashion. The Commercial Companies Law (Federal Law No. 8 of 1984, as amended by Federal Law No. 13 of 1988) stipulates that all companies must be at least 51% locally owned. (Seven different types of business organisation are defined, each with their own requirements for shareholders, directors, minimum capital and incorporation.) This effectively means that many "foreign"-owned companies must have a local partner. These partners can be sleeping, or they can be highly active and helpful when doing business. In practice, though, 51% local ownership is not always the case. Additionally, newspaper reports quoting mid-ranking government sources suggest a new commercial law will be passed in 2005, raising the maximum foreign ownership rule ceiling to 70%, from 49%. The UAE is home to 11 free-trade zones, at least one of which is located in each emirate. All zones offer a range of incentives, the crucial one being 100% foreign ownership of companies. Other incentives include guaranteed exemption of import/export duties, as well as full repatriation of capital and profits. By far the largest free-trade zone is the Jebel Ali Free Zone in Dubai, which is home to more than 2,300 companies. It is also the site of Jebel Ali port, one of the world's leading container ports. More than 80% of companies in Jebel Ali are foreign-owned. Around 75% are involved in trade, warehousing and distribution, with manufacturing accounting for just under a quarter of all companies. Since 2000, high-tech firms have been catered for at the Dubai Media Free Zone, which includes Dubai Internet City (DIC) and Dubai Media City (DMC). DIC offers some of the most sophisticated information-technology infrastructure in the world, and has been a great success in attracting technology firms, from Microsoft to small, Internet start-ups. Rents are higher than in Dubai city, but 100% foreign ownership and excellent infrastructure appear to more than justify the cost. DMC is proving a reasonably strong magnet for the region's media companies. However, the UAE retains a tight control on the output of local media, so many firms remain sceptical about relocating from neutral bases such as Cyprus or London. Even outside the free zones, the 51% local ownership rule is not always rigorously enforced. This is particularly true in entrepreneurial Dubai, where many companies--particularly small and medium-sized enterprises--are effectively fully owned by foreigners. International banks are the exception to the rule. Foreign banks can be 100% foreign-owned, but only they and oil production companies are subject to corporate tax. Foreign investment in UAE equities is not vigorously encouraged. Under federal law, foreigners can own up to 49% of the equity in local public joint-stock companies. However, in practice this is extremely rare. Until 2000, the articles of association of every UAE listed company prohibited any foreign ownership. In 2000 Dubai-based Emaar Properties changed its articles to allow foreigners to own up to 20% of its equity, but take-up has been slow and other companies have failed to follow Emaar's lead. Private property ownership by non-UAE nationals is in its infancy, and is still extremely rare. Since the late 1990s, Dubai has pioneered foreign ownership of property in the UAE, with Dubai government-backed real estate developers Emaar Properties and Union Properties offering 50-year and 99- year leases on a limited number of residential properties. Initially these were only offered to nationals of the Gulf Co-operation Council (GCC)--a six-member organisation comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE--but this has recently been extended to all foreigners. Some commercial properties are now available with 50-year leases. Sharjah, the UAE's third-largest emirate, also allows some foreign ownership of property. No significant property disputes involving foreign ownership have yet arisen, so no legal precedent exists. The issue of foreign ownership of property is complicated by the immigration issue. Although 99-year leases are available on some properties, foreigners can only acquire three-year residence visas. These are renewable as long as the individual has business interests (through employment or ownership), but the issue has made expatriates reluctant to buy property. Unfair Competitive Practices A number of uncompetitive practices remain in place in the UAE. Agency agreements give UAE firms--normally large merchant families--exclusive distribution rights for foreign brands within certain emirates. These can be extremely lucrative, as they shield distributors from domestic price competition. However, such monopolistic practices appear contrary to the terms of the UAEs World Trade Organisation (WTO) membership. There has been speculation that exclusive agency distribution agreements will soon be abolished under pressure from the WTO. The WTO requirement to open up its services sector over the next few years saw the UAE announce plans to abolish the monopoly of Emirates Telecommunications Corporation (Etisalat), the UAEs sole telecoms company, in 2004. The UAE negotiated a number of ten-year exemptions as part of its WTO accession in 1996, and these expire in early 2006. Businesses operating in the UAE are therefore keen for clarification on how this issue will be resolved in 2006. Intellectual Property Rights Intellectual property abuses have been rife throughout the region until very recently, but the UAE has taken a lead in stamping them out. The UAE, at both federal and emirate level, has been particularly successful in combating copyright and trademark abuses. It is widely recognised as the most active Arab country in complying with its commitments under the WTO TRIPs (Trade-Related Aspects of Intellectual Property Rights) agreement. UAE federal and emirate government officials work closely with companies, including Microsoft and Disney, in the war against piracy. The country's success has been recognised by its removal in 2000 from the United States Trade Representative's Special 301 Watch List for piracy. In the May 2005 Global Software Piracy Study by the Business Software Alliance (BSA) and IDC, the United Arab Emirates (UAE), with a 34 percent piracy rate in 2004, is the only emerging economy listed among the top 20 low piracy nations. The report attributes this to deliberate attempts by the country to adopt strong intellectual property protections during the 1990s. UAEs rate of piracy remained unchanged from 2003, but retail losses due to piracy increased from US$29m in 2003 to US$34m in 2004. In 2004, the UAE extended its campaign against intellectual property abuses and launched high-profile raids against traders selling fake toys and DVDs. The UAE has received praise from the international business community for its efforts to prevent copyright abuses. However, one area has so far eluded the crackdown on intellectual property abuse--pharmaceutical patents. A number of global pharmaceutical companies complain that the UAE authorities do not do enough to protect drug patent abuses. Price Controls Prices in the UAE are generally free from controls and fixing. However, power, water and telecommunications services are run by state-controlled monopolies, and as such federal and local governments can control the price. In practice, the official priority is to ensure a reliable and affordable supply rather than reaping excessive profits, so price risk is low. Petrol retailing is in the hands of state-owned companies (at emirate level) and, as with utilities, priority is given to keeping prices low, even in times of high oil prices, rather than exploiting monopoly power for short-term financial gain. |