Posted: July 1st, 2015

Why are foreigners looking to invest outwit a free-zone area in the GCC forced to give away majority ownership to a national, and what are the implications of this law when a dispute arises between the parties or when one of the parties passes away?

The paper must be cited according to OSCOLA referencing

Title: Business Culture in the UAE: Who the real silent partner is in court and why.

RQ: Why are foreigners looking to invest outwit a free-zone area in the GCC forced to give away majority ownership to a national, and what are the implications of this law when a dispute arises between the parties or when one of the parties passes away?

This paper seeks to analyze the risks associated to investment that foreigners (place focus on UK citizens) face when they establish business outwits a free zone in the GCC. It serves as a guideline and provides a unique perspective into the business laws and cultures that impact foreigners. Important to look into the freedom of contract and what the risks are for foreigners vs the risks for UAE nationals.

Section 1: Foreign investment law – History and reasoning behind it
In the UAE, when a foreign investor (any national besides GCC nationals) wants to start a business, they must make a UAE national their partner. Some business licenses such as the license for money exchange, e-commerce, restaurant, and Construction Company are only given to GCC nationals. Other business licenses are open to foreign investors, however the UAE national is given 51% ownership of the business. A foreign investor cannot own 100% of business unless it is in the free zone.
What is the rationale behind this law? Look at neighboring countries that did not/do not have these laws. What has been the outcome? Palestine, Israel? Or South America?

Section 2: The business culture vs. the law
According to the law, the UAE national is a partner in the business. (Look at the constitution, and see how the law must treat the situation. Compare it to the business culture) However, according to the business culture, the UAE national is just a silent partner. According to the business culture, in order to get a UAE national as a partner, the foreign investor must pay an annual fee to the national. The foreign investor prepares all the capital and funds required to commence the business. The UAE national and the foreign investor write a memorandum, in which the national releases themselves from all liabilities, but does not mention that they are excluded from the profit. The foreign investor takes responsibility of all liabilities and risks associated to the company. From that moment onwards, the UAE national is referred to as the “silent partner” as they do not take part in the day-to-day activities of the business.
Q: Can foreigners get insurance to cover the 51%?

Section 3: What happens when a dispute arises – implications of the 51/49 law.
However, in the past 3 decades, whenever a dispute for any particular reason arises between the two, the UAE national has the upper hand, since they own 51% of the company. The national can at any point go to the economic department and request that all business activities are halted. They can also do the same at the bank and block the funds in the company’s bank account. They have the ability to start a case against the foreign investor and claim that they have been deprived from the profits of the business.

There have been hundreds of cases relating to this matter. A major public case has been the one between Sheikh Hasher of the Dubai royal family and Shahram Zadeh who was falsely detained for 60 days.
Ruling family is untouchable, especially in disputes. The Attorney General dismissed the case and the emir gave no response. Q: Would the Attorney general dismiss the case if it included non-elites?

Section 4: What happens when one partner passes away
If the foreign investor passes away, the UAE national has the option of cancelling the company or can take full ownership of the company. If the foreign investor has their family with them in the country, then the family is forced to leave the country as their sponsor has passed away. If the UAE national passes away, their share is passed on to their family. This may lead to another dispute as the family member who takes control is entitled to open a case similar to the one mentioned in section 3,where they can claim profit.

-Look at institutions in London,UK that provide assistance to citizens who want to invest in the UAE (British Council, Institute of Directors,ME Investment)
-Look at cases where issues have arisen