VII. INVESTMENT CLIMATE A. Ten Elements of an Open Investment Regime. Openness to Foreign Investment The general attitude of the U.A.E. government toward foreign direct investment is to welcome it. Proposals for investment under the U.A.E. offset program are screened for conformity with the rules and regulations of the offset program. Other foreign investment is not screened. Foreign investors are not accorded national treatment by the law of the U.A.E., which restricts foreign ownership to 49 percent of any enterprise and does not permit any foreign ownership in any enterprise engaged in importing. The Jebel Ali Free Zone (JAFZ) in the emirate of Dubai is an exception. Foreign investors are permitted 100 percent ownership in the JAFZ. Foreign companies are not permitted to own land in the U.A.E., including in the JAFZ. There was no privatization program underway in the U.A.E. as of early 1994, though the sale of a portion of several public companies is planned for the future. However, authorities including government ministers are openly discussing instituting one. It is envisioned that financial and industrial assets would be offered for sale. Upstream petroleum assets would not be included. With the exception of nationals from other gulf cooperation council (GCC) states -- Saudi Arabia, Kuwait, Bahrain, Qatar, and Oman -- foreigners would not be permitted to purchase any shares offered for sale, according to the comments made by government officials speculating on a possible program. Foreign banks are required to pay a 20 percent income tax, although there is room to negotiate the actual payment of the tax. Domestic banks pay no income tax. No other foreign companies pay income taxes to the U.A.E. government. Neither foreign nor U.A.E. nationals pay individual income or property taxes in the U.A.E.. One hundred percent domestically owned companies are allowed a ten percent price advantage in government procurement. There are no significant government financed and/or subsidized research and development programs in the U.A.E.. Visas, residence permits, and work permits are required of all foreigners in the U.A.E.. The united states receives the most favorable visa treatment of all foreign countries. U.S. Citizens receive ten year, multiple entry visas, authorizing stay up to six months per entry, with the possibility of a six month extension. Incentives are given to investors in the JAFZ. Outside the JAFZ no incentives are given. To import, companies are required by law to be 100 percent U.A.E. owned. The highest statutory tariff in the U.A.E. is four percent. The highest tariff imposed in practice is one percent. Non-tariff barriers include prohibitions against drugs, alcohol, Israeli exports, and counterfeit or contraband products. Conversion and Transfer Policies There are no restrictions on the transfer of funds into or out of the U.A.E., except that the currency of Israel may not be bought or sold in the U.A.E.. All other currencies are traded freely at market determined rates. No license is required to change money. The U.A.E. dirham has been pegged to the dollar at 3.671 dirhams per dollar since 1980. At present, there is a divergence of about 4.0 percentage points or more in U.S. And U.A.E. inflation rates. Despite this, the authorities are under no pressure to adjust the peg. Expropriation and Compensation There have not been any expropriations in the U.A.E. involving foreigners. Foreigners are not allowed to own land in the U.A.E.. They are allowed to own only 49 percent of the equity in a business outside of the Jebel Ali Free Zone. In theory, this 49 percent share could be expropriated. There are no set rules governing compensation in such cases, and individual emirates would treat this, as so many other matters, differently. In practice, authorities in the U.A.E. do not expropriate unless there is a compelling developmental or public interest need to do so, and in such cases compensation is generous. Dispute Settlement There have been no significant investment disputes over the past few years involving U.S. Or other foreign investors, but there have been several contractor disputes in the U.A.E.. Most disputes have eventually been satisfactorily handled through arbitration in the emirates. However, dispute resolution can be difficult and uncertain. Arbitration may commence by petition to the federal courts, on the basis of mutual consent, a written arbitration agreement, independently by nomination of arbitrators, or through a referral to an appointing authority without recourse to judicial proceedings. Enforcing judgments has not always been easy. The U.A.E. is a member of the international center for the settlement of investment disputes. In 1993 the Abu Dhabi Chamber of Commerce and Industry formed the Abu Dhabi Commercial Conciliation and Arbitration Center in an effort to accelerate commercial dispute resolution. The center is chaired by the president of the chamber, and the president of the chamber's customs and arbitration committee acts as the center's general secretary. The center has jurisdiction to conciliate or arbitrate commercial disputes. The center's executive regulations govern its conciliation and arbitration procedure. Referral by two adverse parties of a dispute to the center entails the parties acceptance of the finality of the centers decision. The proceedings of the center may be in Arabic or in any other language selected by the parties. The efficacy of the center will depend in part on the willingness of local courts to grant rapid enforcement to the center's awards. The Dubai Chamber of Commerce and Industry recently promulgated commercial conciliation and arbitration rules which appear to be quite flexible, in the judgment of western legal experts. The rules permit parties to agree to have conciliation or arbitration under the auspices of the chamber, but under other rules. The U.A.E. Federal Supreme Court has recently held that a foreign arbitration clause in a registered commercial agency agreement is unenforceable as a matter of public policy. The decision was based on the Commercial Agencies Law of 1981, which states that the courts of the U.A.E. shall have jurisdiction over commercial agency disputes. The federal supreme court did not comment on the wisdom of registration of commercial agency agreements that contain clauses, such as foreign arbitration clauses, that could later be held unenforceable. The provisional constitution of the U.A.E. established a federal court system while acknowledging the right of the individual emirates to maintain a court system of their own. The federal court system consists of federal courts of first instance, two federal courts of appeal and a federal supreme court. The Court of First Instance consists of civil, criminal, and Shariah (Islamic religious) courts. The Shariah and civil legal systems exist concurrently for the most part. Commercial disputes involving foreign parties tend to come before the civil courts and major commercial disputes are ordinarily heard by a panel of three judges. All cases involving banks and financial institutions are required to be heard by civil courts and not by Shariah courts. In 1992, President Zayed issued a new code of civil procedure. The code contains new rules on arbitration, conciliation and amicable settlement of disputes. According to an analysis prepared by western trained attorneys, the new arbitration rules are similar to those recommended by the federation of the U.A.E. Chambers of Commerce and Industry. The agreement of the parties to a dispute to refer it to arbitration is recognized and made enforceable. No party is now permitted to file a claim with a court if such party has already agreed to refer such claim to arbitration. Reference to arbitration may be made at any stage during litigation. The new code sets out in detail rules governing the qualification and disqualification of arbitrators and many other aspects of the arbitration process. The venue of arbitration is required to be within the U.A.E., and if not, the resultant award is to be treated like a foreign judgment. There are also rules to ensure the prompt enforcement of awards. The new code also introduced procedures to expedite certain business claims. Comprehensive rules were provided in connection with the various types of preventive and provisional remedies prior to the litigation process and upon the issuance of judgments, including attachment of property, confiscation of the defendant's passport and prohibitions on travel, as well as the detention of the defendant in certain instances. The Federal Commercial Code, the last building block in the edifice of federal commercial legislation in the U.A.E., was promulgated on September 20, 1993. The commercial code devotes an entire chapter to bankruptcy, which is the first comprehensive legislation in the U.A.E. on the subject of bankruptcy. Prior to enactment of the commercial code, creditors of bankrupt persons were often faced with a race to the courthouse with other creditors in order to obtain satisfaction of their claims. The commercial code chapter on bankruptcy, however, governs the procedures and effects of bankruptcy in the U.A.E. and should provide a mechanism for the orderly evaluation and distribution of assets of a bankrupt entity, in the judgment of western legal experts. The concept of a mortgage does not exist. With few exceptions, title to all land in Abu Dhabi, the largest emirate, resides in the ruler. Most construction, commercial and residential, is financed by a specialized agency of the government of Abu Dhabi. Commercial banks finance the remainder. Their collateral traditionally has been access to the rent stream of the building or the personal guarantee of the developer. In the past, developers unable to pay off bank loans simply walked away from the problem. The new commercial code's bankruptcy provisions seek to give lenders access to the assets of persons issuing personal guarantees. These provisions have not been tested in court however. Performance Requirements/Incentives The laws and regulations governing foreign investment in the U.A.E. are evolving but are expected to remain conducive to foreign investment. Therefore, it is recommended that potential investors consult a local attorney to obtain the most current investment information at an early stage of planning. Regulation of the establishment and conduct of business in the U.A.E. is shared at the federal and emirate levels. In general, foreign companies which undertake business activities in the U.A.E. or make their products available in the U.A.E. have either entered into a joint venture with U.A.E. nationals for the establishment of limited liability companies, appointed commercial agents, or set up branch offices. The fundamental instrument by which all of the emirates regulate business activity is the requirement that any place of business must be properly licensed by the municipal authorities of an emirate. A license is not required unless a place of business is set up in the U.A.E.. Therefore, foreign businesses exporting to the U.A.E. but without a regular or continuing business presence in the U.A.E. do not need a license. Licenses available include trade licenses, industrial licenses, service licenses, professional licenses, and construction licenses. Several federal regulations govern business activities in the U.A.E. outside free trade zones. Activities within the free zones are governed by special by-laws. 1. The Federal Companies Law: The companies law applies to all commercial companies established in the U.A.E. and to branch offices of foreign companies operating in the U.A.E.. The following provisions are of particular importance: A. Companies established in the U.A.E. are required to have a minimum of 51 percent U.A.E. national ownership. However, profits may be apportioned differently. B. Branch offices of foreign companies are required to have a national agent unless the foreign company has established its office pursuant to an agreement with the federal or an emirate government. C. All general partnership interest must be owned by U.A.E. nationals. D. Foreign shareholders may hold up to a 49 percent interest in limited liability companies. There are seven types of local companies that may be organized under the companies law: 1. General partnership 2. Limited partnership 3. Share partnership 4. Joint Venture Company 5. Limited Liability Company 6. Publicly Held Company 7. Private Shareholding Company. Among the forms of business activities under the companies law, the limited liability company is now considered to be the most suitable form of joint ventures between local and foreign entities. 2. The Commercial Agencies Law: The Commercial Agencies Law requires that foreign principals distribute their products in the U.A.E. only through exclusive commercial agents that are either U.A.E. nationals or companies wholly owned by U.A.E. nationals. The foreign principal can appoint one agent for the entire U.A.E. or for a particular emirate or group of emirates. The law provides that an agent may be terminated only by mutual agreement of the foreign principal and the local agent, notwithstanding the expiration of the term of the agency agreement. 3. The Federal Industries Law. The Industry law stipulates that industrial projects must have 51 percent U.A.E. national ownership. The law also requires projects either to be managed by a U.A.E. national or have a board of directors with a majority of U.A.E. nationals. Exemptions from the law are provided for projects relating to extraction and refining of oil, natural gas, and other raw materials. Additionally, projects with a small capital investment or special projects governed by special laws or agreements are exempt from the industry law. 4. Government Tenders Law: Under the tenders law, a supplier, contractor, or tenderer with respect to federal projects must either be a U.A.E. national or a company in which at least 51 percent of the share capital is owned by U.A.E. nationals. Therefore, foreign companies wishing to bid for a federal project must enter into a joint venture or agency arrangement with a U.A.E. national or company. Federal tenders are required to be accompanied by a bid bond in the form of an unconditional bank guarantee for five percent of the value of the bid. Right to Private Ownership and Establishment. Except as detailed elsewhere in this report, there are no restrictions on the right of private entities to establish and own business enterprises and engage in all forms of remunerative activity. Protection of Property Rights With the exception of intellectual property, private property is protected and respected in the U.A.E.. In 1992, the U.A.E. passed three laws protecting intellectual property: A copyright law, a trademark law, and a patent law. The three laws were to have been implemented by the end of march 1993. By may 1994, effective implementation of the three had not yet begun. Implementing regulations had been written and offices had been set up to accept registrations for copyrights, trademarks, and patents. But no significant enforcement measures had been taken against the major copyright pirates who use the U.A.E. as a base for manufacturing and distributing pirate audio and video materials throughout the region. Pirate computer software in may 1994 continued to control the market, and importation and distribution of pirate compact disks was growing rapidly. It is difficult to determine the extent of trademark fraud, but U.S. companies unearthed new evidence in early 1994 that highly sophisticated pirate copies of their products, including cosmetics and detergents were being exported from the Far East to the U.A.E. for sales as well as onward distribution throughout the region. The U.A.E. copyright law does not protect U.S. works. The U.A.E. has not adhered to any international conventions on intellectual property that would provide protection for U.S. works. Consequently, U.S. firms have been reluctant to test the U.A.E. copyright law in U.A.E. courts. The U.A.E. government announced in February 1994 that by September of that year all distribution of pirate copyright products in the U.A.E. must stop. According to the ruling, producers and distributors could continue to manufacture and distribute pirate materials up to the September deadline. Subsequently, the ministry of information announced in April that the September deadline had been rescinded, and all pirate activity must end immediately. As of may, however, the pirates continued for the most part to operate without interference. Regulatory System: Laws and Procedures Foreign business representatives do not complain that government policy and laws to foster competition are not transparent. To the best of our knowledge, tax, labor, health and safety, and other laws and policies do not present significant distortions or impediments to efficient allocation and mobilization of investment. In general, bureaucratic procedures in the U.A.E. can be characterized as reasonably straightforward and transparent. Efficient Capital Markets and Portfolio Investment The U.A.E. is among the most heavily banked states in this region. There are 317 branches and 47 commercial banks in the U.A.E.. Under local law, all foreign banks must obtain a license from the central bank and provide evidence that an amount equivalent to use 10.9 million has been allocated as capital for their operation in the U.A.E.. In addition to the requirement for minimum capital, the Central Bank requires all commercial banks to maintain a capital to risk weighted asset ratio of 1:10. The Central Bank requires all banks to maintain an advances to deposit ratio no higher than 1:1. Credit is allocated on market terms. The U.A.E. Central Bank would like a few weaker banks to merge, but has had no success in pressing them to do so to date. The limited power of the central bank to oversee the commercial banks is a reflection of the limited power of the federal government in general. The U.A.E. provisional constitution gives very limited power to the central, or federal, government. Most power to control business activity resides in the individual emirates. The Central Bank no longer issues licenses for new foreign banks to establish branches in the U.A.E.. Citibank is the only U.S. Bank in the U.A.E. which offers full banking services. Bank of America has received authority to open a representative office in Dubai in 1994. They have applied for a branch license. Some bankers and certain emirate governments favor the establishment of offshore banking, but the U.A.E. central bank is opposed to it. Most non-oil investment in the U.A.E. is financed by local banks. Even so, the banks lack sufficient lending opportunities for their funds, and consequently place many of them abroad. Most of the manufacturing sector operates with higher levels of debt than prescribed by the 60:40 debt to equity ratio, generally the norm for this sector. Debt is almost entirely made up of bank borrowings. Some three-fourths of gross fixed capital formation in manufacturing is directly or indirectly financed by the banking system. The trade and building sectors receive a disproportionate share of bank loans. Banks lend to the services, trade, and building sectors due to lack of major investment scope in other productive sectors. The oil sector is the province of the government and is beyond the reach of the banks. The farming sector is relatively small and is heavily subsidized. Local banks invest in foreign stock markets to absorb excess liquidity. There is no domestic stock market. Share dealing is conducted through brokers by telephone. The number of joint stock companies and banks is 80. The number of companies and banks whose shares are actually traded in the market does not surpass 30 (13 banks and 17 joint stock companies), the market value of which is about 35.5 billion dirhams. The number of companies actively traded is probably less than 20. There is no available data on the volume of shares traded. However, the number of shares available for trading compared to the total shares issued is extremely low, and does not exceed three percent. The local share trading department of the national bank of Abu Dhabi (nbad) maintains an unofficial index, with a base of 1,000 points, based on the prices of the shares of the companies quoted by the bank. The index measures the market value of shares of 22 companies and banks representing a percentage of 95 percent of the value and number of shares traded in the market. The index was 1000 on January 1, 1988. The index began 1992 at 1,423.56 and as of April 30 1994 was at 2041.48. No non-U.A.E. nationals are permitted to buy, sell, or own shares. The nbad publishes a U.A.E. share directory containing the managerial and economic profiles of these companies. The directory was first issued in 1989. Nbad issues weekly and monthly reports on locally traded shares. It also issues a monthly financial bulletin. Political Violence There is no political violence in the U.A.E.. There have been no incidents in the past few years of politically motivated violence to projects and/or installations. The U.A.E. has two belligerent neighbors, Iran and Iraq. Neither shares a land border with the U.A.E.. The U.A.E. observes united nations sanctions on Iraq and consequently has no dealings with it. The U.A.E. has a longstanding territorial dispute with Iran concerning three islands in the Persian Gulf. The U.A.E. is seeking to resolve this dispute through peaceful means. It is unlikely that the two countries will become involved in a military clash over the islands. B. Bilateral Investment Agreements. The U.A.E. has bilateral investment agreements with a number of countries, including the UK. There is no bilateral investment treaty with the U.S. C. OPIC and other Investment Insurance Programs The U.S. And the U.A.E. signed an agreement on investment guarantees (an OPIC agreement) in September 1991. The U.A.E. is a member of the multilateral investment guarantee agency (MIGA). D. Labor At least 80 percent of the labor force is expatriate labor. Expatriates fill 100 percent of manual labor and clerical positions and most technical and middle management positions as well. There is a shortage of U.A.E. skilled labor with managerial and technical expertise. The federal labor law requires the ministry of labor to regulate expatriate labor, and employment contracts must be registered with the ministry of labor. Individual emirates issue permits for foreign laborers as well. There is no minimum wage. The law does not grant the rights to organize and bargain collectively, form unions, or strike. Public sector strikes are criminal offenses. Employment contracts must describe cost of living allowances, transport, housing benefits and bonuses. The U.A.E. is a member of the ILO convention protecting worker rights. Labor factors do not affect the choice of technology in the U.A.E.. The U.A.E. is well endowed with oil and gas and has established itself as a center of regional commerce. But energy intensive industries are not necessarily capital intensive. An inexhaustible supply of skilled, low wage labor is nearby, and despite the apparent desire of policy makers to steer the economy toward high tech, capital intensive sectors that do not require a large number of workers, the government continues to permit employers to import as much foreign labor as they want. Labor management relations are good. The foreign labor force comes to the U.A.E. because pay is better than at home. Employees believe that their employers can easily replace them. The blue collar labor force is mostly from the Indian subcontinent. A typical salary for outdoor manual labor is about 225 dollars per month. E. Foreign Trade Zones/Free Ports The Jebel Ali Free Zone (JAFZ) in Dubai is the most successful free trade zone in the region. It is difficult to imagine a rival free trade zone taking business away from Dubai, although Iran and the U.A.E. emirates of Ras al Khaimah and Fujairah are attempting to set up free trade zones as well. The JAFZ contains the port of Jebel Ali, the largest man made harbor in the world, capable of handling any class of ships, with 67 berths, over 15 km of quay, and a modern container terminal. Other infrastructure includes roads, labor camps, warehouses, and offices. In all, the government of Dubai has spend more than $2.5 billion to build the JAFZ. In the JAFZ, 100 percent foreign ownership is possible. With regard to labor, the free zone authority itself acts as nominal employer of the staff which companies wish to hire. Within the JAFZ, there is no corporation tax for a minimum of 15 years, extendable for an equal period, even if such taxes are introduced by the government elsewhere in the country. Also, there is no income tax. There are no import or export duties. Within the JAFZ, three types of licenses are issued. The licenses are valid while a company holds a current lease from the free zone authority and are renewable annually as long as the lease is in force. They are the general license, the special license, and the national industrial license. The special license is issued to companies incorporated, or otherwise legally established, within the free zone or outside the U.A.E.. In such cases, no other license is required, and the ownership of the company may be 100 percent foreign. The license is issued for any activity permitted by the free zone authority, including manufacturing. A company with a special license can operate only in the Jebel Ali Free Zone or outside the U.A.E., but business can be undertaken and sales made in the U.A.E. through or to a company holding a valid Dubai economic department license. However, a company with a special license can, itself, purchase goods or services from within the U.A.E.. Products made in the JAFZ, or imported into it, are subject to the same 1 percent tariff when taken out of the JAFZ into the rest of the U.A.E. as any other imported products. F. Capital Outflow Policy -- there are no restrictions or incentives with regard to the export of capital and outward direct investment. G. Foreign Direct Investment Statistics -- figures on foreign direct investment are not available. Total U.S. Investment in the U.A.E. is estimated at use 750 million. H. Major Foreign Investors -- principal foreign investors are the UK, U.S., France, India, and Germany.