As the financial crisis continues to negatively affect the United States’ economic environment, the viability of companies may depend on entry into foreign markets. In order to do business in an international setting, the local law of the country of choice must be analyzed and understood, which is often significantly diverse from the United States legal system. This article will explore certain variations of foreign legal systems to take into consideration when conducting international business focusing on the United Arab Emirates (UAE), particularly Dubai, and Turkey.
Entry into Dubai and Turkey
After a company seeking to do international business has completed its market analysis, then it must determine the best means to operate within such market by means of distribution, agency or franchise relationships or whether to establish its legal presence. Within both the UAE and Turkey, corporations, limited liability companies and partnerships are recognized as available legal entities, with the preferred organizational choice being limited liability companies (except when a company anticipates a public listing, then the optimal entity choice is a corporation). Each of these jurisdictions have recently revised and bolstered their legal systems to be favorable to foreign investments, though certain diverse requirements and laws remain.
In Dubai, the business environment is extremely friendly to foreign investments and it actively seeks companies to establish a business presence. Dubai does not impose corporate or personal income tax or capital gains tax, has established business “cities”, such as Dubai Media City, where companies established in such zones can be one hundred percent owned by foreign nationals, and does not impose tax upon repatriation of funds earned by the Dubai based entity. Within the Dubai free zones, which includes amongst others Dubai Internet City, Dubai Healthcare City and the Jebel Ali Free Zone (inclusive of Port Jebel Ali), foreign owned businesses have a one stop shop for all their needs including company registration, work visas, permits, and centralized systems for leasing office space on standard terms and conditions.
If a company wishing to establish a business presence does not qualify to do business within a Dubai free zone due to its business segment, then the company would need to organize under the laws of Dubai proper. In such case, to establish in Dubai proper, a foreign company will need to “partner” with a local national (person or entity) as the UAE company law dictates that Dubai based companies (outside of the free zones) must be at least fifty-one percent locally owned and forty-nine percent foreign owned. Under this requirement, sponsors become the local shareholder under agreement with the foreign party. One key to successful operations in Dubai is the strength of the local sponsor. Such sponsor often creates business opportunities, beyond the administrative role.
Unlike the United States, companies outside of Dubai’s free zones enter into a sponsorship agreement that normally dictates a yearly fee to be paid to the local sponsor, sets how the profits and losses will be distributed, which can vary from the shareholding ratio in favor of the foreign party, and includes other ancillary considerations. Under this arrangement, the local party signs the articles of organization, certain board and shareholder resolutions, the company’s lease and visa documents. An effective lease is a condition precedent to legal establishment and is used to determine a company’s work visa allotment (based on square footage of leased space). In general, a newly established entity must deposit approximately $100,000 into a local bank, along with appointment of a local auditor, before receiving a certificate to do business.
In contrast to our system of common law, the UAE, Dubai being one of its seven city-states, is governed by the UAE Civil Code, which is based on the French and Swiss civil codes. The code regulates companies and commercial transactions, though it is sparse in content. As precedence does not control judge’s decisions, our common law approach is not applicable to determine what a court may decide. Instead, UAE judges only interpret the civil code provisions under a given scenario within a context of fairness or equality, and published opinions are nearly non-existent. Local lawyers are the best guides to what will happen in a court proceeding so long as such lawyer has taken a similar matter through trial to final decision.
In order for foreign businesses to gain a degree of certainty when entering into important transactional or corporate agreements, the Rules of Arbitration promulgated by the International Chamber of Commerce (ICC) are normally applied, with the choice of law being English law and the location of arbitration to be within a neutral forum, such as London or Paris. By choosing the English laws, and by extension its system of common law, international businesses can utilize a fuller body of legal decisions and guidance to remove some uncertainties when operating in a foreign, emerging economy. As the UAE is a signatory to the New York Convention, arbitration awards can be enforced within its judicial system. Further, transactional documents between foreign parties operating in Dubai and local Dubai based companies are primarily drafted and executed in English. Through the use of English as the governing language and correct arbitration provisions, foreign entities doing business in Dubai can bridge the gap between the relatively unknown provisions in the UAE Civil Code and customary terms and conditions within Western styled agreements.
However, for companies wishing to gain market entry by means of agency or franchise relationships, peculiar requirements of the UAE Civil Code will still apply and cannot be avoided by careful drafting. For instance, unless a franchise agreement is properly entered into and recorded with the Ministry of the Economy, no UAE court will have standing to hear any disputes arising from a franchise or agency relationship. The franchise and agency requirements under the UAE Civil Code favor the local party, which includes granting mandatory exclusivity within areas of the UAE and only permitting termination of the agreement due to specific events.
The same approach regarding arbitration and choice of law provisions can be generally applied to agreements entered into within Turkey. In its efforts to gain EU membership, Turkey has enacted a multitude of laws as required by the EU, most of which are seen as favorable business regulations in line with Western practices. As an example, Turkey enacted a privatization law that mandated privatization of many industries including telecom, opening the door for foreign entities to purchase shares of critical Turkish companies. Further, Turkey has revised certain antiquated laws to create a business friendly legal environment that does not have restrictions on who may own a business (i.e., a foreign national).
In order to establish a business presence within Turkey, a business registration form must be completed at the local trade registry office of the chamber of commerce. Under the limited liability company regulations, the minimum number of shareholders is two, and the maximum number is fifty. Shareholders may be individuals or companies. The minimum capital for establishment is approximately $3,500 to be deposited with a Turkish bank. The newly established company will need to complete standard articles of organization. Certain rights and obligations of the shareholders that are normally contained in a shareholder’s agreement can be inserted into the articles and filed with the trade registry office in order to heighten the protection of shareholder interests.
Different than Dubai, Turkey does tax corporate and personal income. Generally, the effective tax rate on corporate income earned by the Turkish based company is twenty percent. Personal income tax for income earned in Turkey is based on a sliding scale.
Business transactions in Turkey are governed by the Turkish Commercial Code, which shares similar concepts with the UAE Civil Code provisions governing commercial transactions. Again, by properly structuring a foreign company’s agreements, the diversity that exists between the Turkish Commercial Code and our common law jurisprudence can be practically bridged although certain regulations in the code cannot be avoided. Foreign parties are encouraged to select the English laws and utilize the ICC’s Rules of Arbitration with the choice of forum outside of Turkey. Such arbitration ruling can be judicially enforced in Turkey as it is also a signatory to the New York Convention.
Foreign Expectations
As entry into a foreign market contains many risks, the role of local counsel is imperative. Strong local counsel can assist with efficient filings, advise upon proper risk protection. One of the most difficult aspects of establishing a presence within a foreign market is access to resources in English, particularly guides as to a country’s laws and regulations. Ideally, local counsel should provide as much additional resources as required by the client. Experience on the ground is essential to successful entry into a foreign market particularly given distinct cultural norms that should be respected.
Companies who have entered foreign markets, particularly non-English speaking emerging economies, will likely face a different level of legal services from that experienced with American law firms. Frequently, due to the novelty of certain laws and regulations, local counsel cannot provide a strong legal opinion as to certain transactions or provisions within agreements. As a case in point, during the $1.85 billion syndicated loan process for Nakheel PJSC, Dubai World’s real estate arm, banks were asking local counsel to provide its opinion regarding foreclosure on the secured assets. Due to the fact that Dubai had not yet issued a mortgage decree and the foreclosure process had not been tested, particularly against assets ultimately owned by the sovereign, local counsel deferred its opinion with qualifications that basically rendered the opinion useless. Banks did not know if title to the real estate would be transferred after a favorable judicial decision or whether an auction process would ensue, without a set bottom reserve price determined by the banks. Under the recently decreed mortgage law in Dubai, banks can only seek judicial redress after a notification period in favor of the borrower expires. When a favorable judgment is finally obtained against the borrower, then the property is auctioned by the Dubai Lands Department. As the Dubai property market has crashed at the time of this article, the losses during a no reserve price auction could be enormous for secured parties pushed into an auction. As opposed to other international jurisdictions who transfer title to the secured party and then the secured party can sell the foreclosed assets at a price of its choosing, the auction process in Dubai is an enormous concern to financial institutions exposed to non-performing mortgage loans in the UAE.
Also, in case of litigation, it is most difficult to fully understand court pleadings since they will be in the native language and must be translated into English for the client, which is often laden with mistakes. A significant barrier exists for the foreign party to comprehend and influence the legal arguments put forth by local counsel. In addition, the style of argumentation expected when presenting a case to a United States’ court varies drastically in foreign markets. When reviewing legal arguments presented to a UAE court, foreign clients may often be surprised by references to shari’a or Islamic law principles rooted in the Qu’ran. It is the norm and expected within Arabic speaking countries to make such references.
Within Turkey and the UAE, similar to other emerging international markets, can often be the case that there exists no clear guidance as to legal resolutions, which is either seen by businesses as a hindrance or an opportunity. This is the nature of doing business in an emerging economy without a robust history of the rule of law.
Conclusion
In order to understand the diversity of a foreign market, particularly its different legal approaches and nuances, access to accurate information and experience are crucial to successful entry. Depending upon the nation, the United States and British Embassies publish economic and legal resources that can be utilized as base guides. Further, the American Business Council is a strong resource for companies as it has access to country pertinent publications and can provide lists of local professional practitioners. The differences in the legal systems within foreign countries should not be deemed a complete barrier to entry. Instead, with the right resources and experienced counsel, foreign markets are an ever-growing necessity for the viability of companies based in the United States.
The author is a member of Hayden & Craig PLLC and is the former general counsel of a Dubai based real estate conglomerate with operations in Ukraine, former legal counsel for Nakheel PJSC, and former foreign associate for the Istanbul law firm, Herguner, Bilgen and Ozeke.
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