Legal and Regulatory Framework for Doing Business in the United Arab Emirates

I. Strategic Overview: Surveying the Legal Landscape
The United Arab Emirates (UAE) presents a complex, but highly dynamic, legal environment for foreign investors. Understanding the three primary tiers of legal authority—federal, emirate-level, and free zone—is essential for mitigating operational and regulatory risk.

1.1. The UAE Federal Structure and Jurisdictional Complexity
The UAE is a federal state, established on December 2, 1971, comprising seven emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah, and Umm Al Quwain. The federal constitution provides the foundational legal framework, granting the federal government exclusive jurisdiction over critical substantive matters such as foreign policy, defense, and security. Federal legislation takes primacy over the local laws of each emirate.
However, the constitution, specifically Article 122, reserves substantial powers for the local government of each emirate to regulate all local commercial activities and matters not expressly controlled by federal legislation. This autonomy allows individual emirates, particularly commercial hubs like Dubai and Abu Dhabi, to issue trade licenses and manage corporate incorporations to a significant extent.
The inherent complexity of this layered structure is most evident in the judicial system. While five emirates submit to a unified federal court system, Dubai and Ras Al Khaimah maintain independent court systems. Abu Dhabi further utilizes a unique structure, submitting to federal courts while also retaining its own parallel independent court system. All UAE courts exclude juries and adhere to uniform rules of civil procedure; however, the lack of extensive, readily available case law, often without reliable English translations, necessitates reliance on statutory interpretation.
The confluence of independent and parallel court systems, particularly in major financial centers such as Dubai (DIFC Courts) and Abu Dhabi (ADGM Courts), introduces inherent jurisdictional uncertainty into cross-border transactions. This layered structure underscores the necessity for investors to utilize precise and unambiguous Governing Law and Dispute Resolution clauses, as the initial decision regarding where to incorporate (onshore vs. free zone) fundamentally determines whether a company operates primarily within a civil law or a common law judicial environment.
1.2. Free Zones: Regulatory Hubs and Operational Limitations
Free zones are specialized economic trade zones established by the individual emirates to catalyze foreign direct investment (FDI). These zones offer substantial incentives, including permitting 100% foreign ownership, issuing laws and regulations often in English, offering specialized customer care, and granting certain tax advantages.
A critical feature of these free zones is their regulatory autonomy. They are authorized to enact their own laws and regulations in specific areas, which can, in some cases, supersede federal and emirate-level laws. For instance, the Dubai International Financial Centre (DIFC) operates as a financial free zone with its own distinct body of corporate, contract, and employment laws, alongside its own dedicated common law court system. Similarly, the Abu Dhabi Global Market (ADGM) provides a parallel common law framework.
Despite the clear benefits, the key limitation for foreign investors is the geographical restriction placed upon free zone entities. Such entities are generally only permitted to conduct business internationally or within the physical location of the specific free zone. To engage in sales or commercial activities within the UAE mainland (onshore), the free zone entity typically must retain the services of a commercial agent or distributor, or establish a legally separate onshore entity.
1.3. Status of Shari’ah in Commercial Practice
The UAE federal constitution designates Shari’ah as the main source of law. However, in conventional commercial practice, its application is generally limited.
Shari’ah serves primarily as an interpretive aid, used by courts only when there is no express provision of legislation governing a particular legal question. Furthermore, its application is reserved for specific religious, morality, and personal law matters (e.g., inheritance for Muslims). Outside of these specific, limited areas, contractual terms that might otherwise be forbidden under Shari’ah principles are generally enforceable under UAE law. For example, a contractual term in a typical commercial transaction requiring the payment of interest, a concept forbidden under Shari’ah (Riba), is generally considered valid and enforceable in UAE courts.
II. Establishing a Legal Presence and Market Entry
Foreign investors seeking to operate in the UAE market must formally establish a legal presence, typically choosing between incorporating a local onshore entity, establishing a branch or representative office, setting up a free zone entity, or entering into a commercial agency relationship.
2.1. Options for Incorporation in Mainland UAE (Onshore)
To conduct business onshore, foreign investors must secure a commercial license from the Department of Economic Development (DED) or a similar government agency in the relevant emirate. All locally incorporated entities must comply with Federal Law No. 32 of 2021 concerning commercial companies (Companies Law).
2.1.1. Limited Liability Company (LLC) Structure
The Limited Liability Company (LLC) is the most common and flexible legal form adopted by foreign investors. The Companies Law mandates that an LLC must possess sufficient capital to fulfill the objects of its incorporation, with specific minimum capital requirements varying by the emirate and the nature of the business activity.
The Companies Law introduced a significant liberalization by allowing a foreign investor to establish a 100% foreign-owned entity in mainland UAE, provided the activities fall under a specific list issued by the DED in the relevant emirate. However, this liberalization does not apply to activities deemed to have a strategic impact. These strategic activities—which include security and defense, banking and finance (regulated by the Central Bank), telecommunications, currency printing, Hajj and Umrah services, and fisheries—still require a majority UAE national shareholder or must be wholly owned by UAE nationals.
2.1.2. Branch or Representative Office
The Companies Law permits foreign companies to establish branches or representative offices, which may be wholly owned by the foreign parent company.
A branch must carry on the exact commercial activity of its foreign parent company. Branches are generally restricted regarding trading activities, typically not permitted to physically deal or trade in goods within the UAE, unless the goods were manufactured by the foreign parent or its group. They may, however, provide maintenance and repair services. While there are no minimum capitalization requirements for a branch, the foreign company must furnish a bank guarantee of AED 50,000 (approximately US$14,000).
In contrast, a representative office is highly restricted, limited solely to conducting marketing and administrative functions, gathering market information, and soliciting orders for the foreign parent company.
2.2. Strategic Use of Free Zone Entities and Holding Companies
Free zone entities typically take the form of a branch of a foreign company, a free zone company, or a free zone establishment. Minimum capital requirements fluctuate significantly between free zones; for example, the Khalifa Industrial Zone in Abu Dhabi requires AED 150,000, whereas the DIFC does not formally set a minimum for private limited liability companies.
A key benefit is the ability to use specialized regulatory environments for holding structures. Pursuant to Article 268 of the Companies Law, a holding company (which can be an LLC or Joint Stock company) is strictly limited to core objects, such as holding shares in subsidiaries, extending loans and guarantees, management of subsidiaries, and ownership of real estate and intellectual property.
Entities incorporated in specific free zones may be strategically used as offshore holding companies for regional or real estate assets, such as companies incorporated under the Jebel Ali Free Zone offshore regime or “Prescribed Companies” established under the August 2022 DIFC regulations. This practice allows foreign investors to leverage the sophisticated regulatory and common law court systems offered by these financial free zones.
2.3. Commercial Agency Relationships and the 2022 Law
Foreign companies that wish to import and distribute goods without maintaining a physical presence onshore traditionally relied on commercial agency relationships with a local agent (a UAE national or a company majority-owned by UAE nationals). These relationships are governed by the Federal Law No. 3 of 2022 on Regulating Commercial Agencies (Commercial Agencies Law), effective June 15, 2023.
2.3.1. Agent Protections and Termination Risk
The Commercial Agencies Law grants significant protection to the registered agent, including an exclusive right to represent the principal and trade the principal’s products in the UAE. The agent is entitled to commissions even on trade in the principal’s products where the agent was not directly involved.
Termination of a registered commercial agency agreement is highly restricted, occurring only upon expiry (with mandatory notice periods), mutual agreement, through provisions contained in the agreement, or by court order. The latter route is typically reserved for intractable disputes and may result in substantial compensation payments to the agent.
2.3.2. New Direct Sales Provision and Grandfathering Risk
The 2022 law introduced a provision allowing a foreign entity to sell its own products directly in the UAE without a local commercial agent, provided that the product had not previously had a registered commercial agent in the UAE.
This liberalization of direct sales is tempered by critical grandfathering provisions designed to protect long-standing local interests. For agency agreements currently in place, the strict termination provisions of the new law will only apply from June 2025. Furthermore, where the commercial agent’s investment exceeds AED 100 million or the relationship has lasted for more than 10 years, the termination provisions are delayed until June 2033.
This situation creates a significant legal risk for multinational corporations considering market entry or restructuring. While the liberalization of 100% foreign ownership of LLCs streamlines incorporation, the delayed application of the Commercial Agencies Law termination rules means that reliance on the direct sales provision is only viable if there is absolutely no history of a registered local agent for that specific product. Any prior agency relationship locks the principal into decades of potential litigation and compensation exposure to terminate the relationship. Foreign entities must therefore conduct meticulous historical due diligence before relying on the direct sales exemption.
III. Core Compliance: Taxation, Finance, and Anti-Corruption
3.1. Taxation Framework
The UAE’s tax landscape has undergone profound transformation, moving away from reliance on non-tax revenue sources with the introduction of federal corporate taxation.
3.1.1. Corporate Tax (CT) Regime
Federal Decree No. 47 of 2022 (Corporate Tax Law) will primarily take effect from June 1, 2023, establishing a standard CT rate of 9%.
The CT applies to various taxable persons: companies incorporated in or effectively managed from the UAE; natural persons (individuals) earning business income who hold or are required to hold a commercial license; and non-resident juridical persons that establish a Permanent Establishment (PE) in the UAE.
Free zone entities are included within the scope of the CT Law as taxable persons and must comply with its requirements. However, the law provides for potential exemptions that may allow qualifying free zone entities to avoid paying corporate tax based on the nature of their income. This creates an absolute imperative for free zone entities to meticulously manage and document their operations to ensure their income qualifies for the 0% exemption rate.
3.1.2. Value Added Tax (VAT) and Personal Tax
VAT was implemented on January 1, 2018, at a rate of 5% for most goods and services. Businesses with an annual turnover exceeding AED 375,000 must register with the Federal Tax Authority (FTA), submit regular returns, and remit any VAT due.
The UAE retains its status as a major regional tax haven for individuals, as there are no federal income tax, capital gains tax, or inheritance taxes.
3.2. Economic Substance Requirements (ESR)
Entities incorporated in the UAE, both onshore and within free zones, must demonstrate an adequate “economic presence” if they conduct specific “Relevant Activities”. This framework is mandated under international standards to prevent brass-plate companies used for profit shifting.
3.2.1. Scope and Compliance Metrics
ESR applies to entities operating in Banking, Insurance, Fund Management, Financing or leasing, Shipping, Headquarters, Distribution and service centers, and, critically, Holding Companies and those exploiting or holding intellectual property (IP).
Compliance requires entities to evidence economic substance by performing Core Income-Generating Activities (CIGA) in the UAE, being effectively managed from within the UAE, employing an adequate number of staff, and incurring proportionate operating expenditure locally. The requirements are slightly less rigorous for pure holding companies. Entities must self-assess, file an annual notification with the Ministry of Finance detailing relevant activities, and submit a comprehensive report if income was generated. Non-compliance can lead to financial fines, or the suspension or revocation of business licenses.
The introduction of the 9% CT rate formalizes the importance of ESR compliance, particularly for free zone entities seeking the 0% tax rate. ESR effectively transforms from an operational burden into a mandatory tax compliance hurdle; entities that fail to demonstrate sufficient economic substance risk being disqualified from tax exemptions, resulting in immediate exposure to the 9% CT rate. Thus, tax planning and operational substance reporting are now fundamentally integrated requirements for multinational corporations.
3.3. Foreign Exchange Controls and Anti-Money Laundering (AML)
The UAE generally maintains an open financial system, without currency exchange controls or restrictions on the remittance of funds. Free zone entities, in particular, are permitted to repatriate 100% of their profits.
However, the UAE has significantly fortified its laws concerning money laundering, terrorist financing, and proliferation financing to meet global standards set by the Financial Action Task Force (FATF). The cornerstone legislation is Federal Decree No. 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism (AML Law), as amended in 2021. The Central Bank Law (Federal Law No. 14 of 2018) provides the framework for enforcement and supervision of all financial service companies. Additionally, financial free zones like the DIFC, through agencies such as the Dubai Financial Services Authority (DFSA), impose detailed, supplemental anti-money laundering rules.
3.4. Bribery and Anti-Corruption (BAC)
Bribery offenses are primarily governed by the Federal Law No. 31 of 2021 (Penal Code), reflecting the UAE’s adoption of the United Nations Convention Against Corruption (UNCAC). The UAE maintains a strict zero-tolerance policy towards corruption.
3.4.1. Public and Private Sector Bribery
Bribery of a UAE public official—defined broadly to include any public servant, person assigned to public service, a foreign public servant, or an employee of an international organization—is a serious criminal offense for both the official and the parties who offer or facilitate the bribe. This extraterritorial reach, criminalizing the corruption of foreign public officials, requires UAE entities conducting international business to ensure their global compliance programs adhere strictly to UAE criminal standards.
Private sector bribery is similarly prohibited. The Penal Code prohibits anything that confers a benefit on a private sector employee with the intent to influence that employee to violate the duties of his or her function. Specifically, Article 279 introduced a new criminal offense applicable to persons who promise, offer, or grant a bribe to a manager of a private sector company.
3.4.2. Penalties
Penalties for bribery are severe and apply whether or not the offender actually benefited from the bribe. Consequences include forfeiture or confiscation of the bribe proceeds, imprisonment for up to five years, and financial fines commensurate with the amount of the bribe, but not less than AED 5,000.
The following table summarizes the key federal penalties for corruption:
Table 2: UAE Anti-Corruption Penalties Overview (Federal Penal Code 2021)

• Restrictive Agreements: Prohibits agreements that abuse, restrict, or prevent competition, such as agreements aimed at fixing purchase or sale prices.
• Abuse of Dominance: Prohibits parties with a dominant position in a market (defined as a market share exceeding 40%) from taking actions that limit competition, including predatory pricing, refusal to conduct transactions with certain parties, or forced cross-selling.
• Merger Control: Mandates notification and approval from the Competition Department for proposed transactions if the combined market share of the parties exceeds 40% of the relevant market and the concentration would enhance a pre-existing dominant position or otherwise affect competition.
  An essential factor in the competitive landscape is the explicit government exemption contained within the Competition Laws. Establishments that are fully owned, or no less than 50% owned, by the UAE federal government or a local emirate government are exempt from the standard Competition Laws. This structural feature means that private sector businesses must contend with state-controlled competitors who may legally engage in certain commercial behaviors (such as vertical restrictions or linked services) that would constitute an abuse of dominance if performed by a purely private enterprise.
  VII. Conclusions and Recommendations
  The UAE offers a robust legal framework conducive to foreign investment, heavily influenced by recent legislative modernization in key areas like taxation, labor, and IP. Strategic success in the UAE relies on a segmented legal approach that leverages the commercial openness of the mainland while utilizing the regulatory certainty provided by the financial free zones.
• Jurisdictional Strategy: Due to the risk of onshore courts asserting jurisdiction and potentially overriding foreign governing law based on mandatory UAE rules, critical high-value contracts should utilize the common law framework of the DIFC or ADGM, employing their specific courts or using arbitration clauses enforceable under the New York Convention.
• Tax and Substance Alignment: The introduction of the 9% Corporate Tax fundamentally links a Free Zone entity’s operations to its tax status. Free Zone entities must proactively invest in human capital and infrastructure to rigorously meet Economic Substance Requirements, transforming CIGA performance from a regulatory compliance task into a prerequisite for achieving the 0% tax rate.
• Human Capital and Termination Risk: The updated Labour Law, particularly the changes to the ESG regime (which removed financial penalties for employees upon termination), significantly increases the costs and financial liabilities associated with employee dismissal. Companies must prioritize the timely conversion of all existing unlimited contracts to fixed-term status and implement the mandatory, meticulous internal policy and disciplinary procedures required under the 2021 law.
• Commercial Agency Due Diligence: The Commercial Agencies Law of 2022 creates a high-stakes termination risk for foreign principals with established local agent relationships, potentially delaying termination provisions until 2033. Any foreign entity seeking to utilize the new direct sales mechanism must confirm through exhaustive due diligence that the product has never been subject to a previously registered commercial agency relationship in the UAE.
• IP Localization: Standard international work-for-hire clauses are insufficient in the UAE. To secure ownership of employee-created patents and manage the non-waivable nature of moral rights, companies must draft highly specific contractual clauses that include mandatory notification protocols and, where required by law, explicit remuneration agreements for employee inventors.
• Compliance Integration: Anti-Corruption and AML programs must be robustly integrated and validated against the Penal Code, particularly ensuring compliance teams recognize the criminalization of bribing foreign public officials, aligning global internal controls with the strict federal legislative standards.