International Institute of Business & Tax Excellence Newsletter (IIBTE.com)
Edition 9: October 2020
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Welcome to the ninth edition of the IIBTE newsletter, welcome to Edition 9!
The International Institute of Business & Tax Excellence is poised to harness globalization, one business at a time.
In this edition:
Doing Business in the United Arab Emirates (UAE)
by Saijal Singh of Cayman International Asset Managers (Pty) Ltd
www.caymanassetmanagers.comThe Smell Of the Place: Organisational Culture Shift
by Nazneen Adam of Coral International Asset Managers
www.coralassetmanagers.comArticle 1:
DOING BUSINESS IN THE UNITED ARAB EMIRATES (UAE)
A. INTRODUCTION
The UAE is a federation of seven emirates including Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah, and Umm Al Quwain. For the purposes of this article we will focus on the UAE group in entirety. A group which continues to progress across sectors including trade, investment, communications, infrastructure, information technology, tourism, and human and social development, the UAE is a member of international organizations including the United Nations, the International Monetary Fund, and the World Trade Organization among others. The official currency of the UAE, the Dirham, has been pegged to the US Dollar since 1980 and currently, although there is an absence of exchange controls across the UAE, there are controls in place to regulate Anti Money Laundering, Know Your Clients and Anti-Terrorism Funding legislation.
In addition, the UAE has VAT, excise tax and customs duty, no personal income tax and the social security benefits are extended to UAE and Gulf Cooperation Council nationals only, with an End of Service Benefit scheme for expats.
According to the World Bank Report 2020, the UAE has been ranked 1st in the Middle East and North Africa and 16th worldwide in the ease of Doing Business ranking 2020, with regulatory reforms implemented under the Starting a Business, Dealing with Construction Permits, Protecting Minority Investors, Paying Taxes and Trading Across Borders indicators.
A significant indicator which underwent reform was Starting a Business, which will be discussed further below.
A. STARTING A BUSINESS
The factors of measure under this indicator include procedures, time, cost, and minimum capital to start a limited liability company.
The implementation of the UAE Commercial Law in 2015, introduction of the Foreign Direct Investment Law in 2018 and reduction of fees for business incorporation in 2019 have ensured that company laws and regulations have been updated to ensure that legislation in the UAE follows international best practice.
Foreign individuals may look at the UAE to start a business as the UAE is ranked as a favored destination for foreign direct investment, particularly in the fields of business, trade and finance, despite being primarily an oil rich nation.
The timeframe for incorporation of a company ranges between 1 to 3 days and bank account opening procedures may be as short as 3 days, provided that the client has satisfied all documentary requirements.
The different options available to foreign investors looking to undertake business in the UAE include:
I. Trading from one’s home country
This allows entities to trade in the UAE from their home countries without establishing a physical presence, however this option may not always be possible depending on the type of business conducted and whether or not a specific trading license is necessary.
II. Employing an agent
This option allows entities to trade without establishing a physical presence and provides the advantage of leveraging the agent’s local market network. This method of international business seems advantageous to both parties however, it is necessary to register an agreement between parties at the outset as the UAE Commercial Agencies Law grants certain rights to agents and provides protection to agents hence necessitating the foreign party to seek UAE based legal counsel prior to engaging.
III. Setting up a local entity
The two main options in setting up a local entity include onshore establishment and establishment in a UAE free zone. The option selected will depend on the foreign entity’s customer base and the nature of business to be carried out. In addition, establishment of an onshore UAE Limited Liability Company requires a UAE/GCC shareholder to hold at least 51% of the shares meaning that the maximum shareholding a foreign investor can have in an LLC is 49%, while it is possible to establish a 100% foreign owned company in one of the free zones across the UAE. The drawback to this is that businesses are only authorized to carry out business activities within their respective free zone and outside the UAE, not across the different free zones as each free zone is administered and governed by their own regulatory authority.
The third option pertains to entities not intending to engage in business within the UAE. These entities may be established under the offshore regulatory system. The benefits of this option include ability to carry out international business, no foreign ownership restrictions, no requirement for shareholders/directors to reside in UAE at incorporation and no requirement to have physical presence in UAE.
IV. Establishment of a joint venture
A joint venture will enable the foreign investor to have an equity stake and role in the management of a UAE entity with the benefit of participation of a local partner who may contribute financially, through technical skills, local connections and/or experience and without the administrative burden of the contractual obligations which come with the employment of a local agent.
V. Acquisition of an existing local entity
The final option for foreign investors is acquisition or investment into an existing UAE entity which comes with the many factors necessary to consider including conducting thorough due diligence procedures, the restrictions of foreign ownership legislation, regulatory approvals required, transfer of assets and employees and the impact of UAE end of service benefits in the case of business transfers.
Audretsch et al (2006) stated that economies with cumbersome regulations and administrative procedures for starting a business are associated with fewer legally-registered firms, greater informality, reduced foreign direct investment and more opportunities for corruption compared to economies with more efficient regulations, indicating that by enforcing significant reform under this indicator, the UAE endeavors to reduce barriers facing local and foreign entrepreneurs when entering the market and positively contributing to the economy.
B. CONCLUSION
The UAE was among the economies with the most notable improvement in Doing Business 2020, with many benefits to foreign investors looking to invest or establish a business in the UAE. The implementation of the latest UAE regulations in 2015, 2019 and 2020 have ensured that company laws and regulations have been updated to ensure that legislation in the UAE follows international best practice and encourage foreign individuals to start/acquire a business in the UAE. The few challenges investors may face include the need for a local sponsor owning 51% of the business (if not in a free zone), and some inherent risks to the region because of geopolitical concerns. However, the advantages are abundant, and this can be seen in the growing number of international companies, professional service firms and financial institutions.
BIBLIOGRAPHY
Audretsch, David, Max Keilbach and Erik Lehmann. 2006. "Entrepreneurship and Economic Growth." New York: Oxford University Press.
World Bank. (2019). Doing Business Report 2019 “Ease of Doing Business Report 2019.”
World Bank. (2020). Doing Business Report 2020 “Ease of Doing Business Report 2020.”
Article 2:
THE SMELL OF THE PLACE: ORGANISATIONAL CULTURE SHIFT
In my recent research on organisational culture, my interested was piqued after reading about a legendary speech delivered by Professor Sumantra Ghoshal at the World Economic Forum in 1995. I read the transcript of this speech but watching him deliver it had a more profound effect than the written words.
Professor Ghoshal uses his experience of Spring in Fontainebleau and Summer in Calcutta as an analogy to explain how the context of a company influences its people. He calls the context, the smellof the place and says that instead of trying to change people, we should be making a change to the context they are in.He talks about the Fontainebleau forest inspiring activity which is a desire almost impossible to suppress but sweltering Calcutta evokes a contrasting feeling. Unlike the craving to embrace the weather whilst in France, he chooses to hide from the blistering heat when in India.
Companies are creating environments that are defined by: constraints, compliance, control and contract, ultimately transforming into Calcutta in Summer. It is impossible for employees to be innovative and creative in a restrictive context. Despite this environment, management still expect people to be creative, to innovate, to inspire change and reach greatness. The first step is to change the context - the same people may thrive in one environment but barely survive in another – like the analogy. This could very well be because of the difference in cultures - a shift is needed, one that exhibits concepts such as stretch, discipline, trust and support.
Stretch
For many, the goal is minimum compliance, doing the very least every day to avoid going over the line but the concept of ‘stretch’ goes beyond this definition. This means that every person is not content in complying but has an innate goal to do more, achieve more and be regarded as more than just compliant.
Discipline
Self-discipline is respecting goals enough to ensure that you meet them. It is respecting time, deadlines and fully committing to achieving those objectives. These goals may not be the ones you created yourself and could very well be ones you don’t fully agree with but, when a decision has been made – you stand up and offer your full commitment to this process.
Trust
A contract of employment regulates the working relationship but when people are trusted, not by virtue of a contract but as a result of the value they are ready to offer – they will be ready to give more of themselves. Trust is empowering for an individual as it offers an opportunity to build self-confidence which can ultimately result in improved productivity.
Support
Senior management’s role is an enabler who mentors and coaches - existing to help people win and not to ensure strict compliance.
The culture in an organisation of which new hires acclimatise to is usually deep-rooted and not one that can be changed overnight. It becomes easier to turn a blind eye to the glaring gaping holes which exist than do something about them. Unfortunately, the outcome of overlooking flaws in organisational culture is reflected in the company’s bottom line.
Culture can be changed, but a sincere commitment from senior management is required to create a place where people are valued and trusted creating a different smell that they were once used to.
BIBLIOGRAPHY:
Ghoshal, S. (2020) The Smell of the Place (Transcript) https://empoweringpeople.nl/wordpress/wp-content/uploads/2020/05/The-smell-of-the-place.pdf
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