Dubai: Common law to re-boost free zones' appeal after relaxation of FDI law for onshore firm

Common law will create an environment of a level playing field for all the free zones in Dubai and also re-boost their attractiveness after being impacted by the relaxation of foreign direct investment law for onshore companies, say lawyers and tax experts.

Last week, Dubai Media Office said the government is actively exploring applying common law within its free zones to enhance the city's business environment and boost its economic appeal and efficiency.

The initiative supports the economic objectives outlined in the Dubai Economic Agenda D33. A key goal of the Dubai Economic Agenda (D33) is to double the size of Dubai's economy over the next decade and to consolidate its position among the top three global cities. Dubai Economic Agenda D33 includes 100 transformational projects.

The UAE allowed 100 per cent foreign ownership of companies in the mainland, which previously was allowed in the free zones. This was one of the major incentives for foreign companies to set up operations in the free zones.

What is Common Law?

According to Baker McKenzie, Common Law is a body of law created by judges and tribunals while ruling over disputes that are presented to them.

The main characteristic of Common Law is that it is built on precedents. Common Law courts look to the past decisions of courts to create legal principles. Because of its predictability, it is one of the main regimes governing commercial arrangements in the world and is the governing law of choice for international trade and commerce.

Hani Naja, Corporate & Commercial Partner at Baker McKenzie, said most free zones in Dubai, with the exception of the Dubai International Financial Centre (DIFC), which has a comprehensive legislative system, are currently governed by their own regulations in addition to Dubai and UAE Federal laws. This can create some resistance from foreign investors who may not be used to these laws or to the way they overlap.

Benefits

Naja said there are two indirect benefits of the common law. Firstly, having a common legislative system for all free zones makes it a level playing field at least on the legislative/regulatory front. Secondly, it will re-boost the attractiveness of free zones which were somewhat impacted by the relaxation of foreign direct investment for onshore companies.

Benefits for employees?

Hani Naja pointed out that the law would have impact more on dispute resolution and the introduction of some legal concepts which are not available under Civil law, rather than on company setups and structures.

He added that the law will not impact free zone employees’ individual matters such as visas, holidays and other aspects.

“In principle, this should not have any effect on employment matters. That being said, we’ve seen that free zones in the UAE that adopt common law (such as the DIFC and ADGM) usually have more generous benefits, not necessarily because they adopt common law, but perhaps to appeal to foreign investor on another level as well,” he added.

Attracting more FDI

Harikishan Rankawat

Harikishan Rankawat, chairman of The Institute of Chartered Accountants of India (ICAI) – Dubai Chapter, said at present, Dubai has several free zones, each with its own Independent Free Zone Authority (FZA) responsible for governing and regulating activities within the zone. They typically have their own rules and regulations, distinct from those in the mainland.

“Common law provides a well-established and widely recognised legal system with a rich history of precedents and case law. This move will not only be attractive to existing businesses operating in the free zone, but it will also attract more foreign investment and businesses looking for a familiar legal environment. This approach will promote consistency in legal decisions and reduce ambiguity in interpreting laws in various free zones in line with laws of the mainland,” he said.

Rankawat, who is also Managing Partner of RNG Auditors, added that a transparent and established legal system like common law can instil confidence in investors, as they are more likely to have faith in a stable legal environment that protects their rights and interests.

“Common law often offers well-defined procedures for dispute resolution, including arbitration and mediation, which can be more familiar and widely accepted in the international business community,” he added.

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