ME supplement 2013

01

A special report on doing business with Middle Eastern countries

This report comes with the March 2013 issue of The Manufacturer www.themanufacturer.com

Organised by The Manufacturer in association with Eversheds www.eversheds.com

Robin Johnson Partner +44 (0) 207 919 4754 robinjohnson@eversheds.com

C O N T E N T S

3 OVERVIEW

Harry Dalton gives The Manufacturer’s overview of business conditions in the Middle East.

5

ABU DHABI

8

‘Plug and play’ benefits for manufacturers in Abu Dhabi’s Kizad industrial zone.

IRAQ

With a predicted growth of 9.4% over the next few years Iraq offers great potential for manufacturers looking East.

11 SAUDI ARABIA

Now open to 100% foreign owned businesses the Kingdom of Saudi is a welcoming environment for foreign firms - but be prepared for requirements around employment of Saudi nationals.

12 QATAR

Construction crazy in the lead up to the 2022 FIFA World Cup, Qatar is awash with investment but manufacturers must be willing to partner with local firms to benefit.

15 DISPUTE RESOLUTION

Dubai’s International Financial Centre offers familiarity in terms of process and language for firms used to a common law legal system and CPR of England and Wales.

EDITORIAL

This report was written by partners at Eversheds for The Manufacturer Edited by Will Stirling, Editorial Director w.stirling@sayonemedia.com

Contributing Editor Harry Dalton, Contributing Editor reporter@sayonemedia.com

DESIGN

Art Editor Martin Mitchell

martin@opticjuice.co.uk

SALES

Henry Anson, Managing Director h.anson@sayonemedia.com In order to receive your copy of the The Manufacturer kindly email p.kealy@sayonemedia.com, telephone 0207 4016033 or write to the address below. Neither Eversheds nor SayOne Media can accept responsibilty for omissions or errors.

Terms and Conditions Please note that points of view expressed in articles by contributing writers and in advertisements included in this journal do not necessarily represent those of the publishers. Whilst every effort is made to ensure the accuracy of the information contained in the journal, no legal responsibility will be accepted by the publishers for loss arising from use of information published.

All rights reserved. No part of this publication may be reproduced or stored in a retrieval system or transmitted in any form or by any means without prior written consent of the publishers.

Elizabeth House, Block 2, Part 5th Floor, 39 York Road, London, SE1 7NQ T +44 (0)207 401 6033 F + 44 (0)207 202 7488 www.sayonemedia.com.

Copyright © SayOne Media 2013.

INDEPENDENCY takes another step

The Middle East has been weaning itself off oil dependency for decades. But, as Robin Johnson, head of the diversified industrials sector at international law firm Eversheds says, with deep pockets and improved organisation, progress has been rapid as investment pours in for industrial zones and high tech manufacturing facilities.

A

s part of our continuing relationship with The Manufacturer, I am pleased that Eversheds is supporting a third international business supplement.

Previous collaborations have focused on China and Africa; on this occasion we take a look at the business landscape in the Middle East.

As Europe struggles with austerity, opportunities further East beckon for exporters and companies looking to set up sales and manufacturing plants to service existing customers or expand their markets. Large multinationals are looking to move operations to the Middle East and suppliers need to follow.

In just about every country in the Middle East you hear about plans for a 2020 or 2030 vision focusing on developing a sustainable economy which is not just dependant on natural resources. Plans include building lean, energy efficient “factories for the future” and utilising the logistics of the sea routes into Europe, Africa and Asia. Such plans are supported by attractive fiscal policies and long term government grants. Increasingly educated populations are another attraction and it is a realistic goal that the Middle East will become regarded, not only as a place where oil and gas are produced, but a major manufacturing centre within 20 years, if not sooner.

Dwarfing its neighbours, Saudi Arabia is the significant player in the region and is strategically placed to become its power house. Using local knowledge to understand both the opportunities that are available and how to work in Saudi Arabia should not be underestimated.

The US is determined, certainly from a pure geo-political position, to see Iraq become a successful modern state based on high tech manufacturing. The amount of development funding from the US and a variety of non-government organisations that has recently been directed there should help achieve that objective and, given its borders to Europe, Iraq could become a route into Eastern European markets in the long term.

When Eversheds merged with KLSG, a leading Arab firm in the region, we saw the opportunity to have local people on the ground in the Middle East who had knowledge of working for overseas companies. Two years on we have a network of 6 offices: Saudi, Iraq, Jordan, Dubai, Qatar and Abu Dhabi.

This supplement has been written by several senior colleagues in the Middle East and demonstrates the area to be a land of opportunity.

Failing to at least consider the Middle East in your international plans would be foolhardy.

MIDDLE EAST SUPPLEMENT 2013 OVERVIEW

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Since December 2012, Khalifa Port handles Abu Dhabi’s container traffic. Abu Dhabi Ports Company spent AED 880 million ($240 million) building the 8 km Environmental Protection Breakwater that helps protect the coral reef.

Middle East

ZONES OUT The states and sultanates of the Gulf of Arabia have diversified away from an economy based on oil for years.

But it is only more recently, as the vast, subsidised industrial zones spring up from the desert, that manufacturing and technology have manifested as subsectors of a genuinely diverse economy.

Harry Dalton reports.

T

petrochemical industry every year. he trend for Gulf states to use their Saudi Arabia is currently sovereign wealth funds to invest in building the world’s largest the West, especially in European aluminium mine and smelter government bonds hungry for complex at Ras al Khair. Jaguar liquidity, is well known. Flush Land Rover, fresh from announcing with petrodollars, Middle Eastern states have a new £1.1bn factory in China in bought into everything from Citigroup to Manchester City Football Club.

What is Jan Ward, CEO of Corrotherm International less commonly known is that, The Saudi government increasingly, has many programs through their Western firms are investing in the investment bodies and they spend a Middle East. lot of time, effort and money to attract The Gulf offers some singular companies to Saudi Arabia advantages for business. It has the cheapest energy in the world, governments who November 2012, is carrying out a feasibility study for a new facility are willing to support foreign companies and a next to the aluminium complex to prime location between the markets of Europe take advantage of what will be the and Asia. world’s cheapest aluminium.

Energy intensive industries in particular Another major advantage to are finding this a highly attractive cocktail. having a manufacturing base in Outokumpu, the Finnish stainless steel the Gulf is that governments favour manufacturer, recently opened the first stainless steel processing plant in the region in an industrial those companies when looking to fulfil government contracts. zone on the outskirts of Riyadh, Saudi Arabia.

“If you want to supply big Saudi The €25m plant will fabricate 10,000 tonnes of companies you will be looked on pipes and steel sheets for the construction and

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Alan Peaford, editor-in-chief of Arabian Aerospace

Engineering is becoming a focal point in universities so that manufacturing can become an important part of the UAE’s economy far more favourably if you have a manufacturing base in the kingdom,” according to David Lloyd OBE senior consultant at the Middle East Association.

Many countries in the region have made the import of machinery, tools and raw materials exempt from customs duty to help attract manufacturers.

Gulf governments are also using their financial clout and investing in infrastructure to attract Western companies to the region. Saudi Arabia and the United Arab Emirates (UAE) in particular are building infrastructure and promoting Free Enterprise Zones (FEZs).

The Khalifa industrial zone established in 2010 is the largest industrial zone in the region. Abu Dhabi has spent $7.2bn on the project’s first stage which was completed at the end of 2012. A semi-automated cargo port is being built along side the 412km² site with the

ability to process 12 million tonnes of cargo a year. Abu Dhabi estimates that by 2030 Khalifa alone will contribute 15% of non-oil GDP. Gulf states are coming to understand that to attract foreign manufacturers they have to guarantee the right to own 100% of companies as well as to repatriate all profits and not levy any taxes or customs duty. Even companies located outside of FEZs pay some of the lowest taxes in the world due to the region’s oil wealth. The zones also offer low land rates, long term leases and facilities that can be moved into right away.

“The Saudi government has many programs through their investment bodies and they spend a lot of time, effort and money to attract companies to Saudi Arabia”, said Jan Ward, CEO of Corrotherm International.

Skills base and worker issues While many companies are still staffed by foreign workers either at the top by Westerners or the bottom by South Asian immigrants this is changing. Investment in education, particularly in the UAE and Qatar, is paying dividends. They have attracted top class universities like New York University, the Sorbonne and UCL to set up outposts in Abu Dhabi and Doha. Khalifa University of Science, Technology and Research in Abu Dhabi has 1200 students and is expanding.

Speaking about the education boom Alan Peaford, editor-in-chief of Arabian Aerospace said: “Engineering is becoming a focal point in universities so that manufacturing can become an important part of the UAE’s economy.”

Foreign companies operating in Gulf Cooperation Council (GCC) states are being pushed to employ more natives.

Saudi Arabia has put pressure on foreign companies by introducing the Nitaqat system in 2011. It bands companies by the percentage of Saudi nationals they employ and penalises companies that do not employ a high enough percentage by limiting the number work visas they can apply for.

Saudi Arabia is 15 years behind other Gulf states in education terms and continues to have a schools system that is not producing enough qualified employees for foreign firms.

David Lloyd says: “The skills base of Saudi nationals is poor because of the largely flawed education system.” Immigrant labour, particularly from Pakistan and Bangladesh continues to account for up to 90% of the Saudi workforce.

Although the amount of investment into the Gulf – specifically the states within the Gulf Cooperation Council – is still dwarfed by their foreign acquisitions, inward investment is rising year–on-year and will be an important future market.

MIDDLE EAST SUPPLEMENT 2013 ABU DHABI

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Engineer working for An Emirates Aluminium (Emal).

The company’s extended facility in Kizad will make it the largest single site aluminium smelting plant in the world.

THE ABU

Andrew Nunn Partner, Abu Dhabi +971 2 494 3634 andrewnunn@eversheds.com

DHABI

2030

PLAN

Dawn Sanderson Senior associate, Abu Dhabi +971 2 494 3633 dawnsanderson @eversheds.com

KIZAD’S ROLE AND ITS EFFECT ON MANUFACTURING

A

bu Dhabi has a lot Kizad – a name you should know going for it.

Consider if you’re interested in Middle East its world operations. This 417sq km zone, funded class land, sea and air links, and soon to come by $7.2bn of regional investment for rail infrastructure. It has Phase I alone, has a string of benefits relatively low energy for manufacturers, including no taxes, and labour costs, a ‘plug-and-play’ subsidised infrastructure benign tax regime, and a determined and subsidised energy costs. government policy to diversify into the manufacturing sectors.

Abu Dhabi has planted itself firmly at the centre of the world map as a serious option for both local and international corporations searching for manufacturing sites.

In this article we explore the Emirate’s blueprint for diversification and the part that

The Khalifa Industrial Zone Abu Dhabi – Kizad – is playing in attracting inward investment from manufacturers and other industry players from around the world.

Abu Dhabi 2030 Plan It is well known that the Emirate of Abu Dhabi, the capital of the United Arab Emirates, is an oil rich nation. Possibly not so well known is the effort and investment that the Government of Abu Dhabi is putting into diversifying its economy away from its reliance on oil revenues.

This determination led to the development of the Abu Dhabi 2030 Plan, a long term roadmap for the economic progression of Abu Dhabi.

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Diversification is the key driver of the 2030 Plan. Abu Dhabi has already made significant and determined efforts in its plan to leverage its current wealth to build a sustainable economy.

Abu Dhabi is already a large exporter of goods and services to the world’s largest economies through the trade of oil and other products. This fulfils part of the 2030 Plan, focusing on improving the Emirate’s infrastructure and diversification of its industrial base and manufacturing sector.

A key strategic project to support the 2030 Plan is the development of Kizad, a multi-purpose facility including a world-scale container and industrial port, and over 100sq km of industrial, logistics, commercial, educational, residential and special and economic free zones.

Kizad includes the now operational Khalifa Port at Al Taweela, one of the world’s most advanced deepwater seaports. Khalifa Port’s stated aim is to support more than 15 million TEUs (twenty foot equivalent units) and 35 million tonnes of cargo per annum in the long term. It also serves as the gateway to Kizad.

Kizad’s objective is to drive the 2030 Plan by accounting for more than 15% of the non-oil GDP of Abu Dhabi and 70% of the Emirate’s total export of manufactured goods.

Its business plan also projects that 60-80% of goods manufactured in Kizad will be exported to world markets.

Kizad’s objective is to account for more than 15% of the nonoil GDP of Abu Dhabi and 70% of the emirate’s total export of manufactured goods Undoubtedly, Kizad’s geographic location and rapidly developing infrastructure helps its manufacturing and supplier base tap into a market of more than two billion consumers. Europe, Russia, India and Africa are all easily reached while the markets of Asia, especially Korea, China and Japan, are also readily accessible.

If you are an international manufacturer looking for an alternative operating base with easy access to world markets, Abu Dhabi, and particularly Kizad, is a serious option.

UAE’S MANUFACTURING MEGA HUB Kizad is expected to become one of the world’s foremost industrial zones.

Although a relatively new market alternative to other industrial zones, Kizad is making good progress and the high investment and available facilities shows it is serious in its aim to become a world recognised hub for manufacturing, logistics and trade across a number of sectors.

Stretching over 417sq km, and with phase one backed by $7.2bn from Abu Dhabi’s sovereign wealth fund, Kizad is an industrial development of unprecedented scale.

It offers excellent transportation infrastructure including sea, air, roads and a proposed rail network to ensure easy accessibility between the industrial zone and the city. It also offers a lower base cost for utilities than outside the zone, which will be of particular benefit to energy intensive manufacturers. The freight railway in Kizad is due to be completed in 2015, following which it will be extended throughout the UAE

and will eventually link up with the rest of the Gulf creating a cross regional network.

One key benefit of Kizad is the ability for investors to enter into a Musataha agreement, a long-term registerable property right, in relation to the land they lease from Kizad.

This enables the investor to legally own all the assets developed on their plot of land while they reside in Kizad, providing certainty and stability and enabling them to raise finance which can be secured against this real estate interest. These are all key elements for investor confidence that are not always available in developing markets.

Sectors Kizad supports the objective of the 2030 Plan to promote specific industry sectors in order to increase revenues generated by those sectors.

The zone’s business plan is designed to accommodate various

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MIDDLE EAST SUPPLEMENT 2013 ABU DHABI

AT A GLANCE – KHALIFA INDUSTRIAL ZONE ABU DHABI • No taxes • Subsidised energy • Subsidised factory infrastructure • Air, sea, road and soon to be rail communications

vertically integrated clustering with the aim of achieving economies of proximity and efficient supply chains.

Importantly to the aims of the 2030 Plan, Kizad also wants to encourage collective expertise in a field to create a business environment that fosters research and development, and the development of skills and talent.

Ownership

• Musataha – investors can legally own all assets developed on their land while resident in Kizad

Kizad’s business plan forecasts that 60-80% of goods manufactured in the industrial zone will be exported.

types of light, medium and heavy industries. Vertically integrated industry clusters have been identified in the 2030 Plan as the primary and enabling industries needed to drive forward the economy of the Emirate.

These targeted sectors include petrochemicals/chemicals, aluminium, steel, paper, print and packaging, engineered metal products, pharmaceuticals, life sciences, biotechnology, food and beverage, logistics and transportation.

Kizad embraces the concept that clustering encourages productivity and profitable synergies between supplier and customer. Their business model is designed around each cluster focusing on each key primary industry with a number of related midstream and downstream processes located close by.

Kizad is incentivising other suppliers and companies serving the key sectors in each stage of the value chain to establish operations within the cluster.

The considerable investment in this model by the Government of Abu Dhabi and Kizad is driving

The industrial zone enables inward investors the option to joint venture with local companies or to benefit from the relaxation of restricted foreign ownership laws in certain designated free zones within the industrial park. These free zones offer the option of setting up subsidiaries in Kizad that can be 100% owned by an overseas investor.

The suitability of the alternative structures will depend on a number of factors such as the markets and countries the investor is trying to access, what activities it wants to carry out in the United Arab Emirates, and access to duty exemptions.

C ASE STUDY Emirates Aluminium

A current example is the aluminium cluster which is anchored by Emirates Aluminium (Emal) at Kizad.

Emal provides its feedstock to users who then add value to the product in the form of casting or forging. These modified products then supply tertiary companies with components for finishing product which can then be sent for warehousing or to logistics companies for distribution and export.

The ‘hot metal road’ highway

Setting up Kizad has a One Stop Shop service which provides advice and practical assistance for setting up a business relatively quickly and easily in the industrial zone.

Mr Khalid Salmeen, CEO of Kizad, confirmed with Eversheds that the operation had strong momentum: “Kizad has attracted manufacturers and logistics companies from a variety of different sectors.

“With the completion of infrastructure in Area A and the newly inaugurated high tech Khalifa Port operations next door, I am proud to say that we have delivered on our promises to provide a dynamic industrial zone for the future. Kizad provides companies easy access to local, regional and international markets, in a low operating cost environment and a meticulously designed setting to make doing business simple.

It has been a busy year for us as we have been successful in attracting business, not only in the UAE, but also from the Middle East, Europe, Asia, and the Indian Sub-Continent”.

With considerable government investment and strategic planning, a stable political environment and the economic benefits available in the Emirate and driven by Kizad, inward investment in Abu Dhabi is more attractive than ever for the manufacturing sector.

Kizad has created a “Hot Metal Road”, a specially constructed highway that enables the transport of molten aluminium which saves downstream manufacturers the considerable cost of re-melting.

As an illustration of Kizad’s innovative thinking and planning, it has created a “Hot Metal Road”, a specially constructed highway that enables the transport and delivery of aluminium in molten form which saves downstream manufacturers the considerable cost of re-melting.

Emal is extending its facility in Kizad which will make it the largest single site aluminium smelting plant in the world.

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ESTABLISHING A LEGAL PRESENCE IN Despite taking relativity big strides in economic and business reform, Iraq is still a difficult place to do business.

But the most encouraging aspect about the Iraqi legal framework is the possibility of full foreign ownership, says Sanad Law

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he Iraqi Central Bank announced in February 2012 that Iraq’s GDP is forecast to grow at an average 9.4 % per year between 2012 and 2016, mainly due to projected increases in oil revenues. Estimates for 2017 are 8 million bpd, up from an average of 3 million bpd in 2012.

Nevertheless, Government of Iraq (GoI) income is highly dependent on oil, which represents an estimated 95% of overall government revenue. Unemployment remains high at 15% (unofficial figures estimate 20%) so economic diversification is key to the success of Iraq’s economic prosperity. Attracting foreign investment, particularly in non oil and gas sectors, is paramount to achieving economic improvement, long term fiscal health and sustained increases in standards of living, all of which are dependent on the government passing major policy reforms.

On paper, Iraq has made significant legal and technical developments since 2003.

However, despite these efforts, Iraq faces a variety of issues that impact the legal framework governing foreign investment.

In the World Bank/IFC 2012 Doing Business Indicators (“2012 DBI”) report, Iraq ranked 168 out of 183 on the ease of doing

business. Nevertheless, the most encouraging aspect about the Iraqi legal framework is the possibility of full foreign ownership and that all sectors and foreign investors may register as a limited liability company (LLC) or branch office. The section below provides an overview of the main features and requirements of registration.

Limited Liability Company Private companies are governed

by Law No. 21/1997 (the “Companies Law”), as amended.

Foreign investors have the right to establish or participate in Iraqi companies without any restriction except prior approvals from competent Iraqi ministries/ departments. For example, the establishment of an LLC engaged in oil services will require the approval of the Ministry of Oil.

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MIDDLE EAST SUPPLEMENT 2013 IRAQ

Below are some of the prominent characteristics of establishing and forming an LLC under the Companies Law.

1

MINIMUM CAPITAL

The minimum capital of an LLC is 1,000,000 Iraqi Dinars (IQD), approximately $850.

The nominal value of each share is one Iraqi Dinar. The Companies Law prohibits the issue of shares with a higher or lower value. The share capital must be fully paid when the company is established. Cash contributions must be paid and frozen in an account with a bank authorised to operate in Iraq until documents, showing the completion of the establishment formalities, are presented. Contributions in kind must be stated in the memorandum of association, and all founders must approve the value. In certain sectors, the prescribed minimum capital could be higher than the usual minimum capital level set under the law. Notably, in the oil services sector, the minimum capital set by the Ministry of Oil is IQD2 billion.

2

SHAREHOLDERS

An LLC has a limit of twentyfive shareholders, whether legal entities or individuals. A single person (including legal person) may establish an LLC.

3

MANAGEMENT

An LLC is managed by a general manager. There is no requirement for managers to be Iraqi nationals; however, the Ministry of Interior (MOI) must approve the appointment of foreign nationals.

4

LIABILITY OF PARTNERS

The law limits the liability of LLC partners towards third parties.

They are only liable to the extent of their investment in the capital of the company.

5

ESTABLISHMENT PROCEDURES

Persons wishing to found a company under the laws of Iraq must complete an application and submit it to the Companies’ Registrar.

Iraq has the fourth largest oil reserves in the world and currently produces about 2.9 million barrels per day (bpd).

In its latest World Economic Outlook, the International Monetary Fund makes these forecasts for Iraq: 2011

2012

2013

Real GDP

9.9%

11.1%

13.5%

Consumer Price Inflation

6.0%

7.0%

6.0%

Current Account Balance (% of GDP)

7.9%

9.1%

10.8%

Iraq’s GDP is forecast to grow at around

9.4% a year up to 2016

Timeline to establish an LLC The Companies’ Registrar must get the approval of the MOI before issuing its acceptance to register an LLC owned by foreign parties. The timeline for such approval is three to six months and longer in some cases. Following MOI’s approval, a registration certificate is issued by the Companies’ Registrar.

BRANCHES AND REPRESENTATIVE OFFICES OF FOREIGN COMPANIES

Only Companies who possess a contract with a prime contractor of the Iraqi Government, or a Government contract, can open branch offices.

A representative office cannot engage in any business activity in Iraq except business development and marketing activities. If a contract is awarded, a Representative office may be changed to a branch office.

Timeline to establish a branch or representative office The timeline for registration is one to two months from the date of submission of the required documents.

REGISTRATION IN THE KURDISTAN REGION

Kurdistan applies the same Companies Law allowing for 100% foreign ownership.

However, there are procedural differences in the registration process. Most prominently the Companies Registrar in Erbil does not require a government contract for the registration of a branch of a foreign company. Furthermore, the timeline for registration in Kurdistan is considerably shorter, estimated between three to five weeks.

Tawfiq Tabbaa Managing Partner, Sanad Law Group in association with Eversheds LLP +96 26 56 60 51 1 tawfiqtabbaa@eversheds.com

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STARTING A

IN THE KINGDOM OF SAUDI ARABIA

environment has resulted in the market opening up and certain business activities can now be 100% foreignowned – a local joint venture partner is not always necessary.

The key development for the manufacturing sector is that nonGulf Cooperation Council, i.e. foreign, investors may obtain an industrial license which allows them to wholly own manufacturing businesses in Saudi Arabia.

Other benefits include national treatment in terms of investment protection, and relatively generous rules on the repatriation of profits and capital. An industrial license also allows businesses to sell products within the Kingdom and to export, providing access to lucrative neighbouring markets, to a region with

Liberalisation, profit repatriation and the new industrial license – allowing businesses to be wholly foreign owned – means The Kingdom of Saudi Arabia is a better place to establish manufacturing than it used to be. By Muhammad Arif Saeed and Geoff Allen.

S

ignificant government spending on infrastructure projects and a bid to diversify away from reliance on oil and petrochemicals continues to deliver economic growth for Saudi Arabia.

Post-World Trade Organisation accession, liberalisation of the general economic and investment

significant population growth.

The fastest growing manufacturing sectors include building and construction (and associated supply chains), electrical and household goods, and food and beverage production. The recent requirement of local content in government procurement contracts is another significant driver for substantial growth in the local manufacturing industry.

With low energy and labour costs, easy access to, and ready availability of, raw materials, the availability of government funding, dedicated industrial infrastructure and industrial cities, population driven high demand for products and the general growth of the economy, Saudi Arabia provides an excellent environment for manufacturing businesses.

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MIDDLE EAST SUPPLEMENT 2013 THE KINGDOM OF SAUDI ARABIA

• supervising the economic cities.

Foreign investors have to satisfy a number of conditions to obtain a SAGIA license, including the deposit of minimum capital in the Kingdom, and the requirements can vary according to the legal vehicle being used. However, there are a number of activities on the “negative list” which are prohibited in the Kingdom; the manufacture of military equipment, devices and uniforms, for example.

100%

In Saudi Arabia it is now possible to establish a

foreign owned business

Saudi Industrial Development Fund (SIDF) An industrial licence allows foreign businesses to sell products within the Kingdom of Saudi Arabia and to export

There are, however, a number of factors which investors new to the Kingdom should be aware of:

Saudi Arabian General Investment Authority (SAGIA) In 2000, the government of Saudi Arabia put in place the current regime of foreign investment laws, overseen by SAGIA, for any nonSaudi businesses wanting to operate in the Kingdom. The main aims of SAGIA are: • the implementation of government policies relating to the development and promotion of foreign investments in the Kingdom; • monitoring and assessing the performance of foreign investments; and

The Saudi Industrial Development Fund plays a pivotal role in fulfilling the objectives and policies of government programs for the industrialisation of Saudi Arabia. It implements these programs through the provision of financial assistance in the form of short term loans and offers technical, administrative, financial and marketing advice at the highest professional levels to businesses seeking to obtain SIDF support. Loan financing from SIDF is available to foreign investors in the same way as to Saudi businesses.

Saudi Standards Meteorology and Quality Organisation (SASO) SASO’s responsibilities as a regulator are: • the formulation and approval of national standards for all commodities and products; • publishing Saudi standards by the most proper means; and • promoting standardisation awareness by publicity and other means and coordinating all activities relating to standards and measurements in the Kingdom.

Tax rates Non-Saudi investors carrying out business in the Kingdom through a permanent establishment are subject to a basic tax rate of 20%. For businesses engaged in the natural gas industry the tax rate starts at 30% but, depending on activities, can rise to 85%. Those operating in oil and hydrocarbon production are subject to a tax rate of 85%.

Muhammad Arif Saeed Partner, Riyadh +96 61 48 44 44 8 arif@aldhabaan. eversheds.com

Geoff Allen Senior associate, Riyadh +96 61 48 44 44 8 geoffallen@aldhabaan. eversheds.com

Nitaqat – companies defined by % of Saudi workforce

In order to promote the employment of Saudi nationals (“Saudisation”), the Ministry of Labor categorises companies depending on their activities and the number of Saudi nationals employed by the business as a percentage of the total workforce. The categories are:

PLATINUM: this category is “excellent” and puts a business in a favourable light with the Ministry of Labor.

GREEN: this category is “good” and should mean no labour law problems for the business. To be in this category, for example, a medium sized manufacturing company (50 up to 499 employees) would need to employ enough Saudi nationals to ensure a Saudisation percentage of between 15% and 29%.

AMBER: this category is “borderline” meaning the authorities will work with the business to seek ways of employing more Saudis.

RED: this category should be avoided as it can lead to difficulties when dealing with the Ministry of Labour and other government authorities.

Employers should be aware that Saudisation is top of the agenda for the government in Saudi Arabia and further regulation in this area is expected.

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BONDS RULE IN

CONSIDERATIONS WHEN SETTING UP A BUSINESS IN QATAR In this article, Dani Kabbani and Suzannah Newboult set-out the process for establishing companies in Qatar and discuss the requirement for bonds and guarantees on Qatari projects.

“Q

atar is booming”.

This is what one keeps hearing when Qatar’s name is mentioned, and there is little to suggest it is just hype. The Qatari government’s policy of rapid expansion and foreign asset acquisition means that it is one of the world’s fastest growing economies.

With one of the highest GDPs per capita in the world and one

160bn

$

The infrastructure investment in Qatar planned before 2016.

of the lowest unemployment rates, Qatar also holds the world’s third largest natural gas reserves and is the largest liquid natural gas producer in the world. Qatar has a desire to diversify its economy as set out in the Qatar National Vision 2030 and $160 billion of infrastructure investment is planned before 2016.

The national airline is ranked as the best in the world and the small country will host the 2022 FIFA football World Cup. Construction companies everywhere are interested in being part of World Cup fever and many have enquired how to go about setting-up and doing business in Qatar.

The main law governing foreign investment in Qatar is the Foreign Investment Law No 13/2000. This law requires that foreign investors incorporate a company with a Qatari partner or Qatari partners who will own 51% of the share capital. Most commonly, the incorporated entity is a Limited Liability Company (LLC).

Although the shareholding of the foreign entity in a LLC can not exceed 49% of the capital, the profit split can be higher than 49%. The partners can also, for example, agree that the management of the company will remain with

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MIDDLE EAST SUPPLEMENT 2013 QATAR

education, tourism, development and exploitation of natural resources, energy, mining, business services consulting, technical consulting, information technology, cultural services, sports, entertainment and distribution services. This involves the granting of an exemption by the Minister of Business and Trade. It should be noted that such exemptions are at the Minister’s discretion, and the Minister will consider each application on its own facts.

the foreign shareholders and also agree on the distribution of the assets of the LLC following its termination or liquidation.

Certain exceptions to this general investment rule are usually effected through the following structures:

1

REPRESENTATIVE OFFICE: a foreign company can set-up a representative office to introduce, promote and market its products and services but the representative office cannot enter into any commercial agreements in Qatar. However, business may be carried out by the foreign company where the contract can be substantially performed outside Qatar or by an entity authorised to carry out such business inside Qatar.

2

BRANCH OF A FOREIGN COMPANY: the law permits a branch of a foreign company to be registered in Qatar – provided the foreign company is party to a contract in Qatar which results in facilitating the

rendering of a public service or implies public benefit.

In practice, this means that the foreign company needs to have a contract with the government or a semigovernmental entity. The branch exemption is given by way of a resolution of the Minister of Business and Trade. A branch will only be entitled to perform the specific contract in respect of which it has been registered and the registration will lapse on the date specified in the contract for its completion.

If the contract is extended an application for extension of the registration must be made, although if further contracts are awarded to the branch the registration can be extended accordingly.

The branch is not entitled to enter into contracts with the private sector (non governmental entities).

3

EXEMPTED COMPANIES: The Foreign Investment Law allows for up to 100% foreign ownership where a company’s activities fall into the following sectors: agriculture, industry, health,

Despite the different forms available for settingup in Qatar, foreign companies also need to be aware that pre-qualification or bidding requirements for certain projects may require the foreign company to partner with a local company.

Guarantees/bonds in Qatar Security in the form of guarantees, or bonds, are common practice in construction projects in Qatar with contractors, sub-contractors, suppliers, consultants, even lawyers being required to provide some or all of tender, performance, advance payment, supply, maintenance and retention securities.

The terms “bond” and Dani Kabbani, “guarantee” are used Partner, +974 4496 7396 interchangeably danikabbani@eversheds.com and are not used to differentiate between different types of securities in Qatar.

This article refers generically to these securities as “bonds”.

A bond is an irrevocable commitment, made by the bank of the Suzannah Newboult party obliged to Senior Associate provide the bond +974 33 960 391 (e.g. contractor), suzannahnewboult@ eversheds.com to pay out sums of money (up to

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MIDDLE EAST SUPPLEMENT 2013 QATAR

the committed value of the bond) to the beneficiary (e.g. employer) if the terms of the bond are met.

In Qatar you will almost certainly have to provide a bond from a bank in Qatar. For companies new to trading in Qatar, this local bank bond will usually need to be backed by a facility in your home country – adding to the cost of providing the bond.

Bonds are either conditional or unconditional; the latter are also known as “on-demand” bonds. On-demand bonds usually require nothing more than a written request (or “call”) from the beneficiary to the bank with a bare assertion that the event which the bond was to protect against has occurred. In the case of a performance bond the request need only contain a statement that the contractor or supplier has failed to perform as he should.

The bank is obliged to pay out.

Conditional bonds usually require that the bank is provided proof of the failure to meet performance obligations (or such other matter as the bond is intended to provide security against) before it will pay out. This is clearly advantageous for the party obliged to provide the bond. However, conditional bonds are not widely seen in Qatar; on-demand bonds are the norm.

The prevalence of on-demand bonds in Qatar might, on first sight seem unfair, and are certainly a burden rarely seen in the UK. However, bear in mind that the majority of products and services come from overseas.

The companies supplying the products and services have little investment in Qatar (even investment in real estate can only be made by locals, with few exceptions) and few assets. The judgments of the Qatari courts are not bound to be enforceable outside of Qatar and as a consequence the protection needs to be with a form of security “as good as cash”.

Once a bank has paid out under a bond it usually demands the immediate repayment of the sum by the party providing the bond. Typically, this is effected by converting the demand to a credit facility by way of an overdraft or loan on unfavourable terms.

A call on a bond can have a devastating impact on immediate cash flow. It may also have a longer term impact by affecting the ability of the party to obtain credit facilities or bonds in the future. It may hinder the winning of new work – tenderers are often required to disclose if they have ever been subject to a guarantee call.

Bond calls do happen in Qatar. Other problems arise through the beneficiary refusing to return a bond after the circumstances for which it is providing security have ended or, worse, assignment of the bond to their own creditors.

Foreign Investment Law No 13/2000 requires that foreign investors incorporate a company with a Qatari partner or Qatari partners who will own 51% of the share capital

If you are providing an on-demand bond in Qatar: • Include a definite expiry date, do not leave it open or link it to the provision of a certificate.

• Prohibit assignment of the bond.

• Require an indemnity from the beneficiary against a wrongful call (there is one in a standard form FIDIC contract if not removed).

• Talk to the bank if you believe there is a risk of a bond being called, ask it to notify you in the event of a call.

• Consider obtaining an injunction from the local court if you think you are at risk of a wrongful call – but be aware that these are rarely successful.

• If you are in a position to do so, consider pricing for the full value of the bond.

Bonds are crucial to forming a business in Qatar. A local bank bond will usually need to be backed by a facility in your home country, adding to the cost of issuing the bond.

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MIDDLE EAST SUPPLEMENT 2013 DISPUTE RESOLUTION

Dispute resolution The UAE, and in particular Dubai, provides an effective forum for dispute resolution in the Middle East. Ben Burton and Nick Sharratt describe the reassurance and ease of business for UK companies resulting from the Dubai International Financial Centre.

D

ubai has both a civil law onshore regime and the common law offshore jurisdiction of the Dubai International Financial Centre (DIFC).

The DIFC is a financial ‘freezone’ and is permitted by UAE law, to enact its own legal and regulatory framework for all civil and commercial matters. The DIFC Court is an English language court based on the common law legal system, with rules of procedure drawn from the CPR of England and Wales. This offers international companies doing business in the region the type of familiar and efficient process that they would expect in an established common law jurisdiction such as the UK. Traditionally, the jurisdiction of the DIFC Courts and DIFC LCIA1 was limited to circumstances where there was a connection to the DIFC, such as a territorial or transactional connection. However, since the introduction of Dubai Law No. 12 of 2004 (as amended)2, the jurisdiction of the DIFC has been extended meaning that businesses can now opt into the jurisdiction of the DIFC by agreement if a dispute arises or by drafting DIFC jurisdiction clauses into their agreements.

For many disputes in the region, however, determining jurisdiction is often the easy part, with enforcement of any judgment or award outside the DIFC presenting greater challenges.

A party looking to enforce a DIFC judgment or award in Dubai should have confidence that this will be effective. Article 7(3) of Dubai Law No. 16 of 2011 provides that a DIFC Court judgment, order or decision may be sent directly to an execution judge and converted into a judgment of the Dubai Court. This provision supersedes the Protocol of Enforcement between the DIFC and

the Dubai Courts and means that a DIFC Court judgment is given the exact same status and enforced in the same manner as a Dubai Court onshore judgment.

The other emirates This progressive theme of enforcement continued with the introduction of Article 7(2) of Dubai Law No. 16 which arguably provides for direct enforcement of DIFC judgments and awards within the rest of the UAE. Traditionally, a party seeking to enforce a judgment or award of the DIFC outside of Dubai, but within the UAE, would follow the referral procedure outlined in Article 221 of the Federal Procedures Law3.

Article 7(2)4 could avoid this process as it provides that where the subject matter of execution is situated outside the DIFC (for example another Emirate), judgments and awards rendered by the DIFC Courts or the DIFCLCIA should be executed by the competent entity outside the DIFC, in accordance with the procedures and rules adopted by that entity.

Although, the position remains untested, it is arguable that DIFC judgments and awards could be sent for direct execution by another competent entity within the UAE. A party seeking to enforce its DIFC judgment or award outside of Dubai but within the UAE can be hopeful that these changes could remove the potentially costly and time consuming step of referral outlined in Article 221. A recent Memorandum of Understanding between the DIFC Courts and the UAE Federal Ministry of Justice should offer a party additional comfort in this regard.

However, cases of enforcement of DIFC judgments and awards in

the UAE (but outside of Dubai) are few and far between and the lowest risk approach may be to continue to follow the tried and tested route of a referral under the Federal Procedures Law. A party should also have confidence in enforcing its DIFC judgment in countries where the UAE has entered into regional treaties for reciprocal enforcement of judgments and awards, such as the GCC Convention for the Execution of Judgments, Delegations and Judicial Notifications and the Riyadh Arab Agreement for Judicial Cooperation.

Beyond the UAE Given that a DIFC judgment is given the same status as a Dubai Court judgment and provided that the terms of that treaty are complied with, there should be little reason, in theory at least, why enforcement of a DIFC judgment or award would not be possible in, for example, Bahrain, Qatar or Saudi Arabia.

There are as yet no reported cases of a DIFC judgment or award being enforced outside the UAE. This is largely down to the fact that the DIFC Court is still in its infancy and has seen a comparatively small number of disputes.

That said, with the DIFC’s continued efforts to develop, and as parties increasingly opt Ben Bruton, into its jurisdiction, Partner, Dubai +44 (0) 7767 694790 it is likely that benbruton@eversheds.com the developing enforcementfriendly principles outlined above will be tested, resulting in increased certainty and procedural efficiency for parties wishing to resolve disputes in the region.

1. DIFC LCIA Arbitration Centre. Note - this article focuses on enforcement of DIFC Court judgments. However, the process for enforcement of DIFC LCIA awards is identical save for the preliminary step of having an DIFC LCIA award converted into a DIFC Court judgment.

2. As amended by Dubai Law No 16 of 2011; 3. Article 221 of the Federal Procedures Law; 4. Dubai Law No 16 of 2011;

Nick Sharratt Associate, Dubai +44 (0) 7795 152096 nicholassharratt @eversheds.com

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Our seamless worldwide service covers organisations in areas such as: automation, hydraulics, connectors, seals, advanced engineering, process, motion and flow control and diversified industrials. We understand your issues and look out for your interests, wherever you are based.

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www.eversheds.com ŠEversheds LLP 2012. Eversheds LLP is a limited liability partnership.