Category Archives: Insight article

SETUP OPTIONS IN DUBAI – LIMITED LIABILITY COMPANY

The LLC is the most popular onshore structure throughout the UAE.

51% of the share capital must be held by a UAE national or a company wholly owned by UAE nationals.

Although not officially sanctioned by law, common practice for foreigners setting up LLCs is to enter into side agreements altering profit and loss splits – deviations of a ratio of in favour of the foreign interest of up to 80/20 in Dubai and 90/10 in Abu Dhabi are common.

Advantage: a separate legal entity and not a branch of the foreign parent company

Disadvantage: unless the foreign interest is adequately protected by a side agreement, there is a loss of control

Consider synergies in picking a partner.

SETUP OPTIONS IN DUBAI – UAE BRANCH OF A FOREIGN COMPANY

A branch is limited to engaging in those activities undertaken by the parent company.

Branch operations must have a service agent who is a UAE National or is a company wholly owned by UAE Nationals.

Role of service agent is to assist the branch office with liaising with UAE governmental departments, such as obtaining licences, permits and visas.

The service agent is paid an annual fee and does not have any proprietary rights in the branch or any of its assets.

Advantage: the establishment process is convenient and avoids the partnership aspect of the LLC.

Disadvantage: the financial exposure to the parent company, the potential difficulties in terminating the service agency and the agency fees can be quite high.

SETUP OPTIONS IN DUBAI – FREE ZONE ENTITY

Free zones are territories within the UAE which have regulations that are designed to boost international business through providing 100% ownership to expatriates and single window administrative convenience.

Each free zone is governed by its own laws and regulations although federal laws such as the UAE Commercial Companies Law apply in certain free zones.

With some exceptions, the laws of and regulations of free zones prohibit free zone companies from conducting economic activities in the UAE outside the free zone.

It is possible to set a free zone company as:

There are more than 20 operating free zones in Dubai and six6 in Abu Dhabi.

REMARKS – DOING BUSINESS IN DUBAI

From our experience in the setup of our Middle East offices, there are three important lessons to be noted:

Lastly, we reiterate our mantra:

The Collective Investment Law 2010 (DIFC Law No. 2 of 2010), the Collective Investment Rules (CIR), Module of the DFSA Rulebook and the Regulatory Law of the DIFC (DIFC Law No. 4 of 2004) are the primary components of the DIFC Collective Investment Funds Regime (the DIFC Funds Regime). The DIFC Funds Regime is regulated by the Dubai Financial Services Authority (DFSA).

The Main Objectives of the DIFC Funds Regime

With a view to making the DIFC a feasible jurisdiction for establishing funds, the DFSA made changes to its collective investments law following consultation with industry experts. The legal framework is based on the International Organization of Securities Commission (IOSCO) principles for regulating collective investment schemes.

The DIFC Funds Regime primarily focuses on the following:

Kinds of Funds

Under the DIFC Funds Regime, there are two kinds of funds: (i) Domestic Funds; and (ii) Foreign Funds.

Domestic Fund

A Domestic Fund is a fund which is either (i) established or domiciled in the DIFC; or (ii) it is established or domiciled in a jurisdiction other than the DIFC and managed by a Fund Manager which is an Authorized Firm (External Fund).

Foreign Fund

A Foreign Fund is a fund which is established or domiciled in a jurisdiction other than the DIFC, but is not an External Fund.

Type of Funds

Domestic Funds can be of three types:

Additionally, a Specialist Fund can be classified in one of the following categories – Islamic funds, fund of funds, feeder funds, master funds, private equity funds, property funds, real estate investment trust, hedge funds or umbrella funds. There are specific regulatory requirements applicable to Specialist Funds. For example, with respect to hedge funds, the risks associated with the fund must be managed by the adequate segregation of duties between the investment function and the fund valuation process; property funds must be close-ended funds and must invest only in real property or property related assets; and Islamic Fund Managers have to appoint a Shari’a Supervisory Board (SSB).

Fund Structure

Domestic Funds can be established based on one of the following structures: (i) Investment Companies; (ii) Investment Trusts; and (iii) Investment Partnerships.

Investment Company

An Investment Company is required to be incorporated in the DIFC and the Fund Manager should be a corporate director of the Investment Company. An Investment Company can also use the Protected Cell Company structure.

Investment Trust

An Investment Trust is set up by a trust deed entered into between the Fund Manager and the Trustee. The Trustee is not required to be a DFSA licensed Trustee – a Trustee can be a custody provider, or a person regulated and supervised in a Recognized Jurisdiction for custody or depository services. The Trustee is required for safe-keeping of fund property, the maintenance of the Unitholder register, and to monitor whether the fund is managed in accordance with the trust deed and the applicable laws.

Investment Partnership

An Investment Partnership is a limited partnership registered in the DIFC, comprised of a general partner and limited partner(s). The general partner must be authorized by the DFSA to act as the Fund Manager.

Fund Management

Under the DIFC Funds Regime, Domestic Funds can be managed by (i) Domestic Fund Managers; or (ii) External Fund Managers.

Domestic Fund Manager

A Domestic Fund Manager is a body corporate established in the DIFC as an Authorized Firm licensed by the DFSA to carry on the Financial Services of Managing Collective Investment Funds.

External Fund Manager

An External Fund Manager is a Fund Manager licensed in a jurisdiction acceptable to the DFSA. The External Fund Manager is required to appoint a DIFC authorized fund administrator or trustee.

Overview – Legislation and regulatory authorities

Pakistan competition law regime

Competition law in Pakistan was first introduced in the 1970s in the form of the Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance 1970 (MRTPO). However, this ordinance was found to be ineffective at regulating an increasingly modern economic environment.

As such, the Government of Pakistan launched a program to modernize competition law in Pakistan in collaboration with the World Bank and the UK Department for International Development (DFID). This eventually promulgated the Competition Ordinance 2007, which ultimately took the form of the Competition Act 2010 (Competition Act).

This new regime established an independent body corporate known as the Competition Commission of Pakistan and gave it expansive powers to police various kinds of anti-competitive behaviour. The Competition Act further gave the Commission the power to enact subordinate legislation. Since its inception, the Commission has proven to be a vigilant organization which has protected and promoted competition throughout the country. The law in its current state consists of the Competition Act playing the overarching role of prohibiting or restricting certain types of anticompetitive behaviour in Pakistan and subordinate legislation, which provides a framework of procedural rules to implement those prohibitions and restrictions.

Scope of application – entities

The Competition Act applies to any natural or legal person, governmental body, including a regulatory authority, body corporate, partnership, association, trust or any other entity in any way engaged, directly or indirectly, in the production, supply or distribution of goods or provision or control of services.

Scope of application – extraterritoriality

Section 1(3) of the Competition Act provides that it applies to all actions or matters that take place in Pakistan and distort competition within Pakistan.

Regulatory authorities

Competition law in Pakistan is enforced by the Competition Commission of Pakistan (the ‘Commission’). The Commission is a body corporate with regulatory and quasi-judicial functions. It is designed to be administratively and functionally independent from the Federal Government. The Commission has been given a wide array of powers with which it can ensure that competition law is complied with and any infringements of the law are punished.

The Commission has a Competition Policy and Research Department (CPRD), which is responsible for research and analysis of the markets and has remained a key component of the Commission’s efforts to promote free competition, to complement active law enforcement, consultations and advocacy.

The Competition Act empowers the CPRD to conduct research and review policies as stated in the following sections of the Competition Act:

• Section 28 requires the Commission to conduct studies for promoting competition in all sectors of the economy; and
• Section 29(b) empowers the Commission to promote competition by reviewing policy frameworks for fostering competition and making suitable recommendations.

The department’s research and market studies programme helps identify anti-competitive factors/actions and propose appropriate remedies for specific policies/sectors of the economy. Its major activities include focusing on competition policy and conducting sectoral research.

Competition Impact Assessments

The CPRD conducts Competition Impact Assessments which are based on extensive efforts to gather first-hand knowledge from relevant stakeholders covering aspects including market dominance, entry barriers, the effect of international developments on the national market, and the regulatory mechanism. CPRD’s approach is primarily to look at various sectors from a competition standpoint and identify competition vulnerabilities, government interventions that may be distorting incentives, information failures and anti-competitive elements within the industry structure. Market studies serve as a diagnostic tool that enables the Commission to evaluate how competitive the markets are, and work out steps to improve the state of competition in particular sectors.

Key reference table of anti-competitive conduct prohibitions

The following table provides an overview of the primary anti-competitive conduct prohibitions under the Pakistani competition law regime.

Overview of fundamental concepts

Introduction

This section outlines some of the key concepts used in competition law in Pakistan.

‘Relevant Market’

Section 2(1)(k) of the Competition Act defines the term ‘relevant market’ to mean the market which shall be determined by the Commission with reference to a product market and a geographic market.

A ‘product market’ consists of those products which are regarded as interchangeable or substitutable by consumers by reason of the product’s characteristics, prices and intended use. A ‘geographic market’ comprises the area in which the undertakings concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homogenous and which can be distinguished from neighbouring geographic areas because, in particular, the conditions of competition are appreciably different in those areas.

By way of example, In the matter of Pakistan International Airlines (File No. 14/DIR(M&TA)/PIA/CCP/09), Pakistan International Airlines charged a fee (based on a percentage of the air fare) for the rescheduling of domestic reservations within 48 hours of a flight. The Commission had to consider whether this policy amounted to price discrimination among passengers holding reservations in a particular flight and cabin, constituting an abuse of a dominant position. The Commission concluded that the relevant product market was the scheduled commercial domestic air transportation services offered by carriers licensed in Pakistan, and the geographic market was the whole of Pakistan.

Relevant prohibitions

Three major prohibitions of the Competition Act rely on the concept of ‘relevant market’ (i.e. an abuse of a dominant position must be in relation to the relevant market, agreements between undertakings are prohibited only if they prevent, reduce or restrict competition within the relevant market and a merger only requires approval if it substantially lessens competition by creating or strengthening a dominant position within a relevant market).

‘Substantial’ (lessening of competition)

The term substantial lessening of competition has not been defined in the Competition Act. This appears to be intentional as it allows the Competition Commission of Pakistan the flexibility to decide whether mergers should receive approval on a case-by-case basis. The Commission has shed some light on the term through the Competition (Merger Control) Regulations 2007, which state that the strength of the competition in the relevant market and the probability that the merger parties will behave competitively or co-operatively after the intended merger are relevant factors in determining whether a merger substantially lessons competition. The Regulations further provides consideration in determining these factors, such as ease of entry onto the market or level of import competition. However, the definition of term is purposely kept vague for the same reasons as the Competition Act, which allows the Commission to decide what substantially lessens competition case-by-case.

Relevant prohibitions

The concept of substantial lessening of competition is relevant to the restriction on mergers under the Competition Act, which requires mergers to be approved if they substantially lessen competition by creating or strengthening a dominant position in the relevant market.’

‘Object’

The Competition Act, having been enacted in 2010, is still in its infancy. As such, the Superior Courts of Pakistan have not yet had the opportunity to interpret the concept of ‘object. Until such time the word ‘object’ is being given its ordinary definition (i.e. it refers to the purpose for which that agreement was entered into). By using the word object, the statute is ensuring that all those agreements which are intended to be anti-competitive, whether they achieve their desired goal or not, are regulated by the Competition Act.

Relevant prohibitions

Section 4(1) of the Competition Act prohibits undertakings from entering into agreements or making decisions with respect to the ‘production, supply, distribution, acquisition or control of goods or the provision of services which have the object or effect of preventing, restricting or reducing competition.’

‘Effect’

The Competition Act, having been enacted in 2010, is still in its infancy. As such, the Superior Courts of Pakistan has not yet had the opportunity to interpret the concept of ‘effect. Until such time ‘effect’ is being given its ordinary definition (i.e. it refers to the impact of the agreement on the relevant market). As such, the statute regulates all such agreements, which may not be intended to be anti-competitive but nevertheless effectively curb competition in a relevant market.

Relevant prohibitions

The Competition Act prohibits undertakings from entering into agreements [‘Agreement’ pursuant to the Competition Act includes any arrangement, understanding or practice, whether or not it is in writing or intended to be legally enforceable.] or making decisions in respect of the production, supply, distribution, acquisition or control of goods or the provision of services which have the object or effect of preventing, restricting or reducing competition within the relevant market. To determine whether an agreement falls within the ambit of ‘prohibited agreement’ as set out in the Competition Act, the effect of the agreement with respect to preventing, restricting or reducing competition within the relevant market has to be taken into account.

‘Undertaking’

The term ‘undertaking’ is defined in Section 2(1)(q) of the Competition Act to mean, ‘any natural or legal person, governmental body including a regulatory authority, body corporate, partnership, association trust or other entity in any way engaged, directly or indirectly, in the production, supply, distribution of goods or provision or control of services and shall include an association of undertakings.’

‘Contract, arrangement or understanding’

The term ‘agreement’ is defined under Section 2(1)(b) of the Competition Act and ‘includes any arrangement, understanding or practice, whether or not it is in writing or intended to be legally enforceable.’

Under Pakistan law, a contract is a binding legal agreement reached between two or more parties. Generally speaking, a contract will be formed when an offer to enter into binding legal relations is accepted by another party accompanied by the exchange of valuable consideration. The words ‘arrangement’ and ‘understanding’ describe something less than a contract. While there is no precise definition of the words arrangement or understanding, they are taken to imply a meeting of two or more minds. In particular, they ordinarily require communication between the parties, with consensus as to what is to be done, rather than a mere hope or expectation as to what might be done or will happen. Moreover, the definition of ‘agreement’ in the Competition Act is not only restricted to arrangement or understanding and includes ‘practice’.

Relevant prohibitions

Agreements between undertakings that are likely to cause an appreciable adverse effect on competition within the relevant market are automatically void.

Thus any horizontal agreements (between undertakings engaged in identical or similar practices) or vertical agreements (between undertakings and suppliers of goods or services) that prevent, restrict or reduce competition are prohibited in Pakistan.

To continue reading our white paper on Competition Law in the Asia-Pacific, download the full copy below .

Contact corporate partner, Bilal Shaukat, today for advice and information on competition law.