The United Arab Emirates has established itself as a key destination for small and medium-sized enterprises (SMEs) from around the world. This is largely due to its business-friendly policies, world-class infrastructure, and well-developed legal framework. According to the UAE government’s official portal, as of mid-2024, the total number of registered companies in the UAE has reached 1.021 million, marking a 152% increase compared to previous figures. And by July 2024, more than 8,000 Chinese enterprises had invested in establishing companies in the UAE, actively expanding their presence in the local market and the broader Middle East region.

For Chinese SMEs looking to expand abroad, understanding the UAE’s legal environment is essential for making informed decisions and ensuring sustainable growth. The UAE offers a uniquely structured legal system, attractive ownership policies, and strong investor protections that together create an accessible gateway to the Middle East and beyond.

A

A Multi-Layered Legal System:

Flexibility Beyond Uniformity

One of the most distinctive features of the UAE’s legal environment is its federal structure, which provides multiple legal and regulatory layers. The UAE operates under a hybrid legal system that blends civil law principles with international standards, including elements of common law in specific jurisdictions. This system functions across three interrelated levels:

(1)Federal Law: Enacted under the UAE Constitution of 1971, federal legislation governs essential areas such as commercial transactions, foreign investment, and taxation, and applies uniformly across all seven emirates.

(2)Emirate-Level Rules: Individual emirates—such as Dubai and Abu Dhabi—possess regulatory autonomy in certain domains. Their respective Departments of Economic Development (DEDs) issue business licenses, administer commercial rules, and may customize sectoral policies to attract targeted investment.

(3)Free Zone Regulations: Special economic jurisdictions like the Dubai Multi Commodities Centre (DMCC), Jebel Ali Free Zone (JAFZA), and Abu Dhabi Global Market (ADGM) operate under independent legal frameworks, many of which incorporate common law principles. Notably, courts in ADGM and the Dubai International Financial Centre (DIFC) conduct proceedings in English, following procedures modeled on international norms—an uncommon but highly investor-friendly innovation in the region.

This multi-layered structure allows foreign investors, including Chinese SMEs, to select a legal and regulatory environment that best aligns with their strategic and operational needs. For example, a startup focused on fintech may prefer the regulatory clarity and international dispute resolution of ADGM, while a manufacturing firm might benefit from the logistics support and tax incentives offered in JAFZA.

B

Company Law Reforms:

Full Foreign Ownership Now Possible

One of the most significant breakthroughs for foreign SMEs came with the enactment of Federal Decree-Law No. 32 of 2021 on Commercial Companies, which substantially liberalized the UAE’s business ownership regime in favor of international investors.

The key reforms include:

(1)100% Foreign Ownership: Most business sectors now permit full foreign ownership of onshore (mainland) companies, eliminating the previous requirement for a UAE national to hold a 51% stake. Only a few strategic sectors—such as oil and gas, utilities, and defense—remain restricted.

(2)Elimination of Local Service Agent Requirement: Foreign branches are no longer obligated to appoint a UAE national as a local service agent, removing a key operational barrier.

(3)Activity-Based Licensing: Each emirate maintains a catalog of approved business activities eligible for full foreign ownership. Companies must still obtain the appropriate licenses from the emirate’s Department of Economic Development (DED) or the relevant free zone authority.

C

Free Zones: The Preferred Launchpad for SMEs

Free zones in the UAE are popular among first-time investors due to their simplified setup and favorable policies.

Key Advantages for SMEs to Launch Business in Free Zones

100% foreign ownership

Tax exemptions (personal and, in many cases, corporate)

Full repatriation of profits

Streamlined licensing processes

Important Note

Free zone companies cannot conduct business in the UAE mainland directly. To enter the domestic market, they must either register a mainland branch or appoint a licensed distributor.

Example

A Chinese logistics SME in JAFZA wanted to expand its operations to retail clients in Dubai. To do this, it opened a mainland branch office and registered with Dubai DED, enabling direct invoicing and warehousing outside the free zone.

D

Investment Protection and International Agreements

The UAE has signed numerous agreements to protect foreign investors:

(1)Bilateral Investment Treaties (BITs) with over 100 countries, including China, which guarantee protection from unfair treatment and expropriation.

(2)Double Taxation Agreements (DTAs) that help avoid paying taxes both in China and the UAE.

(3)Comprehensive Economic Partnership Agreements (CEPAs) that reduce trade barriers with key markets.

These agreements provide legal and financial certainty—similar to China’s arrangements under the Belt and Road Initiative.

E

Competitive Tax Environment

In 2023, the UAE introduced a federal corporate tax regime, still one of the most competitive globally.

Tax Item

UAE (2023 Onward)

Corporate Income Tax Rate

0% for profits ≤ AED 375,000 (≈ RMB 730,000)

9% above that

Personal Income Tax

0%

Withholding Tax

0% on most cross-border payments

Free Zone Incentives

Tax exemptions for qualifying businesses meeting substance rules

Startup Tax Burden

Low — especially for small profit margins and free zone entities

Compared to China, where the standard corporate income tax rate is 25%, the UAE offers significant savings for small businesses and startups.

F

Government Support for SMEs

Several UAE government bodies support foreign SMEs throughout their lifecycle:

(1) Ministry of Economy – Manages national SME policies and provides funding, training, and resources.

(2) Emirate-level DEDs – Oversee company licensing and sectoral regulations.

(3) Free Zone Authorities – Offer legal and logistical support, often with dedicated teams for foreign investors.

G

Real Success Story: Careem

The UAE’s supportive legal and commercial environment has helped launch many successful SMEs. One notable example is Careem, a ride-hailing platform founded in Dubai’s DED in 2012 by entrepreneurs from Jordan and Pakistan. This small tech SME registered with and based in the Dubai Internet City free zone quickly grew into a regional powerhouse, introducing innovations such as cash payments for unbanked users and expanding into food delivery and digital wallets. Careem quickly expanded across the region by leveraging the UAE’s legal framework, tax benefits, and access to capital. In 2019, it was acquired by Uber for $3.1 billion.

This example shows what’s possible for Chinese SMEs that are agile, innovative, and well-informed about the UAE system.

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