E-Commerce – operating an e-commerce platform in the UAE

12 Apr, 2020
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Yann Mrazek

Managing Partner, M/HQ

The UAE’s e-commerce sales are projected to hit USD 16 billion this year constituting about 10% of the total sales in the country. It is the largest and fastest-growing e-commerce marketplace in the Middle East. Brick and mortar shops are increasingly tempted to access the e-market but not many know how to operate this shift.

What is e-commerce?

E-commerce businesses comprise firms distributing products on the internet marketplace requiring a financial transaction to be carried over through its online platform. It involves coordinating with payment service providers which offer online electronic payments by a variety of payment methods including credit card, smart cards, digital money E-cash. Business models include both B2B and B2C.

Locally, the legal framework regulating e-commerce activities is clearly defined.

Do I need to set-up a local company to distribute my products on the UAE market? 

The answer depends on the commercial model. All entities require a valid commercial license prior to conducting any trading activities.

Two types of investment locations are available in the UAE: mainland UAE (c/o the Department of Economic Development (DED)) and free zones.

Free zones allow 100% foreign ownership, offer prebuilt facilities and streamlined one-stop-shop registration and administrative services. However, while authorities may apply discretion in their approach, from a black letter point of view deploying an activity in the UAE mainland while domiciled in one of the UAE free zones is not permitted. Free zones companies are only allowed to carry out business in their zone of registration and overseas.

Establishing a free zone company with e-trading activities is possible but will restrict entities to act as a middleman and prevent the distribution of the products in its own name. This is a suitable option for entrepreneurs looking to provide a mobile platform, e.g. where sellers and buyers transact directly without any interference from the company and coordinate their own payment arrangements.

Where the entity intends to be an active participant to the transaction, carrying out e-trading activities via a dedicated website with a UAE domain name, it is effectively catering directly to customers. In this scenario, deploying the e-trading business via a mainland entity is the most compliant option.

As of writing, a general E-Trading license is not available with the DED. However, several specific categories of e-trading licenses are available (e.g. Foodstuff e-trading, publications and media materials e-trading, jewellery & precious stones e-trading). For platforms specialized in very specific fields, these activities may be suitable. For less specialized businesses, a registered bona fide trading company can double as an e-commerce platform in the UAE mainland as an ancillary activity.

Structure-wise, different types of vehicles are availed by the DED:

  •       a branch of a foreign company: not allowed to undertake trading activities;
  •       a representative office: ibidem, its activity is strictly limited to the marketing of the brand and the management of the website locally. A courier company will have to be appointed to undertake the distribution of the products locally;
  •       a Limited Liability Company (LLC): the most suitable option to fully deploy a trading activity in the UAE. Foreign shareholding into UAE mainland LLCs is limited to 49%, versus 51% for the mandatory UAE shareholder. Sharia law compliant tailor-made mechanisms can nonetheless mitigate – to the point of elimination – risks associated with having a local partner in the mainland structure and ensure that the foreign investor retains full control over management and profits.

Free zones, such as Abu Dhabi Global Market (ADGM) and Dubai Multi Commodities Center (DMCC), introducing “dual-licensing” regimes, whereby a free zone registered operating company can apply for a mainland license without being required to acquire additional office space or share the capital with a “local sponsor”. Although this allows entities to conduct its activities beyond the border of the free zone, said activities are restricted to the Emirate of registration.

I only want to test the market for now, is there an alternative to registering a company?

Yes. Foreign investors can operate sales locally by appointing a local agent with rights to effectively manage a website with UAE domain on their behalf. In this scenario, no local legal presence will be required.

In practice, the products (purchased through the UAE website) will have to be either shipped from the home country directly to the UAE customers or distributed by the local agent who should have all the required licenses in place to sell the products on the UAE market.

Two different regimes may be applicable to distribution agreements locally: the UAE Civil Law (the UAE Federal Law No. 5 of 1985), and the UAE Agency Law (the Federal Law No. 18 of 1981, concerning the appointment of commercial agents, sales representatives, and distributors in the UAE).

The applicable law will depend on whether the relevant distribution agreement has been duly registered with the competent authorities. The mandatory registration of a distribution agreement with the Commercial Agencies Registry, maintained by the UAE Ministry of Economy (MoE), only exists under the UAE Agency Law.

To qualify for registration, the Agent must be an UAE national or a company wholly owned by UAE nationals. Should the UAE Agency Law apply, the relationship between the brand and the distributor must be exclusive.

In addition to the lack of control over your distribution channel, the UAE Agency Law bestows significant protection to the Agent such as the entitlement to commissions in transactions concluded in the area of the agency, even without the Agent's involvement. It is also worth mentioning that the registered distribution agreement may only be terminated or non-renewed by the mutual agreement of the parties – except in the case of a material reason – even where a fixed term has been agreed upon.

Practical remarks 

 What are the laws applicable to my website?

Two scenarios are foreseeable:

  • Use of a foreign website: there is no link with the UAE jurisdiction in terms of execution of the contract of sale and payment of the products’ purchase price by the UAE customers. The purchase happens in the jurisdiction of registration of the website and under this jurisdiction’s laws. In this sense, you are not required to secure a local license or specific authorization from the UAE Ministry of Economy, the Department of Economic Development or other competent local Authority.
  • Use of a dedicated website with a domain name in the UAE: a shift of the sale operations to the UAE is made (the execution of the contract of sale; and the payment of the products’ price by the UAE Customers). UAE laws will be applicable to the relationship between the company and its UAE Customers.

Consumer Protection – quid of the terms and conditions?

Where an UAE website is operated, and the UAE laws are applicable, the UAE Consumer Protection Law will be applicable. The Ministry of Economy & Planning, the competent government authority regulating consumer protection matters in the UAE, has listed the responsibilities of suppliers – including e-businesses – as follows:

  •       Defective products: all suppliers shall return or replace any goods found to be defective at no costs;
  •       Advertisement and labelling: suppliers may not display, offer, promote or advertise any counterfeit, spoiled or misleading goods or services that would harm the interests or health of the consumers. Each package/container must include a label displaying, in a conspicuous manner, the information regarding the product with a translation in Arabic;
  •       Price and invoicing: the price shall be clear – in the local currency – and displayed conspicuously;
  •       Safety and guaranty: all potential risks associated with the use of the product must be expressly mentioned in a label affixed to the product in a conspicuous manner. Suppliers are liable for any damages resulting from the use of the products.

Aside from the essential basic clauses to be included in terms and conditions (limitation of liability, termination, governing laws, privacy policy, intellectual property rights), the above list should also be reflected in the document. Terms and conditions do not need to be lodged with the local authorities in the UAE.

What about payments and banking solutions?

The implementation of a payment gateway solution to enable the company to accept payments from all major credit and debit cards is paramount. Since the payment gateway requires the services of a third-party payment service provider, no Central Bank external approval nor any additional authorizations from other authorities is – as of writing – required prior to obtaining the licenses.

From a banking standpoint, it is paramount that the company confines its business activities to the products that it is licensed to trade – as reflected on its commercial license.

 

Yann Mrazek

Managing Partner

 

Célia Titouni

Senior Associate

M/HQ

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