Thomas Paoletti participates in IR Global Guide: International Expansion: Building your Business Overseas

Thomas PaolettiFounder & Managing Partner, Paoletti Legal Consultant

Foreword by Andrew Chilvers

Despite these uncertain times, expanding overseas can be a key driver for future growth for an ambitious business. International expansion can breathe new life into a company, drive huge value and set it on a path of continued success.

Expanding a business overseas is a strategic opportunity that will help diversify revenue streams, revitalise product development and give high returns on investment. But expanding a business into different jurisdictions takes time – this is a long distance run, not a sudden sprint to the finish line. Furthermore, expanding operations into a new jurisdiction can be fraught with challenges and risks that need to be addressed long before the first boots are on the ground.

For any company turning up in a foreign country, a multitude of tax and legal issues need to be addressed. This can be a labyrinthine experience and not for the faint hearted – but then faint hearted businesspeople seldom set their sights on overseas expansion.

Tax and compliance have to be at the top of any board’s agenda, ensuring the correct steps are taken the moment the company representatives land in-country. It’s pivotal to learn these issues to avoid any costly mistakes from the start.

What are the main government incentives available in your jurisdiction to attract multi- nationals and FDI investment?

Foreign direct investment (FDI) inflow into the UAE soared over 34% to $14 billion in 2019 as compared to $10.4 billion in the previous year following major investments by US private equity firms in the Abu Dhabi’s energy sector.

Thanks to the political and economic stability of the country, the UAE has been capable of attracting new investors from less stable countries in the region. The UAE was the largest FDI recipient in the subregion of West Asia in 2019, as a consequence of major investment deals in oil and gas sectors and specifically into Abu Dhabi National Oil Company (Adnoc) assets.

Other sectors which have been the recipients of FDI in the last few years are trade, real estate, finance and insurance, manufacture and construction. The main investors are the United Kingdom, India, the United States, France and Saudi Arabia. The strengths of the UAE include its easy access to oil resources, low energy costs, a strong aspiration to diversify the economy. Dubai, for example, one of the seven Emirates of UAE, started many years ago a diversification process pushing and shaping the economy towards different sectors such as tourism, and becoming an international trading and serviced hub, combined with a high quality of life, absence of direct or indirect business and personal taxation (with the exclusion of few sectors, such as Oil & Gas and Banks). Moreover, the UAE can count on 45 free trade zones which allow foreigner investors to own 100% the capital invested into the company and the new UAE Foreign Direct Investment Law (the FDI Law) that introduced a new framework under which foreign investors may apply to own more than 49% of the shares in the capital of companies incorporated “onshore” in the UAE. On March 17 2020, the UAE issued a Cabinet Resolution setting out the “Positive List of Economic Sectors and Activities in which Foreign Direct Investment is Permitted”.

What industries do you feel there are opportunities in for international investors / businesses in your jurisdiction? What factors do you think contribute to inward investment?

E-Commerce. If real estate and infrastructure were the solution to emerge from the 2008 financial crisis, nowadays the post-pandemic crisis is more likely to look for investing in the digital economy and its infrastructure considering that the UAE’s digital economy is nowadays contributing 4.3% of the GDP and it has anticipated spending $900 million by 2023. Furthermore, Dubai’s e-commerce industry is set to account for AED12 billion of the local GDP by 2023. The entire GCC region is becoming a growth market and public cloud spending in the MENA region is expected to grow to $5.3bn by 2023.

Fintech. The MENA fintech market is expected to be worth $2.5 billion by 2022. The UAE is the third-largest market for remittances globally, with $44bn of payments made in 2019 providing a direct route to the $3tn digital wallet market across Asia.

Cybersecurity. The GCC ranks in the Top 10 in the region for COVID-19 cyber-attacks showing that organisations need to do more to tighten their cyber security solutions and processes. Cybersecurity has become a core technology to keep companies secure as they go online, especially with the emerging Artificial Intelligence, Machine Learning, Blockchain solutions.

Logistics. The country’s busy air cargo routes, high maritime freight connectivity, well-established warehousing network and strong logistical system, are key pillars for the UAE sectors. The pandemic has proven Dubai’s strong case as a hub for re-exports, value-added logistics services including testing, packing, labelling for domestic and international markets and cross border e-commerce fulfilment.

Clean Energy. The UAE has planned investments up to $163bn in generating power from clean energy sources. Dubai seeks to secure its power supply by providing 75% through clean energy by 2050. Dubai’s strategy and federal investment has set an overarching goal to have the smallest carbon footprint in the world by 2050.

Why is it important to hire a local firm to support international expansion? How can you help smooth the process for your clients and overcome common pitfalls?

It is fundamental for a consultant law firm to understand the client’s requirements and objectives in order to provide the proper legal advice. The UAE legal frame work can be a tangle of rules, regulations and policy that each Authority and Free Zones (UAE has 45 different free zones, and each of them has its own legal system) have adopted. Providing alternative legal solutions in order to overcome or mitigate the applicability of the 49/51 rules (as per UAE Federal Law 2/2015) for the onshore company, as an example, is a complex process that requires deep knowledge of the legal system and capability to utilise different frameworks (English law combined with the UAE law).

It is often necessary to proceed with a backward path and start from the final goal before you can suggest the optimal solution for the client. Did the client win a construction project in Abu Dhabi? Is the client aware of the classification criteria issued by the Abu Dhabi Municipality and how they differ from the Emirate of Dubai? Or, moreover, is the client aware that for a certain type of construction work it is not allowed to participate in a tender in the form of a joint venture? If the project is related to Oil & Gas, is the client aware that he may need to satisfy additional requirements? These are the typical examples of preliminary legal assessment that we conduct at the early stage in order to support the client’s initiative and investment.

Meeting these challenges is the way, as Corporate Lawyers, we can be useful to our clients, by adding value and playing a valuable role in the client’s business and in the local society, leveraging our international experience, creativity and legal knowledge.

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