Camille Chamoun of Law House explains how a new law in the UAE is laying the foundations for knowledge-based economy
Small and Medium size Enterprises (SMEs) are recognised worldwide as a tool of economic growth. SMEs are universally recognised as important because they contribute to economic growth, create employment and ensure financial stability.
SMEs in the Gulf region are in much need of financial support and access to capital as they have the lowest rate in the world. Until recently, support for SMEs was limited to initiatives of private funds with (sometimes) the backing of international financial institutions.
The UAE has played a leading role in fostering small and medium enterprises and encouraging the spirit of creativity and entrepreneurism among its citizens. This drive culminated in the issuance by His Highness Sheikh Khalifa bin Zayed Al Nahyan, President of the UAE, of Federal Law No. 2 of 2014, for the Small and Medium Enterprises sector (the Law). The Law is a pioneering step towards achieving diversified and sustainable economic growth in the UAE.
The Law sets out the legal framework for the cooperation between the private sector (namely Small and Medium size entrepreneurs) and governmental entities.
The Law starts by defining, in its article (3), an SME and sets out that an enterprise will be considered as an SME (and consequently benefits from the support), if it meets at least two of the following criteria: employment size; its annual returns; and capital investment. The same article empowers the UAE Cabinet to add other criteria while article (4) adds that the Cabinet will issue a unified definition of SMEs, based on the recommendations of the SME Council, in consultation with competent local authorities.
Article (5) of the Law stipulates that the Cabinet will issue a resolution setting up the SME Council (the Council) at the Ministry of Economy (MOE). The Council will be the body responsible for the implementation of the Law.
The Council will be responsible for: the creation and development of policies and strategic plans towards the development of SMEs; the creation of rules and regulations required for the coordination between the National Programme (the Programme) and stakeholders; Monitoring the performance indicators of the Programme and approving its annual report on SMEs; periodically reviewing the effectiveness of the SMEs, classifying criteria to propose the appropriate amendments and submitting the same to the Cabinet; setting conditions and criteria for membership in the Programme; and any other relevant tasks mandated by the Cabinet.
According to article (7) of the Law, an SME Programme will be created and will be responsible for the following:
• Liaising with the competent authorities to draw the guidelines relating to providing expertise in addition to technical, administrative and training assistance in different fields to support [SME] projects and facilities.
• Preparing a periodic evaluation of the projects and facilities to be submitted to the Council, along with challenges and suitable solutions.
• Liaising with federal and local government authorities and the private sector to promote the projects’ products and facilities inside the UAE and abroad.
• Liaising with the relevant authorities to provide advantages and incentives for projects and facilities.
• Liaising with the relevant regional and international authorities to support the development of the projects and facilities.
• Developing awareness Programmes to encourage the establishment of projects and facilities, and defining available and reasonable investment opportunities and risks as well as defining local and international exhibitions and to help participate in them.
• Establishing a database of projects and facilities registered with the Programme and their classification.
• Encouraging self-employment, joint cooperation and integration between projects and facilities.
• Approving the applications to grant advantages and incentives for projects and facilities registered with the Programme.
• Any other task mandated to it by the Cabinet.
ADVANTAGES & INCENTIVES
The advantages and incentives that projects and facilities may benefit from range from access to financing to award of contracts, to promotion of the projects and facilities in and outside the UAE. Article 10 of the Law lists the ‘Advantages & Incentives’ as follows:
• Finance, marketing and promotion from the private sector, provided associating with these facilities does not conflict with any financial or legal obligations.
• Commitment of Federal Government entities to contract with local SMEs by not less than 10 per cent of the total contracts of these entities towards meeting their purchasing, servicing and consulting needs.
• Commitment of companies in which the Federal Government owns more than 25 per cent of the total capital, to contract with local SMEs by at least 5 per cent of the total contracts of these companies.
• Simplify the procedures relating to these facilities, in addition to reducing licensing costs, and enabling them to benefit from land granted to them for industrial or agricultural purposes, in accordance with relevant legislations and in coordination with the concerned authorities.
• Allocation of adequate space in the exhibitions that the UAE participates in abroad, to showcase products made by national SMEs, and providing necessary information to them about international markets in accordance with the regulations prescribed by this law.
• Organising local, specialised exhibitions for SMEs or facilitating their participation in domestic exhibitions to promote and market their products.
• Permissibility of exempting SMEs, for production purposes, from customs tax for equipment, raw materials and intermediate goods, through a Cabinet resolution issued by relevant UAE authorities and Union members, each in his/her own capacity, based on the recommendations of the Minister of Economy.
• Exempting SMEs from bank guarantees that companies must lodge for new workers. The SMEs Council will coordinate with the Ministry of Labour to implement the regulations and conditions required in this regard.
A very important aspect of the Law whose purpose is to transform the UAE to a knowledge-based economy and foster creativity and innovation is laid out in article (11). This article relates to incentives to be given to SMEs in terms of Intellectual Property as part of their research and development (R&D) efforts.
The Law is issued to benefit UAE nationals and enterprises fully owned by them. It sets out the mechanism for the financing to be provided by the Emirates Development Bank that should not be less than 10 per cent of the annual credits it issues. The Law penalises SME owners who do not use the facilities for the purposes mentioned in their applications to the Programme. In an effort to also limit the misuse of the incentives and the benefits and promote transparency, the Law penalises SME owners who assign their businesses without the approval of the relevant authorities.
Finally, the Law is certainly a first step of a much awaited long term plan to support UAE Nationals and engage them further in the private sector and the economic cycle. It remains to be seen however how the Law will be applied when the executing bylaws are issued.