THE NEW LAW IN TOWN
BUSINESS GEAR UP FOR COMMERCIAL COMPANIES LAW, 2015
Qatar has been steadily removing obstacles that have been hindering new companies in kick-starting their operations. The first was to increase the foreign ownership limit (FOL) from 25% to 49%, and now the new Commercial Companies Law will replace the legislation enacted in 2002. The new law, which will come into force 30 days after its publication in the Official Gazette which is expected to be around early July this year, is already making news as businesses across the GCC region and elsewhere are keenly watching the developments. Companies will have six months thereafter to comply, where necessary, with the new provisions. Besides offering a host of concessions, the new law is said to be a game changer as far as the functioning of commercial entities in the country is concerned.
HE Sheikh Ahmed bin Jassim bin Mohammed Al Thani, Minister of Economy and Trade, says that with the new law, “the practice of commercial activities in the country will experience a leap of great quality in the near future; it is aimed at encouraging the private sector to play a vital role in achieving sustainable development.” The Minister further explains that the new law takes into account the international standards that are being built by rating countries in terms of ease of starting and doing business or service, which will contribute to raising the classification of Qatar, and meets the economic and social variables requirements to achieve Qatar National Vision 2030.
Its implementation is expected to give a big thrust to the government's economic diversification programme. “The main purpose of this new law is to enhance Qatar's strategic international economic standing and growth and develop the business environment in order to promote foreign investment in the state in the private sector,” comments Dani Kabbani, Managing Partner at Eversheds. “The new law has taken into consideration some of the advantages set out in other countries' laws and amended the provisions to be further in line with international standards. It aims at creating a more conducive environment for start-ups and business operation.” Describing the new Commercial Companies Law as an “important step forward” for Qatar as it seeks to diversify its economy and, in particular, stimulate the private sector, Middle East Economic Digest (MEED) Editorial Director Richard Thompson says that the advancement of the non-oil economy is the next stage of the region's development and right at the heart of this is the need to stimulate private enterprise and support risk-taking entrepreneurs.
While Kuwait enacted its own version of the commercial companies law in 2012, after a quarter century of debates and discussions, the UAE issued a similar law in April, two months before Saudi Arabia opened its market to foreigners. Qatar issued the new law last month and with business-friendly legislation coming into force, the spillover of international investments that Saudi Arabia attracts is likely to flow into Kuwait, Qatar and the UAE.
The enactment of this legislation is crucial and comes at a time when Qatar is slipping in the World Bank rankings on ease of doing business. While it occupied the 45th rank in 2014, it has gone down to 50th position in 2015. This would send nothing but the wrong signals to potential international investors at a time when foreign direct investment is imperative for the country's economic growth.
Peter Cook is Managing Director of the British Chamber of Commerce, which seeks to encourage British SMEs to set up shop in Qatar and take advantage of the country's booming economy. He knows
“IN THEORY, IT SHOULD NOW BE POSSIBLE, SUBJECT TO ALL DOCUMENTATION BEING IN PLACE AND CORRECT, TO INCORPORATE AN LLC WITHIN THREE OR FOUR DAYS OF SUBMITTING AN APPLICATION. IN ANY EVENT, THE MINISTRY OF ECONOMY AND COMMERCE MUST NOW RESPOND TO AN APPLICATION TO REGISTER A COMPANY WITHIN 15 DAYS OF THE APPLICATION BEING PRESENTED.”
Partner Simmons & Simmons Middle East
that British companies will welcome many aspects of the new law. “The fact that the law is changing would imply that there are improvements worth making to the law to reflect the new economy and the new market conditions that prevail in Qatar. Laws tend to be living creatures, and reflect characteristics of the economy of the time,” he says. “The old law was no doubt a good one back in 2002 but clearly it is no longer as good as it could be. I am pleased that one aspect of preparation of the new law is that the Qatar authorities have been consulting widely with business leaders to take their views into account. That is a really important step and gives business confidence that any new law will try to address the concerns about the old law.”
True to that, the new legislation appears to be in response to the demands from the business community to expedite registration and renewal procedures. It is considered far-reaching and significant as it is expected to streamline, encourage and support the growth of commercial entities, particularly the SMEs, in the country and make their operations more effective and commercially viable. It is being talked about as equally beneficial to SMEs and large corporations, touching companies that are just starting up to large corporations that are listed on the stock
“ESTABLISHING A BUSINESS ONLINE WITH LITTLE PAPER WORK AND WITHOUT REQUIRING THE INVESTORS TO PHYSICALLY ATTEND TO THE PROCESS IS NOT YET AVAILABLE IN QATAR; WHEREAS BY COMPARISON TO THE US AND CERTAIN OTHER COUNTRIES, THE ELECTRONIC APPROACH APPEARS TO BE INCREASINGLY COMMON AND IS PROVING TO BE MORE FAVOURABLE WITH INVESTORS.”
Charbel Maakaron Corporate Partner, Squire Patton Boggs Founding member, American Chamber of Commerce in Qatar
exchange. As Kabbani puts it, “The main advantage for SMEs in light of the new law is the deletion of the minimum share capital requirement for limited liability companies. This type of company is the most common for SMEs establishing in Qatar, with fewer regulations and no corporate governance requirements. As for large corporations, the changes introduced to shareholding companies, whether related to the incorporation, shareholders, board members and corporate governance, will strengthen their position and will grant advantages.”
A friend of SMEs and LLCs
First and foremost among the many reliefs for those looking to start a business in Qatar is the waiver of the previous requirement for a Limited Liability Company (LLC) to have a minimum paid-up share capital of QR200,000. It is now left to the discretion of the shareholders who will decide about the capital of the company. This is easily the most widely appreciated change in the law. “This is great for entrepreneurs as it significantly reduces the entry barrier to start businesses. It also saves the cash they have to be spent on customer validation and developing initial product prototypes,” says Ahmed Abdulwahab, Head of Incubation at Qatar Business Incubation Center. “Part of the learning at the Lean Startup Program is iteration, i.e. updating and improving on the Minimum Viable Product, and cash is needed for this.” Analysts also believe that this will enable local SMEs to compete with those in other countries in the GCC and the wider Middle East region.
Partner at Simmons & Simmons Middle East, Andrew Wingfield, says, “For first-time entrepreneurs and other businessmen, establishing a company should be that much easier without having to have QR200,000 in cash from ‘day one.' In addition and helpfully it will be possible for an LLC to be incorporated with just one shareholder,” he says. He refers to the provision that the single-person company is no longer a separate corporate vehicle as it has been merged with the limited liability companies, which is now possible with one shareholder. “The provision prohibiting the object of a limited liability company to include banking, insurance, banking activities has been deleted although the
“HOLDING COMPANIES MUST NOW ENSURE THAT ALL SUBSIDIARIES KEEP ALL NECESSARY FINANCIAL RECORDS AND THE HOLDING COMPANY MUST PREPARE CONSOLIDATED FINANCIAL STATEMENTS, A PROFIT AND LOSS ACCOUNT AND CAPITAL EXPENDITURE STATEMENT TO BE PRESENTED TO THE GENERAL ASSEMBLY WITH NECESSARY EXPLANATIONS AND STATEMENTS AS REQUIRED BY INTERNATIONAL ACCOUNTING STANDARDS.”
Dani Kabbani Managing Partner Eversheds, Qatar
“LAWS TEND TO BE LIVING CREATURES, AND REFLECT CHARACTERISTICS OF THE ECONOMY OF THE TIME. THE OLD LAW WAS NO DOUBT A GOOD ONE BACK IN 2002 BUT CLEARLY IT IS NO LONGER AS GOOD AS IT COULD BE. I AM PLEASED THAT ONE ASPECT OF PREPARATION OF THE NEW LAW IS THAT THE QATAR AUTHORITIES HAVE BEEN CONSULTING WIDELY WITH BUSINESS LEADERS TO TAKE THEIR VIEWS INTO ACCOUNT.”
Peter Cook Managing Director British Chamber of Commerce, Qatar
prohibition still exists under the Qatar Central Bank Law,” Kabbani clarifies.
The hope is that the new law will ease up one of the aspects of starting up a business and complement some of the other efforts by the government to support SMEs. “The mandatory requirement to have commercial space, the difficulties in procuring financing from local banks, the restrictions on hiring or moving staff, are several other issues that SMEs often struggle to address. We are aware, however, of certain initiatives taken by the Qatari government to address those issues, namely the SME funding programme undertaken by Qatar Development Bank,” says Charbel Maakaron, Corporate Partner at Squire Patton Boggs which is a founding member of the American Chamber of Commerce in Qatar.
The new law also introduces friendlier publication requirements for foreigners, requiring publication to be made now in two local newspapers, at least one of which should be in the Arabic language, which leaves the possibility to publish in English newspapers. Publications should also be made on websites if available, according to Kabbani.
Further up the ladder
For holding companies and large shareholding companies too, there are provisions that provide some much-needed breathing space in some cases and tighter restrictions in others. “Holding companies must now ensure that all subsidiaries keep all necessary financial records and the holding company must prepare consolidated financial statements, a profit and loss account and capital expenditure statement to be presented to the general assembly with necessary explanations and statements as required by international accounting standards,” says Kabbani. He goes on to add, “Another important change is in relation to the conversion of companies to a public shareholding company (except for the conversion of private shareholding companies which is governed by other provisions). Whilst it was required for the company to have been registered for at least three years and must have achieved net profits that are distributable of not less than 10% of its capital within the two fiscal years preceding its request for conversion,
the only requirement in the new law is for it to have been registered in the commercial registry for at least two years. The new law however kept the Ministry's discretion to impose other requirements. The definition of acquisition has been widened, steps have been established to protect minority shareholders in the event of acquisition, and new offences have been put in place.”
Wingfield says the new law reflects government's commitment to speed up the incorporation process for LLCs and there are already in fact a number of government locations in Qatar which effectively offer a “one-stop shop”, meaning that it is now possible to apply for an LLC's Commercial Registration, membership of the Qatar Chamber of Commerce and the LLC's Commercial and Signage Licences at the same place ( but not the Immigration Card). In theory, this should mean it will be possible, subject to all documentation being in place and correct, to incorporate an LLC within three or four days of submitting an application. “In any event, the Ministry of Economy and Commerce must now respond to an application to register a company within 15 days of the application being presented,” he says. In case the registration is not done, the aggrieved party has the right to knock on the doors of justice and now the Ministry of Commerce and Economy will hear such cases and dispose of them within two weeks. Kabbani considers this system revolutionary for expediting the process of incorporation. For example, once the new law is in force, the Ministry of Economy and Commerce would launch an online system whereby new companies can get their contracts with their respective clientele endorsed, along with approvals from the Ministry of Justice.
“Red tape and slow and painful licensing and registration processes are among the biggest barriers and pain points to small and medium-sized businesses and startups. Any initiative that removes these pain points is to be welcomed, so long as it is real and enforced,” Thompson says. He also advises all budding entrepreneurs in Qatar to visit the Ministry of Economy and Commerce website or consult a commercial law firm to know more details.
This shift to electronic documentation and approvals has long been on the wish list of local businessmen. This is the first step towards the “ideal”, which negates the need to even visit a government office during the registration process. “One must acknowledge the Qatar government's efforts in expanding its offering to the public through electronic means by making information and documents available to investors through the internet. However, establishing a business online with little paper work and without requiring the investors to physically attend to the process is not yet available in Qatar; whereas by comparison to the US and certain other countries, the electronic approach appears to be increasingly common and is proving to be more favourable with investors,” says Maakaron.
The new law isn't a complete overhaul, however, and many provisions have been retained. While the capital requirements have been relaxed, provisions in the existing law are still reflected in the new law, meaning that the management and shareholders of an LLC will have to take remedial action if losses amount to more than half of the company's capital.
“It is important to appreciate that the new law does not bring about any changes to the general requirement for a company (subject to certain exceptions) to be owned 51% by a Qatari shareholder. Restrictions on foreign ownership of Qatari companies
“THE MAJORITY OF QATARIS ARE KEEN TO INVEST IN THE COUNTRY AS QATAR WILL BE HOSTING A SERIES OF SPORTING EVENTS SUCH AS 2022 FIFA WORLD CUP, AND THE GOVERNMENT IS CREATING THE RIGHT AMBIENCE FOR THEM TO LAUNCH NEW BUSINESSES.”
Hassan Yousef Al Hakeem
Chairman Al Hakeem Group of Companies
“THE WAIVER OF THE MINIMUM PAID-UP CAPITAL IS GREAT FOR ENTREPRENEURS AS IT SIGNIFICANTLY REDUCES THE ENTRY BARRIER TO START BUSINESSES. IT ALSO SAVES THE CASH THEY HAVE TO BE SPENT ON CUSTOMER VALIDATION AND DEVELOPING INITIAL PRODUCT PROTOTYPES.”
Ahmed Abdulwahab Head of Incubation Qatar Business Incubation Center
are contained in the Foreign Investment Law and that law remains unchanged,” Wingfield points out. This is a deeply contentious issue; while many feel that it enforces accountability among a largely floating population, others like Maakaron feel it greatly influences the ease of setting up a business. “A foreign investor can establish a company in the US without requiring a local partner as is the case here in Qatar, which simplifies the process and removes a number of requirements that would otherwise be very time consuming, including, for example, drafting suitable articles of association or other partnership documents. By contrast, however, for a local investor establishing a business in Qatar, the process can be quicker and easier given the absence of certain requirements that would otherwise be required of foreign investors,” he says.
While we are on the topic, we should also note that the new law does not make any changes to the incorporation of companies in the Qatar Financial Centre or the Qatar Science & Technology Park, both of which have their own separate incorporation regimes and rules.
Another gripe of start-ups, particularly in the technology space, is that “the commercial law still requires companies to have an office space, so incubation is still vitally important”, according to Abdulwahab. Given the cost of office space in Qatar, incubators will remain very important for start-ups to grow, he opines.
In addition, the new law makes no change to the existing relatively attractive tax regime. Essentially, LLCs which are 100% Qatari-owned do not pay tax, whereas LLCs which have foreign ownership will have their profits taxed at the rate of 10% on the share of the foreign investors' profits, Wingfield points out.
In the long term
There is cautious optimism with regards to the immediate and long-term effects of the new law. “The immediate effects will most likely be demonstrated through shorter and easier establishment processes for setting up companies in Qatar. The longterm aspects, however, will be exemplified through improved corporate governance measures that the new law now requires not only for public joint stock companies, but also for private shareholding companies,” says Maakaron.
Kabbani feels it's good that the new law has introduced a few new concepts although most of the essential features and framework of the law have been maintained. “It is without doubt that companies incorporating in Qatari limited liability companies will appreciate the evolution of the law in terms of the share capital requirement. Investors would also feel more confident in dealing with listed companies. It is important to bear in mind that the new law anticipates that various regulations will be published to implement its operative provisions. We will have to wait and see how and if these further regulations might assist in the application of the new law.”
Cook too feels that the longer-term benefits are harder to envisage at this stage as only time will tell. “Definitely the new law will be helpful but to what degree is dependent on the market. The fact that markets and the global economy are evolving so fast will undoubtedly have an impact on business regulation in many countries, so we will need to see how the new law is affected by these.” For him, the important aspect is for the Qatar authorities to continue to consult with business leaders and business groups on the effectiveness and efficiency of the regulatory regime. It's a precarious balancing act between keeping up with the times and not frustrating businesses with frequent changes in regulation.
Stamp of approval
Overall, the response to this provision on the law has been positive. “Such laws promote our country's economy as it makes things easy for newcomers,” says Hassan Yousef Al Hakeem, Chairman of Al Hakeem Group of Companies. According to him, the majority of Qataris are keen to invest in the country and the new law will reduce the cumbersome process of registering a new company and, whether a Qatari or an outsider, will help in establishing new ventures. “Everyone wants to be part of one project or another,” Al Hakeem says.
While Cook wouldn't be too quick to judge the ease of doing business here, which is influenced by so many other factors like the size of country, scale of economy, trade, a complex set of laws, systems, and regulations etc, he believes that Qatar has undoubtedly improved as a place to set up business in recent years. It has become a more progressive place for business and it's apparent in its attitude to encourage new ventures, and the fact that the authorities are looking at bringing in a new law is the best evidence that they want to become even more attractive to business