Cross-Border Catch-Up: Doing Business in the Middle East

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Patty Shapiro: Hi, and welcome to The Cross-Border Catch-Up, the podcast for global employers who want to stay in the know about cutting-edge employment issues worldwide. I am Patty Shapiro and I am here today with my colleague, Shirin Aboujawde. We are cross-border attorneys here at Ogletree Deakins. And today, we are going to discuss doing business in the Middle East. Shirin, where should we start?

Shirin Aboujawde: Well, Patty, the Middle East is such an interesting area of the world, and there are so many different quirks about doing business in the Middle East. And I think one of the first things that employers need to really think about, which is very unique to the Middle East, is how they set up and what that means for, believe it or not, their physical presence. Now, the Middle East is known across the world as an expat Mecca, right? You’ve got jurisdictions like the UAE, which is full of expats, and now jurisdictions like Saudi Arabia and Kuwait and Qatar are becoming hugely popular with the expat population.

And why do I mention this in relation to physical presence? And that’s because most of the countries in the Middle East have now put in criteria where you must have a certain amount of square footage of real estate locally in the country. And that directly correlates to the number of visas that you’re granted to bring people in. And because the expat population is just a huge component of doing business in the Middle East, that’s one of the first things you need to think about is how big a physical presence you’re going to have. I mean, in the days now that we’re in with remote work, not a lot of people think about physical presence. It is truly alive and well in the Middle East.

Patty Shapiro: So when you say physical presence, you literally mean a brick and mortar place where your employees are coming and doing work like traditional office space?

Shirin Aboujawde: That’s absolutely right. So your physical square footage lease hold in the Middle East. Yep, yep. And that’s not the only quirk, right? I mean, you’ve got to think about whether you want to have a different work week. In some jurisdictions in the Middle East, you don’t get a choice. In jurisdictions like Saudi Arabia, Kuwait, Qatar, the weekly working days are Sunday through Thursday, and your weekends are Friday and Saturday. And that’s non-negotiable. If you try and ask employees to come in on a Friday, no one will show up. Now, the-

Patty Shapiro: Is it non-negotiable because culturally? Or is it actually legally it has to-

Shirin Aboujawde: Legally. Yeah, it’s legally because you have to remember in those jurisdictions the national religion is Islam, and so Friday is their day of rest. Now, the UAE has very recently converted all of its public sector work to a Monday to Friday work week, which is revolutionary given the fact that it is smack dab in the middle of the Islamic world in the Middle East. But I think in their attempt to modernize and become more Western and align themselves more with the business life of the Western world, they’ve moved the public sector over. And as a result, what you’re starting to see in the UAE is a lot of businesses shift their calendar week to align with the government.

And that’s for a number of reasons, right? If you’re interacting with the government, you want to align to their calendar. Schools are aligning to this calendar as well, so employees who have children will find it difficult to work on the days when their child is not in school. So there are a number of reasons why businesses are starting to align in that way. But the UAE stands alone in the Middle East with the Monday through Friday work week. The rest of the jurisdiction, except for a few, Israel and Lebanon don’t, but the majority of the Islamic countries follow a strictly Sunday through Thursday schedule.

Patty Shapiro: Interesting. What else? What else is unique?

Shirin Aboujawde: Well, besides the, and this is only related to the UAE, there are no taxes in the UAE. And it kind of throws people for a loop because you’ve got employees who are getting literally the full amount of their pay in their take home, which is very unique. And then that’s usually why it’s such a big expat haven. But what that also means is that when you start to think about exiting them, you have to take a lot of these nuances into account. There is actually, they’ve just a few years ago they issued, there’s now VAT that applies in the UAE. And so you actually have to pay a small tax when you buy things, but it definitely makes things very interesting. The other Middle East jurisdictions absolutely have tax. This is a quirk of the UAE.

And I talked a little bit about this is why it makes it lucrative and also very enticing to expats. And that kind of goes back to what I was saying originally at the beginning of this podcast, which is that the expat population in the UAE is massive, right? It’s something astronomical, like 90% of the workforce is expat in the UAE. And a growing number of employees within Saudi Arabia, within Kuwait, and within Qatar are all expat. And not only does that reflect on how much real estate you have to hold, but now what the local governments within the Middle East have noticed is that jobs are slightly heavily favored toward expats and they need to do something on their own initiative to protect their own local workforces.
And so what you’re starting to see is mandatory localization rates. So in the UAE there is an Emiratization rate where if you have any number of employees, you have to have a certain number of local nationals employed from as low as even those with less than 50 employees will need to have one local national on their books. And then once you have more than 50, it changes to two. And it gets higher and higher after that as a percentage of your total workforce. Saudi Arabia has very similar laws with regard to their localization rates. And it’s very difficult to find locals as well that are available to work because the populations in these jurisdictions is now becoming so heavily weighted towards the expat community.

Patty Shapiro: Yeah. And it’s interesting that, proportionally, it’s still a significant number of expats permitted per local hire, right? Having 50 employees and only one needs to be local is kind of wild.

Shirin Aboujawde: Yeah, yeah. It just goes to show that they’re very hard to find. If you try recruiting a local in the UAE or Saudi Arabia, you do struggle a little bit. And then that’s because the government provides for its citizens very, very well. And so a lot of them have local government jobs that really take care of their people extremely well, and they don’t go looking for other jobs elsewhere.

Patty Shapiro: So do employers just need to make a good faith effort to hire somebody local?

Shirin Aboujawde: No, you must. Yeah. It’s not just a you have to try. You absolutely, once you hit the threshold and then you have to have the person on your books. And if you don’t, there are severe penalties for non-compliance.

Patty Shapiro: Wow, interesting. Okay.

Shirin Aboujawde: Yeah.

Patty Shapiro: Quick question I meant to ask about the income taxes. So you said that employees take home, their net is basically they’re gross, right? That is what you pay them.

Shirin Aboujawde: Yep. That’s right.

Patty Shapiro: So does that mean that there aren’t social deductions, like social contributions that get deducted from your pay either?

Shirin Aboujawde: There are not, there are not. And that’s because, in those jurisdictions, the government is of the view that you are an expat and you’re not staying. And so things that you would normally see taken, deducted in a normal jurisdiction, contributions to pension, state pension, and even local healthcare deductions, that doesn’t happen in the Middle East. Instead, your employer is responsible for providing you with medical insurance as an expat. And you don’t get a pension because the government has no intention of allowing you to stay there once you’re done with your assignment. And so those contributions are unnecessary.

Patty Shapiro: Oh, okay. And what about corporate taxes? Does that mean that employers have an incentive to set up shop there and not have to pay corporate taxes? Or is this purely individual taxes?

Shirin Aboujawde: Yeah. No, it’s purely individual taxes. The UAE actually rolled out corporate tax a while ago, and so you do have to pay corporate tax on the revenue that you generate as a business. It’s still an incentive. A lot of businesses move to the Middle East. The UAE has a particularly low corporate tax rate, so that’s always appealing. And Saudi Arabia just launched an initiative to try and get companies to headquarter themselves there, or at least create regional offices there. And they’re offering incentives in that respect too. So there’s a lot of movement in the Middle East to try and engage and initiate business.

Patty Shapiro: Yeah, it sounds like it. What else? What else should our audience know about the Middle East?

Shirin Aboujawde: So a few other quirks. And again, this is mostly focused around your heavy expat population, is the requirement to have, firstly, a PRO, a public relations officer. Now, when I say public relations officer, everyone thinks I’m talking about marketing or media. I’m not. A public relations officer is the person that interacts with the government for you. They are usually a local. It’s mandatory for them to be a local. But obviously, if you only have 10 employees, then you might not have a local on your books. And then what do you do? In that case, companies usually outsource that function. And so you have to be thinking about that right away because what does a PRO do, right? They interact with the government. Okay, well, how often do you think that someone really needs to interact with the government? And the answer, unfortunately, is all the time. And the reason why the answer is all the time is because to do just about, as an expat, to do just about anything in the Middle East, you need to file a No Objection Certificate.

Patty Shapiro: What does that mean, a No Objection Certificate?

Shirin Aboujawde: So a No Objection Certificate is a formal letter from your employer that you put on file which says that they have no objection to you doing a particular thing. Now, what are the types of things that you need a No Objection Certificate for? You need a No Objection Certificate to get a driver’s license, to have a bank account, to get a mortgage, to keep alcohol in your house. These are all the types of things that, as an expat, you need permission from your employer to do.

Patty Shapiro: So interesting. So even things that are completely unrelated to your job.

Shirin Aboujawde: Yep. And that’s right. And that’s because your employer is sponsoring you. And so if you do anything that’s on the wrong side of the law, your employers could be on the hook for it. And as a result, they have a very tight hold on what they can and can’t allow you to do.

Patty Shapiro: I see. Okay. Interesting. What about employment agreements? I know those are required in most of the world. How does that work in the Middle?

Shirin Aboujawde: Yeah, great question. And so, again, very unique to the Middle East. There’s a very specific way to do employment agreements, and you actually have two. The first one is a template agreement, and that is a government form that you usually file when you do your visa application. So in the UAE, you’re usually, unless you’re in a free zone, you’re going through MOHRE, which is the Ministry of Human Resources and Emiratization, for your employment visa. And in order to get an employment visa, you need to submit an employment contract. And that employment contract must be the MOHRE template. So you don’t get a choice, right?

Very similar thing in Saudi Arabia. If you are bringing on an expat, you submit your application through the QIWA portal. And the QIWA portal has a template employment agreement that has almost no wiggle room for what you can and you can’t put in there. It is mostly a fill in the blanks document. It doesn’t have any of the bells and whistles that you would normally want in an employment agreement, and no protections for the employer whatsoever. And so what most employers will do is they’ll fill out those template documents, and then separate and apart they’ll create their own almost private employment agreement with the employee. It’s a far more robust document. It’s more akin to the employment agreements that you generally see in other jurisdictions like Europe or Asia.

Patty Shapiro: Okay. And does it usually include statutory benefits and that kind of thing as well?

Shirin Aboujawde: Yeah, it does. So in some sense, it’s a bit of a repetition of the statutory entitlements that you see in the contract. But then on top of it, it layers in a lot more of the robust provisions that you’d see in a normal employment agreement, obviously robust language around intellectual property rights, more detail and context on non-solicits, non-competes, the obligation to return company property when you leave, how allowances may be clawed back if they’re paid on an annual basis, things like that. So it obviously includes a lot of really integral clauses to the employment relationship that you wouldn’t get an opportunity to put in in the government-issued template.

Patty Shapiro: Let’s talk about some of those statutory benefits, because I understand some of them are kind of unique and very different than what we’re used to in other parts of the world. So you even mentioned that there’s private medical insurance requirements for employers there when they’re hiring expats. What other kinds of things should our audience be aware of?

Shirin Aboujawde: Yeah. So the Middle East has a few really specific and quirky things above and beyond what you’d normally see internationally, right? There’s obviously statutory annual leave, statutory maternity leave, things like that. But very unique to the Middle East you’ll have things like Hajj leave, which is a mandatory time off to go make a pilgrimage to Mecca. You’ll have things like Ramadan hours where, during periods of Ramadan, there’ll be reduced work hours. And those are mandatory, right? You don’t get to agree out of them.

Patty Shapiro: And do those apply to everyone, even non-Muslim employees?

Shirin Aboujawde: They do, they do. So it doesn’t matter what your religion that you follow is. During Ramadan, you get reduced hours, which is really nice if you’re a non-Muslim.

Patty Shapiro: Yeah. And Hajj leave too, do non-Muslims get that benefit?

Shirin Aboujawde: No. No, non-Muslims don’t get that. You have to actually be making a pilgrimage to Mecca. And they won’t let you make a pilgrimage to Mecca if you’re not Muslim.

Patty Shapiro: Figures, figures. How about at the end of the employment relationship? Because as you know, it’s always so different in other jurisdictions, especially for US-based employers and companies. So what does that look like, particularly with respect to an expat population?

Shirin Aboujawde: Yeh. So just like all other countries around the world, termination procedures are going to be unique to the country. In some jurisdictions in the Middle East, it can be easy. In other jurisdictions, it can be difficult. But there are a few universal things that come into play when you’re terminating an expat in the Middle East. One of the big things that you see across the jurisdictions, so in the UAE, Saudi Arabia, Qatar, Kuwait, is end-of-service gratuity for expats. And that gets paid regardless of how the employee is terminated. Whether they resign, whether they’re made redundant, whether you’ve terminated them for gross misconduct, they’re going to get an end-of-service gratuity. And that’s usually a number of days of pay for each year of service that they work.

And it varies. The calculation varies by jurisdiction, but it’s almost seen in the Middle East as a bit of a pension, if you think about it. Remember back earlier in the podcast we talked about the fact that there are no contributions, there’s no state pension or anything like that. They really do view the end-of-service gratuity as almost a quasi pension, right? This amount that accrues while you’re working. And regardless of how you leave an organization, it’s money that you take with you when you leave. So that’s very particular to the Middle East.

And then because we’re talking about expats, the other thing that we have to talk about is visa cancellation because that’s another big thing. So obviously, when an expat is leaving, again, of their own volition, or because you’ve terminated them, their visa has to be cancelled. There’s no way around it. The UAE used to, used to have an exception where you could transfer visas from one employer to the other. They have since closed that loophole. And so now, even when you are going from one employer to another in the UAE, your current employer must cancel your Visa and your new employer must apply for a new one. And along with doing that is a mandatory payment clearance form where the employee has to agree that they’ve received all of their payments that are owed to them.

Patty Shapiro: I see. Okay. So a lot of extra steps, even if you have an expat.

Shirin Aboujawde: Exactly.

Patty Shapiro: Any final thoughts? Other things that our audience should know about when doing business in the Middle East?

Shirin Aboujawde: I mean, the purpose of the podcast is to provide a high level. There are so many details about doing business in the Middle East. I could spend hours talking about it. We’ll probably have to have another one of these to cover those. But I think this has been a good high level overview of pitfalls to be aware of when thinking about doing business there.

Patty Shapiro: Absolutely, absolutely. A lot of really interesting things to consider. Well, thank you all for joining us for today’s Cross-Border Catch-Up. Follow us to stay in the know about cutting-edge employment issues worldwide.

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