This article was first published by Lexis Middle East as an E-Journal on 2 November 2021, to read this original article, please click here
The COVID-19 pandemic has dramatically changed the way we do business. Owing to the surge in digital shopping in 2020, it is not surprising to see e-commerce aggregators and marketplaces mushrooming every other day. The United Arab Emirates (UAE), in particular, has become an e-commerce hub driven by factors such as high internet penetration, a well-developed logistics system, high disposable income, and a tech-savvy population.
Here are 5 things to know about running an e-commerce aggregator or marketplace in the UAE:
1. Legal Structure and Business Activities
The first question we hear from all entrepreneurs is: “Should I set up my legal entity onshore or in a free zone?”
Free zones have traditionally been an attractive proposition for a marketplace because they allow you to have 100% foreign ownership and are more dynamic in their approach to online businesses. For instance, the Dubai Multi Commodities Centre (DMCC) explicitly recognizes an “e-commerce marketplace business” as a business activity. No wonder some of the prominent e-commerce marketplaces are based in the DMCC, such as Instashop, BulkWhiz, and Just life. However, a free zone company is restricted to perform its services within the free zone and therefore, such an entity would have to use a third-party logistics provider (3PL) for physical interactions (such as the delivery of products) with customers outside the free zone.
Of course, the recent implementation of 100% foreign ownership in onshore (also known as mainland) entities has caused many businesses to question whether it makes sense to be set up onshore. The answer is not straightforward because there are unwritten rules surrounding the implementation of the 100% foreign ownership law in Dubai.
To elaborate, the Dubai Economy (popularly known as the DED) does not explicitly list ‘e-commerce marketplace’ as a business activity. Instead, it lists “portal” as a ‘professional’ activity which is described as a platform that connects buyers with sellers. Under the new regime, ‘professional’ activities can only be carried out under a (i) sole establishment (which does not offer limited liability and can only be owned by a single natural person), (ii) civil company (which does not provide limited liability and can only be owned by natural persons), or (iii) branch office of a foreign company (which is a separate legal entity). As such, you cannot set up a limited liability company for a ‘portal’ which is a significant limitation.
Owing to the above, the legal structure of an e-commerce aggregator/marketplace requires careful analysis to ensure that you consider the best corporate vehicle from a long term perspective.
2. Licenses and Approvals
Apart from the trade license to be obtained from the relevant emirate’s Department of Economic Development, there are sector-specific approvals and licenses that may come into play in the case of an e-commerce marketplace or aggregator.
For instance, e-commerce aggregators dealing with pharmacy products or healthcare services must seek the approval of the Ministry of Health and Protection (MOHAP) for any advertisements related to healthcare. Similarly, the Dubai Health Authority (DHA) has recently introduced the requirement for an e-commerce aggregator to register with the DHA for providing COVID-19 PCR testing services.
3. Key Commercial Documents
An e-commerce aggregator or a marketplace is essentially an intermediary between buyers and sellers and must have the following critical commercial documents in place:
- Seller Agreements: The strength of an e-commerce marketplace is the quality (and, in many cases, quantity, too) of sellers. As such, an e-commerce marketplace must have a solid agreement with its sellers encompassing all commercial terms and clarifying the relationship between the seller and the aggregator, particularly the fact that the aggregator is not a party to the contract of sale between the buyer and the seller.
- User Terms and Conditions (T&Cs): Needless to say, every website must have user terms and conditions (T&Cs), which represents the agreement with the users of the website or application. In such T&Cs, an aggregator must clarify that it is not the seller of products or services listed on the website and that it is merely an intermediary. Similarly, provisions relating to accountability for defective products or services must be set out in the T&Cs in the event of a customer complaint.
- Returns and Refunds Policy: A returns and refund policy should ideally stipulate a time frame for returns or refunds, list return requirements, define the expected condition of returns, and set out the mode of refund.
Most e-commerce aggregators or marketplaces outsource all or some part of their supply chain management to third-party logistics providers (3PLs), particularly the delivery of products to end customers. The logistics agreement with such third parties must include, amongst other things, provisions on the scope of work, performance standards, branded attire for delivery persons, liability for failure to deliver on time, termination, and IP considerations.
5. Other Legal Considerations
- Prohibited Products: Apart from the above legal considerations, an e-commerce aggregator/marketplace must be mindful of legal restrictions on what can be listed on a marketplace. Products that cannot be sold online in the UAE include tobacco products (including cigarettes and sheesha related products), pork, and non-halal matters.
- Intellectual Property (IP): Appropriate IP ownership and licensing provisions must be in place between the aggregator/marketplace and the sellers to avoid misunderstandings between the parties on brand usage and display for marketing and advertisements.
- Tax: Depending on whether the e-commerce aggregator or marketplace is located onshore or in a free zone, there could be custom duties considerations if the entity is directly importing and selling the goods themselves. Additionally, VAT advice must be sought to ensure a tax-efficient legal structure.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.