A guide to setting up a business in the UAE – the legal requirements
The following is a brief introduction to the commercial and legal mechanisms available to foreign companies for investing in and carrying on business in the UAE.
The main methods by which foreign businesses may establish a presence in the UAE are as follows:
- Appointing an agent or distributor.
- Incorporating a limited liability company.
- Establishing a branch or representative office of a foreign company.
- Establishing a professional partnership or professional sole proprietorship (with unlimited liability).
- Establishing a company or opening an office in a free trade zone.
The procedures and requirements for establishing a business often involve liaising with a number of institutions and bodies, both local and federal depending on the nature of the venture and the legal structure.
Appointing an agent or distributor
A foreign business operating in the private sector can supply products to its customers directly in the UAE and therefore may not need to appoint an agent or distributor. Such arrangements are common in respect of low volume or bespoke products, the import of which is arranged directly by the customer.
However, some foreign companies prefer to appoint an agent in the UAE who can source and market to customers, handle logistics, sponsor employees for UAE residency and work visas and generally co-ordinate the sales process on behalf of their foreign principals.
Moreover, in order to tender for government projects in the UAE, foreign companies are generally obliged to appoint an agent or obtain a suitable operating licence of their own.
The UAE legal system distinguishes between two forms of commercial agency: the registered and unregistered agency.
Registered Commercial Agency
Registered Commercial Agency agreements are agreements between companies and agents which are registered with the Ministry of Economy. Only UAE nationals or 100% UAE owned companies may be registered as agents with the Ministry.
Once registered, the agency agreement is given substantial protections under the UAE Commercial Agencies Law. These include the agent’s exclusive right to market and sell a particular product in one or more of the Emirates. The agent is also entitled to commission payable on any sales of products regardless of whether the registered agent contributed to the sales.
A registered agent is ordinarily able to prevent parallel imports of the same product into their territory. Whilst this can be a useful tool for foreign principals wanting to limit sales of competing products in the Emirates, it can also prevent a principal from appointing another agent or from selling its own products directly to the market.
Registered agency agreements can be difficult to terminate. Even if termination provisions are agreed in writing in advance, and complied with, a registered agent may be entitled to payment of substantial compensation if such termination is deemed to have occurred at an inconvenient or inappropriate time or is otherwise considered unjustified.
Unregistered Commercial Agency
Unregistered Commercial Agency agreements do not benefit from the protections offered by the Commercial Agencies Law, but are instead governed by the Commercial and Civil Code.
On strict reading of the Commercial Agencies Law, a foreign principal that supplies products to its agent under an unregistered agency agreement may not be entitled to sue the agent for payment of their products through the courts. However, claims may be heard under the provisions of the UAE Civil Code. It is therefore advisable to insist on guaranteed methods of payment in the agency agreement.
A prospective UAE agent is likely to insist on the establishment of a registered as opposed to an unregistered agency. In all cases, commercial agency agreements should be carefully drafted and foreign companies should seek legal advice before entering into any agency agreement.
UAE Commercial Companies Law (CCL)
On 1 July 2015 a new Commercial Companies Law (Law No. 2 of 2015) was implemented, replacing the previous Federal Law No. 8 of 1984. A number of changes were introduced with the new CCL which affected companies throughout the UAE. Various penalties may be issued to companies who fail to comply with the CCL, which would include fines, licence suspensions, deregistration and, in severe cases, criminal actions. The penalty imposed will depend on the severity of the breach by the company/directors.
Incorporating a Limited Liability Company (LLC)
Under the CCL, foreign investors can conduct business through an LLC. This is a popular method of doing business in the UAE in all business sectors, with exception to banking, insurance and financial investment which may not be legally carried out by an LLC.
UAE national partner requirements
In most cases, an LLC can be incorporated with a minimum of two and a maximum of fifty shareholders provided a UAE national holds not less than 51% percent of the company’s shares. Whilst a foreign partner’s equity in the company may not exceed 49%, profit and loss, distribution can be prescribed to favour the minority shareholder in ratios of up to 80/20 in the Emirate of Dubai. Under the CCL one UAE national or a 100% UAE national owned company may now set up an LLC on their own.
Responsibility for the management of an LLC can be vested in the foreign partner or a third party. It is possible to enter into a scheme of arrangement with the UAE national partner to protect and define the interests of the minority partner, particularly in situations where in reality the minority partner provides all the capital in the company. It should be clear however that legally the UAE national will remain holder of at least 51% of the company. Any attempt to transfer shares affecting this minimum threshold will be invalid under Article 10 of the CCL.
Previously, LLC’s were required to have a share capital of at least AED150,000 (approx. US$41,000), although in practice the minimum capital accepted by the Dubai licensing authorities was AED300,000 (approx. US$82,000). It is however no longer necessary to deposit share capital as this is not required to be paid up prior to registration and companies are expected instead to have adequate share capital in order to achieve the purpose of its incorporation.
In practice however, the minimum share capital imposed is at the discretion of the relevant licensing body in each Emirate and these authorities continue to impose minimum share capital requirements for certain trade activities.
An initial application seeking approval of the LLC’s name and activities should first be made to the relevant government registration authority. In Dubai this is the Dubai Department of Economic Development (DDED). In Abu Dhabi the Abu Dhabi Department of Economic Development is the relevant authority. Depending on the type of activity contemplated, special approval from interested ministries or departments may also be required. For example, oil and gas related activities would ordinarily require the prior approval of the Rulers Office in the relevant Emirate, and in certain cases the Supreme Petroleum Council.
A memorandum of association should then be prepared in accordance with the provisions and requirements set out in the CCL and signed before a UAE Courts’ Notary Public. A copy of the EJARI certificate evidencing the LLC’s lease agreement will also need to be submitted to the relevant government registration department, along with various supporting documents pertaining to the identity of the shareholders and the LLC’s proposed manager.
Provided the application is in order and all necessary fees are paid, the relevant Emirates’ business licensing department will enter the LLC into the Commercial Registry database and issue a licence to operate.
Branches and representative offices of foreign commercial companies
A foreign company can establish a branch office in the UAE or what is known as a “representative” office. The registration of a branch/representative office of the foreign company does not constitute the establishment of a new company or separate legal entity. Consequently, the foreign company will be fully responsible for the liabilities of its branch/representative office.
A representative office is limited to gathering information and marketing the activities of its parent company and is issued with a professional (i.e. non-trade) licence. Such offices should not enter into contracts/write business of their own accord, but rather refer customers to the services/products of their parent company. By contrast, a branch office is a fully-fledged business which is granted a commercial licence and is permitted to perform contracts or conduct other activities in the name of its parent company. Such activities must be specified on the branch office trade licence and must be ancillary to the activities of the parent company. Authorities may, however, impose restrictions on the activities undergone by a branch. Such restrictions will vary between Emirates.
UAE national agent requirements
In order to obtain a licence for a branch or representative office, it is usually necessary to enter into a national agency agreement with a UAE national, or with a 100% UAE national owned company.
The national agent is not required to own equity in or participate in the management of the representative or branch office. In practice, the role of the national agent is confined to providing specific services such as assisting in communications with government departments (e.g. facilitating visas for foreign company personnel) or undertaking other administrative matters. The annual fee payable to a national agent is a matter for negotiation, as are the terms.
Both branch and representative offices must obtain an operating licence from the relevant Emirates’ Department of Economic Development. Once initial approval has been received an application must be made to the Ministry of Economy. The fees charged by each department will vary between Emirates and the approval of other ministries may also be required if the activity is regulated, for example insurance activities require the approval of the UAE Insurance Authority.
Various corporate documents including the parent company’s memorandum of association, audited accounts, certificate of incorporation and board resolutions pertaining to the establishment of the representative or branch office must be submitted to the relevant licensing authority and Ministry of Economy. Powers of Attorney granted by the parent company to the managers or other employees of the branch representative office will also be required along with the deposit of a bank guarantee with the Ministry of Economy of AED50,000.
Professional partnerships and sole professional proprietorships
Professional partnerships may be formed between two or more individuals carrying out ‘non-commercial’ or professional activities. An individual can also conduct such activities through a professional licence issued in his or her own name. These types of businesses may be 100% foreign owned but generally must appoint a UAE national agent similar to those needed by a branch and a representative office.
Individuals conducting business under a professional partnership or sole professional proprietorship are liable to the full extent of their assets for the liabilities of the business. Examples of professional partnerships/sole professional proprietorships include those rendering legal advice, auditing and accounting services, managerial and economic consultancy, educational services and medical services.
Special approvals may be required from concerned ministries/government departments, depending on the activity to be practised.
For example, law firms in Dubai must obtain a professional licence from the Government of Dubai Legal Affairs Department and medical professionals would ordinarily require the approval of the Ministry of Health.
An application for a licence should be made to the Department of Economic Development/relevant Emirates’ licensing authority. Various documents including the national service agent agreement, tenancy contract of the office premises and degree or work experience certificates should be submitted. Certificate(s) of good standing from the foreign body responsible for registering the relevant profession may also be required.
Establishing an entity in a UAE free trade zone
The UAE’s free trade zones offer foreign investors the opportunity to establish a business presence in the Middle East region with 100% foreign ownership. Unlike most other entities in the UAE, companies operating from the various free zones do not require a UAE national partner or agent. However, if a foreign entity based in the free zones wishes to sell products within the UAE, it may only do so through a distributor or an agent appropriately licensed in the UAE or by obtaining a suitable licence of its own through the Department of Economic Development/relevant Emirates’ licensing authority.
Types of free zones
In recent years there has been a proliferation of free zones, with more than a dozen currently operating in the UAE. Traditionally the free zones were located around major seaport or airport facilities. Examples include the Jebel Ali and Hamriyah Free Zones which are based around man-made seaports, and the Dubai, Sharjah and Abu Dhabi Airport Free Zones.
A number of free zones cater to specific industries, for example, Dubai Knowledge Village aims to attract companies serving the educational and academic sectors and the Dubai International Financial Centre (DIFC) serves the financial sector. There are however free zones wherein almost all activities can be undertaken. For example the Dubai Multi Commodities Centre (DMCC) which originally limited itself to more shipping and commodities focused companies, now has a wide range of service providers from all industries.
The DIFC is a financial centre which attracts a number of financial services providers as well as insurance companies and legal services providers.
The DIFC is unique amongst the free zones in the UAE as it has its own legislative system of commercial laws and regulations based substantially on the principles of English Common Law. Further, the DIFC has an independent judicial system responsible for the independent administration and enforcement of justice in the DIFC. As well as having exclusive jurisdiction of all civil and commercial disputes arising within the DIFC, parties established outside of the DIFC can choose to have their commercial contractual relationships governed by DIFC law, DIFC courts, or arbitration or mediation in accordance with the DIFC-LCIA Arbitration Centre rules.
Free zone entities
It is possible to establish branches of foreign companies in the UAE free zones or to incorporate a free zone entity. The types of entities which may be incorporated include single shareholder entities, commonly known as free zone establishments, and free zone companies with commonly two to five shareholders. In most free zones, both free zone establishments and free zone companies will have limited liability, however, this does vary between free zones and therefore the rules and regulations as to whether a single shareholder company is given limited liability should be considered.
The minimum capital requirements for free zone companies vary significantly between free zones. For example, DMCC incorporated companies have a minimum capital requirement ranging from AED50,000 (approx. US$13,614) to AED1 million (approx. US$273,000). For other free zones a lower capital may be required and some free zones may not prescribe a set capital requirement.
There are generally no minimum capital requirements imposed on foreign branch offices operating in free zones.
Companies operating in UAE free zones must obtain a suitable operating licence, renewed annually, from the relevant free zone authority and enter into a lease. In most cases it is possible to rent existing office or warehouse space or to custom build premises. Leases of up to 50 years duration are available in some free zones such as Jebel Ali Free Zone. The DIFC and some of the other free zones also offer freehold ownership options or “hot desk” solutions for start up satellite companies with one or two employees whereby an office is not required. Various corporate documents, similar to those required to set up LLCs or branch offices, must be also submitted and regulatory approvals will be required for certain industries.
Legalisation & translation of documents
Most documents originating outside the UAE must be notarised and legalised through diplomatic channels prior to being submitted to the UAE authorities. Once legalised it is usually necessary to obtain a certified Arabic translation of corporate documents before these can be submitted to the UAE authorities. This latter requirement does not apply to free zone licence applicants.
Fees, taxes and charges
With the exception of foreign banks and oil companies, there is no corporate or individual income tax levied in the UAE. There are also no restrictions imposed by the UAE authorities on the repatriation of profits. Annual fees are payable to the relevant licensing authority in order to obtain and renew business licences. Additional fees may be imposed and calculated according to the number of employees sponsored by the applicant. Fees are also payable to the relevant Chamber of Commerce and other government departments. The free zones generally impose annual licensing tariffs calculated as a flat fee and charge additional fees to sponsor and renew the work and UAE residence permits of employees. There is presently a 5% customs import duty on most goods entering the UAE. Additional, and in some cases substantial, duties are payable on luxury products such as alcohol and tobacco.
The UAE Ministry of Finance has confirmed that Value-Added Tax (VAT) will be introduced at a rate of 5% across the UAE and Gulf Cooperation Council in January 2018.
For more information, please contact Rula Dajani Abuljebain, Managing Partner, Middle East, on +971 4 423 0502 or firstname.lastname@example.org, or your usual contact at HFW.