Opening a company in the UAE
Against the backdrop of unfavorable political-economic conditions for business in 2022 and imposition of restrictive sanctions by a number of European states, the United Arab Emirates has become one of the most attractive countries for investment and formation of bilateral business relations. One of the most popular requests from Russian entrepreneurs in the spring of 2022 is related to a company opening in the UAE and business relocation to the Middle East market. Trade House in the UAE is ready to support in opening a company in the UAE on five possible options.
What you need to know about the Emirates before opening a company in the UAE
The United Arab Emirates is a federal state in the Middle East, consisting of seven emirates, each of which is a state — an absolute monarchy: Abu Dhabi, Ajman, Dubai, Ras Al Khaimah, Umm Al Qaiwain, Fujairah and Sharjah.
For many years, the emirates were separate principalities, but on December 2, 1971, six emirates announced the creation of a federation called the United Arab Emirates. The seventh emirate, Ras Al Khaimah, joined it a year later. Thus, a new country appeared, which today is considered the youngest and most dynamically growth state in the world.
UAE administrative structure is based on the right of each emirate to dispose of hydrocarbon reserves on its territory. And it is in accordance with oil reserves that the influence of certain emirates is distributed in determining the general policy of the country. Certainly, the most powerful emirate of Abu Dhabi plays a key role in the UAE. That is why the President of the UAE is Emir of Abu Dhabi. Since 2004 Khalifa bin Zaeyd Al Nahyan is holding this position.
Arabic is the official language in the UAE. The second most important language is English, which is actively spoken and used in business.
Regulatory framework in the UAE
To conduct business and open a company in the UAE, one must consider that the legal system in the UAE is based on the principles of the civil code and Islamic Sharia law. Sources of law for civil affairs include Constitution, Federal laws and regulations, laws and decrees of each individual emirate, Islamic Sharia.
Federation and Emirates
The Constitution of the UAE provides for the authority distribution between the federal government and the government of each emirate. Moreover, the Constitution serves as the legal basis for the federation and is the basis of all legislation proclaimed at the federal and emirate levels. Under the Constitution, the federal government has exclusive jurisdiction over various independent matters, including foreign policy, defense and security. The law enacted at the federal level takes precedence over the local law of each emirate.
Local authority of each emirate is allowed to regulate all local matters that do not fall under federal law. Also, the government of each emirate retains significant power to regulate commercial activities, to issue trade licenses and to conduct company registrations to the extent that such activities are not already regulated under federal law.
Although the Constitution states that Sharia is the main source of law, it is still not the only source of law and its application is usually limited to:
- use by the courts as an interpretative aid where there is no express legislation governing a particular issue;
- religious, moral and personal law issues, especially concerning Muslims (e.g. inheritance, divorce and etc.);
- operations that are deliberately expressed to be Sharia compliant, such as Islamic banking transactions.
Except where such provisions are to be contrary to the UAE law (including Sharia law and public policy), the UAE recognizes and permits the concept of freedom of contract. This allows the contracting parties to regulate their relationship as they wish.
Five options for opening a company in the UAE
There are five options for opening a company and doing business in the UAE, available to foreign investors:
- «Shift method», or doing business from abroad;
- Doing business through an agent/distributor;
- Opening a company;
- Joint venture;
- Merger and Acquisition (M&A).
Option 1. «Shift method», or doing business from abroad
This form of business allows a foreign company to trade in the UAE from its home country, thus saving on the need to be physically present in the Emirates (office rental costs, salaries for local specialists, etc.). However, this option is usually applicable only to specialized services and goods. At a certain stage, including when expanding a business, it is the fact of a remote presence that can become a serious barrier to successful development in the Emirates: not all issues can be solved from abroad. Besides, for many clients from the UAE the physical presence of the company within the country is still a fundamental point.
The UAE Companies Law requires foreign investors to be registered and licensed by the competent authorities in the UAE in order to conduct business. This is a significant limitation on the nature and level of activities that can be performed on a «shift method» basis.
Option 2. Doing business through an agent/distributor
This option also allows foreign companies to avoid a physical presence in the UAE and use the services of agents or distributors in the local market. This significantly reduces the cost and risks as the office rental costs are saved and existing third-party customers are used. However, caution and due diligence should be carried out before the entry into any such agreement with a local party.
The UAE Commercial Agency Law (Federal Law No. 18 of 1981, as amended) governs the appointment of registered distributors, commercial agents and sales representatives. Commercial representation is defined as «any arrangement whereby a foreign company is represented by an agent to distribute, sell, offer or provide goods or services in the UAE for a commission or profit to the agency».
The Commercial Code (Federal Law No. 18 of 1993) builds on the Commercial Agencies Law and establishes a framework that regulates various types of commercial representation. A contract agency is the most common type of agency and involves an agent to represent the foreign principal in the distribution and sale of goods or services on an ongoing basis and in specific activities in order to find clients and close deals for the principal for some fee.
Under the UAE law, agency and distribution agreements are generally treated as the same. There is a wide range of different options and types of agents/distributors and the distinction should be made between registered and non-registered agreements. A registered arrangement (agency or distribution) is only possible where the agent or distributor is a UAE national or a company fully owned by UAE nationals. Agents also usually benefit from product exclusivity, as imported products must be exclusive to the market.
Completing a registered agency/distribution agreement can be difficult and costly as there are strict rules and restrictions that apply.
Option 3. Opening a company
When opening a local company in the UAE, it should be considered that there are three key options available to a foreign investor:
- Opening a local company within the UAE;
- Opening a company in the UAE in one of the free economic zones;
- Offshore company (the so-called «International Business Company»).
Opening a company within the UAE
Federal Law No. 2 of 2015 is the new Commercial Companies Law (CCL), which came into force on July 1, 2015 and replaced the previous Commercial Companies Law (UAE Federal Law No. 8 of 1984, as amended). Foreign businesses willing to operate within the UAE usually do so either through a Limited Liability Company (LLC) form of company or through a branch/representative office, although the new CCL does allow for other forms of companies that can be registered in the UAE.
Opening a company by Limited Liability Company UAE (LLC) form
Currently the new CCL does not impose a minimum capital requirement for an LLC. However, in practice many businesses continue to apply the old minimum capital requirement (e.g. AED 300,000 in Dubai or AED 150,000 in Abu Dhabi). The capital in an LLC must be divided into shares of equal value. New LLC activities in many sectors are still subject to certain minimum capital requirements as part of binding agreements.
Moreover, other important points should be considered:
- Operational management of the company may be carried out by a manager, who is usually appointed by the foreign owner.
- It is possible to provide in the Foundation agreement that profits and losses will be divided in a ratio different from the ratio of equity shares.
- It is necessary to appoint an auditor who must be accredited in the UAE.
- Although there are no ownership restrictions on affiliates, a Local/National Service Agent must be appointed and must be either a UAE national or a company fully owned by UAE nationals. The Service Agent is not entitled to the profits of the company or the profits generated by the affiliate, but only provides certain limited governmental and administrative services subject to the arrangements specified in the National Agent Service Agreement. Such services typically include apply for a license application, license renewal and branch visa applications.
Opening a branch of foreign companies
The new CCL allows a foreign company to open a branch in the UAE. The local branch in the UAE is not a separate legal entity from its parent company. Therefore, there is no legal protection for the parent company in the form of limited liability. Local branches are usually limited to conducting the same activities as the parent company.
It usually takes approximately 4–6 weeks to register a branch as there are many steps and accompanying documentation that needs to be legalized to complete the registration process. The reforms envisaged in the new CCL can help shorten this time period.
Opening a company in the UAE on the territory of Free Economic Zones
An alternative to opening a local company is to open an LLC or a branch in one of the many Free Economic Zones in the UAE.
Free zones are defined areas within the UAE and have been introduced to attract foreign investments. Each free zone is governed by its own regulatory bodies with its own rules and regulations. The licensing authority in each free zone is responsible for issuing free zone licenses and companies registration. Generally, free zones focus on a particular industry and are adapted to certain areas of business, so they only license certain types of activities.
Although there are a large number of free zones in the UAE, most of them are located in Dubai. Most popular free zones are:
- DIFC — Dubai International Financial Centre;
- JAFZ — Jebel Ali Free Zone;
- DMCC — Dubai Multi Commodities Centre;
- DAFZ — Dubai Airport Freezone;
- DCC — Dubai Creative Clusters, otherwise known as TECOM, which includes Dubai Internet City, Dubai Media City and etc.;
- KIZAD–Khalifa — industrial zone of Abu Dhabi;
- Masdar City.
In most free zones, we usually see two main types of free zone companies of the form Limited Liability Company:
- Free Zone Establishment;
- Free Zone Company.
The main difference between the two types is the number of shareholders and share capital requirements.
Although free zones allow 100% foreign ownership, companies established in a free zone are not allowed to operate within the UAE. Each free zone has its own (non-criminal) laws that apply to companies located there, along with UAE federal laws and local laws in the respective emirate. DIFC is the only exception to this as it has its own set of laws (other than criminal laws) which are not governed by the laws of the UAE. Usually, each free zone permits the registration of a company, branch or representative office, in its jurisdiction.
It is possible to register a branch in free zones. The concept of a branch is the same as the concept of a branch within the UAE, the branch is an extension of the foreign parent company and therefore is not a separate legal entity and does not imply limited liability. The branch is also not required to have its own share capital. The main difference between a local UAE branch and a free zone branch is that the free zone branch is not required to appoint a national service agent. However, the branch is limited in that it only engages in activities that are the same as those of its foreign parent company.
The main restriction for free zone entities (or companies of the form Limited Liability Company or branch) is that they are not allowed to conduct business outside of this specific free zone territory. However, free zone enterprises are able to trade freely in its respective free zone and outside the UAE. To attract customers within the UAE (i.e. outside the free zone), a free zone entity may work with a local distributor/agent (who is properly licensed) or may open its own local LLC or branch within the UAE.
Offshore company opening in the UAE (International business company)
Companies not intending to engage in any business within the UAE (or within the UAE or in one of the Free Zones) may open a business under the offshore regulatory system. As a rule, such companies act as holding companies and do not conduct commercial activities. Under the offshore regulations of certain free zones, these companies act as a suitcase for owning freehold properties within the UAE.
The Jebel Ali Free Zone and the Ras Al Khaimah Investment Authority are the largest free zones that offer the registration of Offshore companies in the UAE.
Option 4. Joint venture
Foreign companies willing to enter the UAE market or establish its existing work outside of an agency or distribution agreements often choose a joint venture. A joint venture allows a foreign investor to obtain a block of shares and a role in the operation and management of its venture in the UAE, while benefiting from the participation of a local partner. The local partner may contribute financially or through technical skills or local ties and reputation.
Although the CCL allows for a specific type of venture to be used as a joint venture — a suitcase, in practice, most joint ventures are formed using the Local Company or Free Zone Limited Liability Company forms. In the case of a local company, the previously mentioned requirement of 51% share capital held by a UAE national or a company fully owned by UAE nationals is applied.
There is no need to license a joint venture or publish a joint venture agreement. As in all jurisdictions, right partner(s) selection is key factor to ensure that they are able to further the joint venture along the intended path.
Option 5. Merger and Acquisition
The final strategy for foreign companies to enter the UAE market is to acquire or invest in an existing UAE company or business. In the UAE both the purchase of a share and the acquisition of an asset are possible. While the following important points must be considered:
- Limited amount of publicly available information and the need for a full qualitative check.
- The impact of restrictions on foreign ownership and the need for local companies to be 51% owned by UAE individuals or companies owned by UAE nationals.
- Lack of a regulatory equivalent in a European transfer of obligation and the emerging need to deal with the transfer of employee contracts as part of any asset agreement.
- Impact of severance payments in the UAE in case of asset transfers.
Key costs for opening a company in the UAE
The process of registering a company or registering a branch is usually longer than in other jurisdictions in the world. The documentation required to submit the application must also be notarized and legalized in the issuing country. When planning the costs of opening a company in the UAE, finances should be allocated to the following positions:
- Agreements between shareholders;
- Cost of rent/accommodation.
The decision to enter into a local business within the UAE versus offshore (i.e. in one of the free zones) depends significantly on the location of customers and consumers and the nature of the business activity (for example, a free zone may make more sense if the customer base is more located in the Middle East and not directly within the UAE).
It is important that the business license obtained accurately reflects the intended and actual business operations. This differs from approaches in other jurisdictions where «shelf companies» and companies that may engage in more general activities are widely used.
The costs for a company opening can be higher than in other jurisdictions because, for example, support costs such as the need to have documents notarized, legalized and translated from another language and real estate requirements are a key part of the incorporation process.
The time period required to open a business can be significantly longer than in other countries and jurisdictions.
The material was prepared using current information from International Wealth