The UAE has become a global hub for a number of sectors including aviation, hospitality, financial services, technology and the creative industries. The continuing influx of tourists and expats, recovering COVID-19 hit economy, one of the highest global COVID-19 vaccine administration rates to date, recent announcement of reforms allowing 100% foreign on-shore ownership and normalisation of Israel-UAE relations makes the UAE an ideal location for foreign investment and a stepping stone into the emerging South Asian and African markets.
This is the first in a series of articles we will be releasing that aim to provide potential investors with some initial information on how to set up a new business in the UAE.
Types of Vehicles
Firstly, the type of entity that will be used to carry on the new business should be considered. There are a number of different structures an investor can implement in order to enter the UAE market. It is important to understand the different types of company structures available, taking into account the intended commercial operations so that the most appropriate corporate vehicle is used. We set out below some of the commonly used corporate vehicles:
Limited Liability Company (LLC)
As is the case in many other jurisdictions, LLCs are commonly used vehicles in which the liability of shareholders is generally limited to their shareholding. There is also no minimum share capital specified by UAE Law to set up an LLC. However, the LLC must have share capital that is sufficient to achieve its purpose of incorporation. For this reason, the level of share capital set for an LLC usually needs to be approved by the relevant authority in the Emirate of incorporation.
Additionally, previously, the position in mainland UAE was that an LLC must have at least one UAE national shareholder and this shareholder must own a minimum of 51% of the shares in the LLC. However, Federal Law Decree No.26 of 2020 (the Amended Companies Law) has repealed the 51% UAE national ownership rule, allowing the possibility of 100% foreign ownership of an on-shore company. Although we understand that certain business activities with a deemed 'strategic impact' will still require UAE national participation to some extent.
The list of activities with 'strategic impact' and the practical implications of the Amended Companies Law are yet to be clarified by the Council of Ministers and the Departments of Economic Development of the different Emirates. For the position on foreign ownership in the various UAE free zones which have already permitted 100% foreign ownership prior to the Amended Companies Law, please see our discussion on Free Zones vs Mainland UAE below.
The requirement stipulating that a UAE local individual or corporate entity must hold at least 51% of the shares in an LLC meant that private arrangements deviating from this position, also known as 'side agreements', were entered into between shareholders. These agreements were not notarised and registered with the authorities, thus allowing 100% foreign beneficial ownership even if a UAE national legally held 51% of the shares of the LLC.
Although commonplace in the UAE, we note that to date, the validity of such side agreements has not been tested in the UAE Courts and therefore there is a grey area as to whether such arrangements are enforceable. With the introduction of the Amended Companies Law and the greater flexibility afforded to foreign investors carrying out certain business activities, it is expected that the use of these 'side agreements' will decrease.
Foreign Branch Office
A branch office is an extension of a parent company registered outside of the UAE. A branch office can be 100% foreign owned, but it is important to note that a branch office is not a separate entity; it represents the parent company and carries on business under its name.
A UAE national service agent was previously required to set up a foreign branch office. Article 329 of the Amended Companies Law has repealed this requirement although we will need to wait to see how this change will be implemented in practice.
A branch office is commonly used to market and promote the products of the parent company. As a branch office is not a separate legal entity, it cannot engage in activities such as trading. The parent company will be 100% liable for actions of the branch office and all revenue will be taxable in the country of incorporation of the parent company. A refundable bank guarantee of AED 50,000 is required when setting up a branch office and this bank guarantee cannot be used as working capital or withdrawn for the duration of the licence of the branch office.
Trade Representative Office
Setting up a trade representative office is a useful vehicle to introduce a company's products to the UAE market and thereby attract new clientele.
A UAE national sponsor is required to set up a trade representative office, although as with foreign branch offices, this local sponsor cannot participate in management and has no equity in the trade representative office.
The trade representative office cannot import, export or sell goods or services in the UAE and can only engage in promotional business for the foreign parent company. As is the case with branch offices, a refundable bank guarantee of AED 50,000 is required when setting up a trade representative office and this bank guarantee cannot be used as working capital or withdrawn for the duration of the licence.
Free Zones vs Mainland UAE
We note that there are a number of free zones in the UAE, operating different shareholding, tax and customs regimes. Some prevalent UAE free zones include Abu Dhabi Global Market, Dubai International Financial Centre and Twofour54 Abu Dhabi Media Free Zone. Owning a business in a free zone enables an investor to retain 100% of the shares in the company, without the requirement of a UAE national shareholder. However, it must be borne in mind that strictly speaking, a free zone company does not have access to the mainland UAE market and is restricted to doing business in its specific free zone.
Another potential benefit of establishing a business in some free zones is that unlike in mainland UAE, a physical office may not be required (depending on both the type of entity and the free zones' regulations). Business owners may therefore be afforded greater flexibility in their commercial operations.
We note that investors may still choose to set up business operations in mainland UAE (as opposed to the free zone areas) due to the wider access available to the UAE market, however a vehicle such as an LLC would be required to do so. An LLC would be able to trade with any entity, whether they are inside or outside the UAE.
There are a number of registration and licensing requirements which will need to be complied with in order to get started with a new business in the UAE and different cost implications depending on the type of business vehicle you choose and where you would like to set up the entity. The Trowers & Hamlins' International Corporate Team would be happy to look into potential options for investors, provide structuring advice and assist with the incorporation process.
Alternatively, to avoid company set-up costs and requirements, an agent or a distributor can be used to access the UAE market. In our next article in this series, we will outline the general distinctions between appointing an agent or a distributor in the UAE.
