Establishing a business in the UAEChoosing the right structurefor your business

International companies intending to establish a legal presence in the UAE must tackle a number of important issues. One of the most important is establishing a clear understanding of the nature of the business they intend to undertake in the UAE. This largely determines the form of the legal presence to be established, or even if a legal presence is required at all.

What you should know about the UAE

When considering establishing a business in the UAE it is important to be aware of how it is structured and how it differs from other countries, both globally and in the Middle East.

• The UAE is made up of seven Emirates: Abu Dhabi, Dubai, Ras Al Khaimah, Sharjah, Furjairah, Ajman and Umm Al Qwain. Abu Dhabi is the capital of the UAE.

• There are a number of federal laws governing the operation of businesses in the UAE. The most relevant are the Commercial Companies Law (CCL), the Commercial Agencies Law (the Agency Law), the Labour Law and the Civil and Commercial Codes. The CCL sets out the different forms of legal structure available and the regulation of such entities following their incorporation.

• As well as the federal laws (which are generally applied throughout the UAE) each Emirate also has its own specific local laws. The effect of this is that the process for establishing a presence often varies slightly from Emirate to Emirate. The other ramification of this is that an international company wishing to do business in several Emirates should have separate entities established in each of those Emirates so that it has the correct trade licence to undertake specific activities.

Legal structures

The most relevant forms of legal entity available to a foreign company wishing to conduct business in the UAE are:

• free zone entity (branch or limited liability company)

• limited liability company (LLC)

• branch of a foreign company (Branch).

Free Zones

Free zones are essentially off shore jurisdictions within the UAE. They are unique in allowing a foreign company 100% ownership, have no restrictions on foreign exchange or repatriation of capital and provide operational support and business continuity facilities. Incorporation in a free zone is relatively quick compared to setting up in any of the Emirates. Free zones are also tax-free jurisdictions. However, an international company should be mindful that, technically, it can only operate within the territory of the free zone it is incorporated in. To conduct business activities outside the free zone you will need to be licensed and establish a legal presence within the relevant Emirate. It should also be noted that products that originate from a free zone which are exported to any Emirate are subject to a customs duty.

Many of the free zones are sector specific such as the Dubai Media City, the Dubai Knowledge Village and the Dubai Healthcare City. The largest free zone in the UAE is the Jebel Ali Free Zone which houses various manufacturing industrial and logistics companies. The Dubai International Financial Centre (DIFC) is the fastest growing financial centre in the world and has the unique feature of being a ‘super free zone’ with its own courts and governance structure. The DIFC focuses on financial activity.

Business within an Emirate

For incorporations in the UAE (outside of a Free Zone) the most usual forms of entity for international companies are a LLC or a Branch. Both forms require the involvement of a UAE national to varying degrees. The Branch structure is attractive to international companies as they can maintain management control and 100% ownership whereas a UAE national is required by law to own 51% of the shares of a LLC.

Whatever form of entity is decided upon, it is very important for an international company to be able to define its business activities as relevant licences will need to be obtained. There are some activities which cannot be carried out by a Branch in certain Emirates and is not lawful for a company to undertake any business for which it does not have a valid licence.

The advantages and disadvantages of an LLC and Branch

Establishment Key features Advantages/disadvantages

Branch • Most popular way for foreign companies to retain 100% ownership.

• Legally an extension of the parent company so not a separate legal entity.

• Needs to have a national service agent. This can be an individual or a company provided that the individual is a UAE national or the company is wholly-owned by UAE nationals. The national service agent does not acquire any rights in the Branch, it merely provides services relating to federal and local government requirements such as complying with the immigration requirements on the Branch’s behalf. National service agents will normally receive a fixed annual fee.

• Must carry out similar activities to its parent and is not permitted to import the products of the parent company.

Advantages

• The most common form of entity for a foreign company.

• 100% ownership and control retained.

• National service agent deals with governmental authorities.

Disadvantages

• Branch is not a separate legal entity.

• The parent company will generally be taxed on the profits of the Branch.

• Rigorous experience requirements will need to be provided for the incorporation of the Branch.

• Lengthier procedural requirements than the LLC.

Limited Liability Company

• A form of private limited company.

• Must be 51% owned by UAE nationals.

• No minimum capital requirement but initial capital must be appropriate for the business to be conducted.

• Day-to-day management can be conducted by a foreign manager and power of attorney is often provided to foreign managers.

• It is possible for the memorandum to provide that the profits of the LLC be shared in a ratio which is different to the percentage of shares owned by the shareholders.

Advantages

• A separate legal structure.

• Limited liability.

• Any profits retained within the LLC will generally not be subject to tax in the parent company’s home jurisdiction.

• Does not require foreign company to have significant experience, except in some sector specific areas.

Disadvantages

• Has to be 51% UAE owned (although profits can be shared in a different way).

• Up-front cost of capitalising the LLC.

• Difficulty in enforcing ‘side agreements’ between the shareholders in the LLC.

Agency

Due to the nature of the business a legal entity may not be required (such as a pure export business) and a commercial agent or distributor can be appointed on behalf of the international company in the UAE. If the agent or distributor is a UAE national or wholly-owned UAE company, then the Agency Law may apply. This affords a high level of statutory protection for the agent particularly with regard to the international company’s ability to terminate the agency without the payment of compensation to the local agent. We would recommend that specific legal advice is sought prior to the entry into any agency or distribution arrangement in the UAE.

Conclusion

The UAE provides international companies with a number of business opportunities and positions them strategically well to take advantage of the opportunities available in the wider Arabian Gulf region. Although some of the procedures for setting up and obtaining a license can be lengthy, obtaining the appropriate legal advice will greatly facilitate the process and help international companies understand the optimal legal structure for conducting business in the UAE.

Key contacts

Nasser Ali KhasawnehManaging Partner – Middle East +971 4 332 6550 nasseralikhasawneh@eversheds.com

Andrew NunnPartner – Corporate +971 2 494 3634 andrewnunn@eversheds.com

Aya AbuhassanPartner – Corporate +971 4 332 6550ayaabuhassan@eversheds.com

Geraldine AhernPrincipal Associate – Commercial and Employment +971 2 494 3632geraldineahern@eversheds.com

Sean YatesPrincipal Associate – Real Estate+971 4 389 7007seanyates@eversheds.com

Tim ArmsbyPartner – Projects+971 2 494 3630timarmsby@eversheds.com

Nayiri BoghossianPartner – Dispute Resolution+971 4 332 6550nayiriboghossian@eversheds.com

www.eversheds.comEversheds LLP is a limited liability partnership.

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Information provided does not constitute advice on any specific legal matter. Whilst Eversheds makes every effort to ensure that content is accurate and up to date, nothing in these pages should be construed as legal advice. If you require advice on any specific legal problem or matter, please contact one of our lawyers on the contact details set out above.

Reference to Dubai is subject to pending licensing applications and approval.