Different Business Structures in the UAE
This article focusses on different legal business structures in Dubai and the most common and preferred business structures. In general, foreign entities with an intention to establish a commercial presence in the UAE opt for a Limited Liability Company. They can also incorporate their business in any of the UAE Free Zones or can establish a Branch office or Representative office. However, before commencing the business activities, these entities need to obtain a valid trade license from the specific authorities. There are two types of companies in the UAE, one established under the Commercial Companies Law and the other Civil Companies regulated by the Civil Code. The Federal Law No. 8 of 1984 stipulates the following legal business structures which were amended by Federal Law No. 1 of 1984, Federal Law No. 13 of 1988, Federal Law No. 15 of 1998 and Federal Law No. 4 of 2000.
1. General Partnership
2. Partnership Limited by Liability
3. Joint Venture
4. Public Joint Stock
5. Private Joint Stock
6. Limited Liability Companies
7. Partnership Limited by Shares
Company Law do not apply to Sole Proprietorship, business set up in the Free Zones of UAE, Companies engaged in the field of oil exploration, extraction, manufacturing and transportation, Companies engaged in the business of electricity and gas, water desalination and other related activities. Certain companies are excluded from the realm of Company Law by a resolution of the Council of Ministers.
General Partnership Companies are limited to UAE Nationals only. Once you know the type of business structure that you need to set up, then you should be examining the laws applicable to that specific business structure which would be a critical element in deciding your success or failure of business. First, you need to register in Dubai’s Economic Development Department to start up a Company and also need to have your local sponsor if you are not located in any of the Free Zones. Certain business structures also may require further approval from various ministries or other authorities. However, there are certain commercial activities which are exclusively owned by UAE Nationals or restricted to UAE Companies or Nationals only. A license will be provided to you that indicate what activities you are allowed to conduct. If the kinds of activities are more, then the fees for setting up business will also be high.
Let us examine some common business structures preferred in Dubai.
1. Limited Liability Companies
The most preferred commercial entity by those wishing to conduct commercial activities in Dubai is the Limited Liability Company (LLC) and is the commonly used commercial entity for companies with non-UAE national element. This is a private company and its shares are not offered to the public. The main fact that attracts the expatriates is that this gives a maximum legal ownership (49%) to them for a trading license. The local sponsor or UAE nationals participation shall be upto 51% and the minimum capital required shall be AED 300,000 which should be contributed in cash and paid up fully on establishment. A minimum of two and a maximum of 50 persons can form a Limited Liability Company. The liability of these persons shall be limited to the extent of their shares in the capital of the Company. The Company can be formed in less than a month after receiving all the documents and complying with the procedures.
You will also be given a license which will serve as an indicator of what services you are allowed to conduct and provide in the said place. It is known that the more activities for setting up business in Dubai that you apply for, the more fees you are about to pay. Therefore, you should be definitely prepared for that. However, you may not engage in the business of insurance, banking or investment of money on behalf of third party.
Following are the requirements for setting up an LLC in Dubai:
a. Trade name approval and approval of the Memorandum of Association by the Licensing Department of the Economic Development.
b. Attesting of the Memorandum of Association of the Company by a Notary Public in the Dubai Courts.
c. Applying for entry in the Commercial Register of the Companies and getting approval from the Department of Economic Development.
d. Getting the License from the Department of Economic Development.
Resolution of the Board of Directors, specifying the Representative and his powers, Power of Attorney to the Representative, and Memorandum and Articles of Association and Certificate of Incorporation have to be duly notarized at the place of incorporation, legalized by UAE Embassy, attested by UAE Foreign Ministry, and the Arabic translation authenticated before the Ministry of Justice have to submitted in case of foreign body corporate. Once the approval is granted, the Company will be entered into the Commercial Register and have its Memorandum of Association published in the Ministry of Economy and Commerce’s bulletin. Once the Company gets the License issued by the Department of Economic Development, the Company will be registered with the Dubai Chamber of Commerce and Industry.
2. Public and Private Joint Stock Companies
A Public Joint Stock Company similar to a Public Limited Company requires AED 10,000,000 as minimum share capital and 10 founders minimum and they will be responsible for the incorporation of the company. Shares of a Public Joint Stock Company should be offered to the public and subscription notices are to be published in any two local dailies. A Public Joint Stock Company is to have between 3 to 15 directors and is elected for three year terms. Majority of the board of directors including the Chairman should be UAE Nationals.
A Private Joint Stock Company requires AED 2,000,000 as minimum share capital and 3 founders minimum. All the regulations applicable to a Public Joint Stock Company equally apply to a Private Joint Stock Company also except the fact that the shares of a Private Joint Stock Company cannot be offered to the public. Generally, such joint stock companies are primarily suitable for large projects or operations like banking, insurance, or financial activities.
3. Joint Venture
Joint Venture refers to a contractual agreement between two or more people, companies or associations with a common economic objective. The term of a Joint Venture may be limited or unlimited and can be local or international in scope. An International Joint Venture will be a business combination of two or more partners from different jurisdictions with the governing law being foreign to one or more of its participants. There are several business structures that can be used for joint venture business or project in the UAE such as a contract venture, a general partnership, a limited partnership, joint stock company or free zone company situated in Dubai’s free zones. Most importantly, the joint venture arrangement will depend on the agreement negotiated between the parties to the venture.
4. Sole Proprietorship or Establishment
For a Sole Proprietorship concern, an individual is issued a trade license in his/her own name and as such shall be liable for all assets and liabilities incurred by the business to the full extent. Only UAE Nationals and certain GCC Nationals are granted permission to form a Sole Proprietorship in Dubai. Certain foreign Nationals in selected fields can form Sole Proprietorship concerns if they reside in the UAE and such a firm would be referred to as a Professional Firm. Mostly these kinds of firms engage in medical services, auditing services, managerial and economic consultancies, engineering fields and technical services, legal profession, computer services, and other artisan activities. The firms which are registered as professional firms can only practice specific activities and does not extend to any commercial business. A UAE National should be the local service agent for a professional firm of foreign Sole Proprietorship concern and is paid a lump sum and/or a percentage of profits or turnover. This local service agent mainly assists in obtaining licenses, visas and labor cards and has no direct involvement in the business.
5. Branches and Representative Offices of Foreign Companies
Article 314 of the Companies Law regulates the operation of branch and representative offices of foreign companies in the UAE. It can be wholly owned by a foreign entity; however a UAE national should be appointed as the local partner. This local partner usually assists with administrative matters such as obtaining visas, licenses and dealing with local authorities and is paid a fixed fee and does not have a right to participate in any profits and not involved in the operations of the branch or representative office.
A representative office can only promote its foreign parent company’s activities and cannot carry out the parent company’s activities. While a branch office may carry out activities similar to those of its parent company, certain activities are restricted to UAE nationals only such as importing goods. Representative offices can only act as administrative and marketing centers for their foreign parent company’s head office because they have restrictions on the number of employees they can sponsor.
Once a company receives approval from the Ministry of Economy and Commerce and the Department of Economic Development, and obtains the appropriate trade license, a company shall establish a branch or representative office in the UAE. The branch or office should be entered in the Economic Department’s Commercial Register and also be registered on the Registry of Foreign Companies at the Ministry of Economy and Commerce before commencing its trade. Finally, the branch or representative office should be registered with the Dubai Chamber of Commerce and Industry.
Written by Nesirin Vinod.
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