01 Nov 2011

GUIDE FOR FOREIGN COMPANIES SETTING UP IN THE UAE

Authored by: Marisa Finnerty

GUIDE FOR FOREIGN COMPANIES SETTING UP IN THE UAE

There are a variety of corporate structures available to foreign companies seeking to set up in the UAE. In this article, we take a look at those most commonly used.
 
In brief:

  • Pursuant to the UAE Companies Law, the maximum foreign ownership permitted in UAE limited liability companies is 49%.
  • Companies which are established in UAE free zones are permitted to be 100% foreign owned but are subject to certain trading restrictions of which investors should be aware.
  • The corporate structure which is ultimately adopted by the foreign company will depend on its specific business requirements.

There are a number of options available to foreign companies looking to establish a presence in the UAE. The most popular corporate structures usually adopted by foreign companies include:

  1. UAE (non free zone) based companies. The most common type is the limited liability company;
  2. free zone based entities; and
  3. branch offices of foreign companies.

UAE (non free zone) – Limited Liability Company (LLC)
 
LLCs are widely used for foreign companies wishing to conduct commercial activities in the UAE.
 
The UAE Companies Law restricts foreign ownership in LLCs to a maximum of 49% of the share capital. However, the shareholders are permitted to agree that the profits should be distributed in proportions which deviate from the shareholdings meaning that the amount of profits to be distributed to the foreign shareholder may exceed 49%.
 
LLCs are required to have a minimum of two shareholders. Following a recent amendment to the UAE Companies Law, the minimum share capital requirement for LLCs was abolished, leaving greater flexibility for shareholders to determine capital requirements for their companies themselves (subject to the approval of the relevant licensing body).
 
In addition, LLCs are not subject to corporation taxes for most industry sectors.
 
Free zone entities in the UAE
 
There are currently over 30 free zones in existence in the UAE with more being developed. The UAE free zones were established for the specific purpose of facilitating foreign investment and therefore were given a distinct legal status. Free zone entities are not subject to many of the restrictions imposed by the UAE Companies Law including the ownership restrictions referred to above. Each free zone currently has its own laws and regulations regulating the licensing and governance of entities operating therein.
 
Entities incorporated in the free zones benefit from a wide range of commercial incentives including 100% foreign ownership, zero rate corporate and income taxes and freedom to repatriate profits.
 
Companies established within free zones are treated as being offshore or outside the UAE for legal and operational purposes. Accordingly, limitations currently exist on the business activities of free zone entities outside the relevant free zone, as a free zone licence will not permit the free zone entity to carry on its activities outside of the free zone in the general UAE jurisdiction. A new law was recently introduced in Dubai which indicates that free zone entities may be permitted to carry out activities outside of the relevant free zone in the Emirate of Dubai. However, the parameters within which such activities may be carried out have yet to be defined by the authorities.
 
Currently, in order to sell its products and provide its services outside of the free zone, a free zone company must appoint a locally licensed commercial agent or distributor. Therefore, free zones are well suited to foreign companies intending to use the UAE as a regional manufacturing, distribution or service base particularly in circumstances where a large part of their business is based outside the UAE.
 
Branch offices of foreign companies (either within or outside a free zone)
 
A foreign company may set up a branch office either within or outside of a free zone. A branch office is not considered to have a separate legal identity and the parent company will remain responsible for all of the liabilities and financial obligations of the branch office. This may have tax implications in the country of origin of the parent company since any revenue generated by the branch, no matter where it is established, would generally constitute a part of the revenues generated by the parent company.
 
Branch entities established outside of the free zones may be 100% foreign owned provided that a UAE national is appointed as local agent. Generally speaking, a branch will be permitted to carry out activities similar to that of its parent company subject to the approval of the UAE Ministry of Economy from time to time.
 
Entities established in any of the free zones may be 100% foreign owned and there is no requirement to appoint a local agent (so long as the branch does not operate outside of the relevant free zone).
 
Other options
 
If a foreign company does not intend to trade in the UAE, then it may wish to consider setting up a representative office. A representative office is similar in nature to a branch with the main difference being that a representative office is not permitted to trade or earn revenues.
 
If a foreign company does not wish to establish a physical presence in the UAE but wishes to trade its products in the UAE then it may simply appoint a local commercial agent or distributor to do this. The functions of a commercial agent or distributor are similar to those in Europe and the United States.
 
The above is a brief outline of the options available for foreign companies wishing to carry out business in the UAE. Hadef & Partners has helped many foreign companies establish a presence in the UAE market and we welcome your contact if you have any questions about the options or the process.