Recent amendments to the UAE Commercial Companies Law enable local and international partners in an LLC greater flexibility with respect to minimum share capital requirements and related operational factors. The amendment is expected to help stimulate the UAE economy in the current global economic climate and encourage investment in UAE companies.
In brief:
- Abolishing the minimum share capital requirements of LLCs setting up in the UAE by amending Article 227 of the UAE Commercial Companies Law Federal Law 8 of 1984, is expected to improve the investment environment in the UAE.
- The new amendment enables partners in limited liability companies to determine what they consider to be sufficient capital requirements for establishing their company.
- Partners in an LLC now have more flexibility when it comes to factors such as dissolution, dividend payments and conversions.
Changes to Commercial Companies Law
In August 2009, the UAE President, His Highness Sheikh Khalifa bin Zayed Al Nahyan, issued a decree amending certain provisions of the UAE Commercial Companies Law Federal Law 8 of 1984 (CCL) with respect to reducing the capital required to form new businesses. Previously, a new limited liability company (LLC) was required to have share capital of at least AED300,000 in Dubai and a minimum of AED150,000 in the other Emirates. The amendment now enables partners in LLCs to determine what they consider to be sufficient capital requirements for establishing their company.
The changes – what it means in practice
Implementing the new rule will also be subject to the oversight and discretion of the relevant licensing body and requires a high degree of harmonisation among the authorities involved in the setting up process within the same Emirate and a wider harmonisation among the authorities in the UAE nationally, including the economic departments, chambers of commerce, notaries public, labour offices and immigration departments in each Emirate.
The licensing authorities may impose minimum share capital requirements for specific trade activities. For example, the Dubai Economic Development Department (DED) previously required a share capital of not less than AED3 million to establish an LLC for the purpose of investing in certain industrial and agricultural enterprises.
Some government officials have discussed the possibility that LLCs will be required to submit annual audited financial statements when renewing licences. This step may herald the beginning of real activation of Article 238 of the CCL which requires the managers of a company to prepare an annual balance sheet and profit and loss statement and lodge these documents with the Ministry of Economy and any other competent authority. To date, this requirement under the CCL has not been enforced. It is possible that any change may only apply initially to LLCs established after 1 June 2009 and future practice will confirm the policy. Reduction of share capital of companies established prior to 1 June 2009 may not be allowed according to officials.
Dissolution
Article 289 of the CCL provides for a triggering event for the dissolution of an LLC by its shareholders, namely if the company suffers losses that amount to more than 50% of its share capital. Pursuant to the new amendment, if the shareholders agree to have a minimal share capital, any losses made could exceed the said percentage and the shareholders would then need either to recapitalise the company or dissolve it.
Dividends
Article 255 requires an LLC to allocate 10% of its net profits each year to its statutory reserve and allows the shareholders to distribute the remaining 90% as dividends. The shareholders may suspend the 10% allocation once statutory reserve reaches half the capital. The amendment allowing minimum share capital therefore provides an opportunity for shareholders of an LLC to have a larger amount of disposable cash for dividends. However, in most businesses, the practical effect will be negligible.
Conversion
In case of conversion from an LLC to a public joint stock company, audited financial statements of an LLC for the past two or three years, depending on the Emirates Securities and Commodities Authority’s (ESCA) request, must be submitted to ESCA along with the conversion application. The audited financial statements must also show that the company had achieved an average net profit of not less than 10% of the capital, distributable to shareholders.
Visas
Another issue which may arise is that of the residency visa for an individual foreign investor in an LLC which has a nominal share capital. At the time of writing this article, the question of whether the UAE immigration departments grant a residency visa for an investor in an LLC knowing that the Dubai immigration department requests a minimum equity of not less than AED30,000 by the foreign investor in an LLC is yet to be tested.
Conclusion
The recent amendment to the Commercial Companies Law is a useful measure to invigorate the UAE economy, although the vast majority of companies would expend their share capital (of AED150,000 to AED300,000 under previous criteria) within the first period of operations.
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