United Arab Emirates

Company Formation and Doing Business in United Arab Emirates

Introduction

Foreign enterprises wishing to conduct business in the UAE may do so either by establishing a formal, permanent presence in the UAE, or by using a commercial agent. There are several methods pursuant to which a foreign entity may be licenced on a permanent basis in the UAE including

  1. Incorporating a Limited Liability Company (LLCLLC);
  2. Establishing a Branch office or Representative office;
  3. Establishing a wholly owned entity in one of the UAE Free Trade Zones.

By establishing a presence under one of these methods, a foreign entity is permitted to engage in all activities as licenced in the UAE. While the scope of activities that may be conducted through these vehicles can include contracting, providing services and possibly manufacturing, foreign entities operating pursuant to these alternatives may engage only in those activities licenced by the relevant UAE authorities. Such foreign entities also will remain subject to the relevant restrictions that reserve certain activities, such as commercial agency activities, for wholly UAE owned enterprises.

Each of these business forms is discussed in detail below.

Establishing Permanent Presence in the UAE

A. Incorporating a Limited Liability Company

Foreign investors are permitted to hold an equity ownership in UAE companies as long as 51% of the equity is held at all times by UAE nationals. The preferred company form for foreign investors is the Limited Liability Company (LLC) due to, among other factors, its flexible management structure, and protection of minority shareholders. The LLC requires a minimum of two and a maximum of 50 members and in all cases must have a minimum of 51% UAE ownership. The minimum capitalization is Dh 150,000. Management of the LLC is vested in the “managers” (up to five natural persons).

B. Establishing a Branch or Representative Office

Through either a liaison office or a branch office, foreign entities may establish a presence with significantly less  UAE participation than is required to establish a Limited Liability Company. Foreign companies are permitted to establish wholly owned branches and representative offices in the UAE; however, these offices are limited in the activities they may conduct within the UAE (Article 314 of the Commercial Companies Law).

The primary difference between a representative office and a branch office is that a representative office theoretically is limited to gathering information and soliciting orders and projects to be performed by the company’s head office. In this regard, representative offices also are limited in the number of employees they may sponsor (typically three or four). In essence, a representative office merely serves as an administrative and marketing centre for the foreign company. By contrast, a branch office is a full-fledged business, permitted to perform contracts or conduct other activities as specified in its licence.

A foreign entity must appoint a UAE national “service agent” for the branch or representative office. A service agency should not be confused with a commercial agency discussed below. The service agent is not permitted to own equity in or participate in the substantive management of the representative or branch office. In practice, a foreign entity typically contracts with the service agent to provide specific services such as assisting in communications with government departments (e.g., facilitating visas for foreign company personnel) or undertaking other administrative matters. The compensation of the service agent is a purely contractual matter between the service agent and the foreign entity, usually measured by the level of services provided or, in some instances, by the level of activity or turnover of the branch or liaison office.

Due to the interaction between the UAE federal government and the government of the particular Emirate in which the branch office is to be located (e.g., Abu Dhabi or Dubai), it should be noted that registration entails submitting a number of applications and obtaining a number of approvals from several government departments. After the application is approved by the government of the Emirate where the branch is to be established, the approval of the federal government approval is then required.

C. Establishing an Enterprise in a Free Trade Zone

The UAE has established 10 Free Trade Zones (FTZ) and two specialized FTZ targeting IT, e-business, and the media. These Free Trade Zones are in various stages of development. The primary benefit of establishing a branch office in a Free Trade Zone is 100% foreign ownership; however, conducting business in the UAE market itself is prohibited. The FTZ’s were established to attract foreign capital and investors by offering incentives such as

  1. 100% foreign ownership of the enterprise;
  2. 100% import and export tax exemptions;
  3. 100% repatriation of capital and profits;
  4. No corporate taxes for 15 years, renewable for an additional 15 years;
  5. No personal income taxes; and
  6. Assistance with labour recruitment, and additional support services, such as sponsorship and housing.

An independent Free Zone Authority governs each free zone and is the agency responsible for issuing FTZ operating licences and assisting companies with establishing their business in the FTZ.

Most of the free zones are tailored to meet the needs of industrial, shipping and manufacturing enterprises. As such, the FTZ’s tend to be located near major ports and have large warehousing and storage facilities available. The exception is Dubai Internet City (DIC), which is a unique free zone dedicated to IT and e-business companies wishing to set up bases in the Middle East. Dubai Media City (DMC) is an FTZ based on the same concept as DIC but with a focus on media rather than IT.

Commercial Agency

Foreign investors may decide to have an agent to represent their interests in the UAE instead of establishing a permanent presence. The UAE Commercial Agencies Law (Federal Law No. 18 of 1981, as amended by Federal Law No. 14 of 1988) regulates and governs the appointment of commercial agents, sales representatives, and distributors in the UAE. This law defines a commercial agency as any arrangement whereby a foreign company is represented by an agent to “distribute, sell, offer, or provide goods or services within the UAE for a commission or profit”. (Article 1 of the Commercial Agencies Law). The Commercial Code (Federal Law No. 18 of 1993) augments the Commercial Agencies Law and establishes the regulatory framework for the various types of commercial agencies permitted under the law. The most common type of agency is the contracts agency, whereby the agent undertakes “on a permanent basis and in a specific area of activity, the instigation and negotiation of the conclusion of deals, to the advantage of the principal and in return for payment”. (Article 217 of the Commercial Code). Distributor contracts are treated like contracts agencies when they involve one agent as the sole distributor. (Article 227 of the Commercial Code).

The primary requirements and characteristics of commercial agencies are

  1. Commercial agents must be UAE nationals or companies incorporated in the UAE and owned entirely by UAE nationals.
  2. Commercial agents must be registered with the UAE Ministry of Economy and Commerce to engage in commercial agency activities.
  3. The agency agreement must be registered in order for the agent to avail himself of the protections afforded under the law and to have the agency relationship recognised under UAE law.
  4. Commercial agents are entitled to an exclusive territory encompassing at least one Emirate for the specified products (Article 5(1) of the Commercial Agencies Law).
  5. Unless otherwise agreed, commercial agents are entitled to receive commissions on sales of the products in their designated territory irrespective of whether such sales are made by or through the agent (Article 7 of the Commercial Agencies Law).
  6. Commercial agents are entitled to prevent products subject to their agency from being imported into the UAE if the agent is not the consignee.
  7. Commercial agents are entitled to receive compensation from the principal if the agency is terminated without substantial justification or if the agency is not renewed by the foreign principal, and the agent may be able to preclude the foreign party from appointing a replacement agent in such circumstances.

The Commercial Agency Law provides for compensation of the agents terminated without due cause only if the agency agreement has been registered with the federal Ministry of Economy and Commerce (MOEC). Many UAE commercial agents will insist on a registered arrangement in order to avail themselves of the protection of the Commercial Agencies Law. Notwithstanding whether the agency agreement is registered and therefore subject to the protections provided in the Commercial Agency Law, foreign entities should note that the Commercial Code also may affect the relative rights and duties of the parties as noted above. In summary, foreign parties should consider carefully the application of the Commercial Agency Law and the Commercial Code in drafting any agreement to engage a UAE party to perform any type of marketing, sales or other “commercial” activity in the UAE

Public Sector Procurement

Pursuant to the Federal Regulation of Conditions of Purchases, tenders and Contracts, Financial Order No. 16 of 1975 (the Public Tenders Law), and subject to certain exceptions, only UAE nationals, foreign entities represented by a UAE agent, or foreign entities with UAE partners (i.e., a UAE entity with at least 51% UAE ownership (national entities) may bid for public sector tenders for the supply of goods and public works projects that are governed by the Public Tenders Law. As a result, foreign entities wishing to perform public sector contracts are generally required to have some level of UAE national participation. Such participation typically takes the form of either

(i) A registered commercial agency;

(ii) A “service agent” of the foreign entity’s UAE branch office; or

(iii) The majority owner of a joint venture in which the foreign entity owns 49% or less of a UAE Limited Liability Company (i.e., a national entity).

The following are three major exceptions to the application of the Public Tenders Law:

  1. The Public Tenders Law does not apply to purchases and contracts conducted by the federal defence forces. In light of potential national security concerns, procurements for the federal defence forces are conducted pursuant to Decree 12 of 1986 of the Deputy Supreme Commander of the Armed Forces (the Armed Forces Procurement Regulations). The Armed Forces Procurement Regulations generally follow the Public Tenders Law by requiring bidders to be represented by commercial agents or national companies except with respect to cases requiring “rare specialization”. In practice, instances of rare specialisation typically involve the sale of certain weapon systems and related materials, or sales that have been arranged on a government-to-government basis (collectively, “strategic military procurement”); however, there is no published definition of what items fall within this category.
  2. The Public Tenders Law relates to federal government procurement and not procurement by the individual Emirate Governments. For example, Abu Dhabi has a procurement system, which generally tracks that of the Federal Public Tenders Law by requiring suppliers to have commercial agents or national companies that are registered with the Abu Dhabi municipality. However, there are differences in such areas as compensation, formality and flexibility.
  3. The general requirement for UAE national participation is not uniformly observed by all government agencies in the context of certain direct sales to the public sector or private tenders in which the government solicits bids directly from relevant manufacturers, particularly in cases in which the goods or services are quite specialized or not widely available. These “exceptions” arise on a case-by-case basis.

Tax

There is no federal income tax in the UAE for general businesses. However, with respect to Dubai only, the Dubai Income Tax Ordinance of 1969 specifies that an organization that conducts trade or business, including the rendering of any services in Dubai, is subject to the following tax scale:

 Income between Dh 1,000,000–Dh 2,000,000   10% rate
 Income between Dh 3,000,000–Dh 4,000,000   30% rate
 Income between Dh 4,000,000–Dh 5,000,000   40% rate
 Income above Dh 5,000,000   50% rate

 

Disclaimer
Whilst every effort has been made to ensure that the details contained herein are correct and up-to-date, it does not constitute legal or other professional advice. IQTESADI does not accept any responsibility, legal or otherwise, for any errors or omission.