Law Guide for Your UAE’s Company Formation
Favorable business conditions, state-of-the-art infrastructure, taxation policies and tactical location are the main crowning features which make the United Arab Emirates one of the most sought after destination for expanding business. Hundreds and thousands of international entrepreneurs and investors flock to the nation to tap potential international clients and reap the benefits of global profits. But, in order to conduct business in the UAE, a foreign businessman or investor must incorporate a formal legal entity within the geographical boundaries of the UAE through any one of the following means:
- Local business setup
- Register a branch or representative office
- Free Zone company formation
- Entering into a commercial agency relationship
We shall discuss these options for company formation methods in detail.
Local Business Setup
A local business entity can be incorporated through either the Companies Law or UAE Civil Code.
Companies incorporated under the Civil Code are not permitted to carry out “non-commercial” or “civil” activities as these promote the skills and ability of people conducting the business. Certain consultancy services, those producing art work or literature and involved in sale of agricultural commodities are examples of activities that may be conducted by entities established under the UAE Civil Code.
A Civil Code entity can take one of the following forms:-
- speculative venture partnership
- professional service entity
- Islamic Shari’a-compliant arrangement called a Mudaraba
Note: Though the above mentioned entities enjoy the status of a “company”, in general, they are not companies. The only companies which can be formed in the UAE are those outlined by the Companies Law.
All companies established in the UAE (apart from those under the UAE Civil Code) must be incorporated by the Companies Law. The legal forms of entities include:-
- Private Joint Stock Company
- Public Joint Stock Company
- Limited Liability Company
- Joint Partnership Venture
- General Partnerships
- Limited Partnerships
- Partnerships with limited shares
Of the many factors that govern company formation under Companies Law, the key feature is requirement of a local UAE national who must own a minimum of 51% in the company’s capital while the rest 49% can remain in the hands of the foreign incorporators.
Branch or Representative Office
As stated under Articles 313 to 316 of the Companies Law, foreign companies are permitted to open branches or representative offices in the UAE with 100% ownership rights. However, Article 23(1) of the UAE Commercial Code requires a non-UAE national to engage in “commercial business” in the UAE in partnership with a local UAE national who must own 51% of the company’s share. Accordingly, the branch and / or representative office completely owned by foreign incorporators can typically only conduct non-commercial business activities in the nation.
Furthermore, a branch office must only engage in activities carried out by its parent company. On the other hand, a representative is only allowed to conduct marketing and administrative functions on behalf of its parent company.
Commercial Agency Relationship
If an international organization wishes to conduct business in the UAE without keeping a physical presence in the nation, it can enter into a commercial agency relationship with a local company completely owned by a UAE national.
Under a commercial agency relationship, the international organization and the local commercial agent must agree to the terms of sales commission, the area of the distributorship and the duration of their relationship. In case the commercial agent registers the contract with the Ministry of Economy and Commerce, the local agent can avail a host of protections under the UAE Commercial Agencies Law. These include:-
- Exclusivity : Commercial agents registered with the ministry have the exclusive right to import goods that are the subject matter of the agency.
- Commissions : Commercial agents registered with the ministry are entitled to receive a commission on the sale made in international / local market or any other party.
- Termination : The principal can only terminate an agreement unilaterally against material reasons which must be acceptable to the Commercial Agencies Committee. Furthermore, the principal cannot refuse to renew the agreement post expiry date without the payment of compensation to the registered commercial agent.
There are more than 40 free zones operating in the UAE across five Emirate states where foreign companies can set up their business and engage in global business activities. The main advantage of a free zone venture is that it can be completely owned by a foreign entrepreneur or investor. Free zones are also granted several ancillary financial advantages.
A free zone venture usually takes one of the following three forms:-
- A free zone company
- A free zone establishment
- A branch or representative office of an organization
Free zones offer the following licenses:-
- Trading license
- Service license
- Manufacturing / Industrial license
To legally engage into sales within the UAE (and outside the relevant free zone), the company must have a commercial agent or distributor. However, UAE free zone companies with service licenses can provide services outside of their free zone without any movement of people, goods and assets outside of the boundaries of the free zone.
No matter if you are planning to incorporate a limited liability company or a branch office in the UAE, at Jumeira Consultants, we expertise in all types of UAE company formation processes and are well versed with the laws and legal formalities that follow. For more information, send us a message or contact us on +971 4 3277 201.