Firstly, there are certain key questions to ask from the outset and these answers will dictate the best method of setting up a company in the UAE:
What is your activity and where are your target market?
Do you need a physical presence, are you selling products or services?
Do you want access to Government Companies or Oil and Gas?
Should I set up in a Free Zone?
The Free Zone vs Onshore question is a key issue that new companies in the UAE often deliberate.
The Free Zones are a very popular route to market for many foreign companies wanting to operate in the UAE (there are circa 40 Free Zones throughout the Emirates). These dedicated areas offer a foreign company 100% ownership and the set-up costs are often cheaper in the early stages. However, Free Zone companies can only operate within that Free Zone, and they cannot legally trade with Onshore companies or government entities.
Many companies are not told this and are encouraged to set up in a Free Zone when they actually should be based Onshore within the UAE. However, you will not pass pre-qualification checks if you are looking to work with government organisations and other counterparties may seek to use this as an excuse not to pay invoices or contracts. The key questions to ask here are: ‘where are my clients?’ and ‘where is my target market?’ as this will dictate which Free Zone or Emirate you should establish in.
If you are undertaking services outside of the Free Zone - for example providing consultancy services at a client's place of work, selling products to UAE residents or services to UAE companies and if you want to target government or quasi-government organisations, then you need to be registered as an Onshore company, such as an LLC (Limited Liability Company) or a Foreign Branch.
LLC vs Foreign Branch?
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is the most commonly used vehicle for setting up in the UAE as a foreign investor and is often the only choice for many business activities.
An LLC can be formed by a minimum of two and a maximum of 50 shareholders whose liability is limited to their shares in the company's capital. At least 51% of the share capital of the company should be owned by UAE national(s) or a 100% owned UAE company (sponsors).
Profits can be allocated in different percentages as agreed by the sponsors and foreign shareholders of the company. With the approval of the sponsors, it is possible for the legal documents of an LLC to contain the following provisions designed to protect the interests of a foreign minority shareholder; appoint all directors, appoint the general manager and through a power of attorney the entire business operations of the company can be exclusively managed and controlled by the foreign shareholder(s).
As far as further safeguarding of the foreign shareholders interest is concerned, this can be done by way of shareholder resolutions and certain related security documents.
Foreign Branch Office
Setting up a branch office of foreign company in Abu Dhabi or Dubai is straightforward and an attractive prospect for clients in that it can be 100% foreign owned. A branch office is not a separate legal entity, but rather an extension of the parent company abroad. As such, a branch office will, when conducting business in the UAE, be acting on behalf of the foreign parent and as such be linked to all contracts entered into in the UAE. Depending on the parent companies tax jurisdiction, profits earned by the branch will be taxable in the home country.
In order to establish a branch office, a National Service Agent (NSA) will need to be appointed. The NSA must be a UAE national (or a 100% UAE owned company). The NSA is normally in charge of dealing with local, and federal authorities for the purposes of obtaining necessary documentation for the branch office and its staff; such as approvals, licences, labour cards and visas.
The NSA is not a shareholder and does not have any rights in the company. The NSA will enter into a service agreement with the branch office, under which the agent will provide services in consideration of the payment of a fixed annual fee or percentage of the profits or transactions undertaken by the branch office. This is a matter for negotiation.
The Branch can only undertake certain business activities.The business activities have to fall within its main objectives and scope of business, as outlined in the foreign company’s articles of association, to ensure that the business activities that the foreign company is intending to carry out are competent in the UAE.
~ article written in July 2015
PRO Partner Group provides advice in the early stages of the company formation decision process, and can help clients looking at a Free Zone set up as well as assist with Onshore formation. PRO Partner Group has helped form over 200 Limited Liability Companies, Representative Offices and Branch Offices and collectively have over 40 years of experience in the region. For more information, visit www.propartnergroup.com or email firstname.lastname@example.org.