Article by Intuit Management Consultancy/Management consulting www.intuitconsultancy.com
In the UAE, economic activity is regulated by individual emirates as well as the Federal Government. In Dubai, the authorities have deliberately sought to create an environment which is well ordered without being unduly restrictive. As a result, Dubai offers businessmen operating conditions that are among the most liberal and attractive in the region.
There are many options open to international companies seeking to establish a business relationship with Dubai. Apart from forming a trading relationship, for many companies there are distinct advantages in being on-the-spot to research market prospects, make contacts, liaise with customers, and see through the details of any transactions and orders secured.
Having a presence can provide considerable business advantages in the Middle East. Businessmen in the region prefer to deal with someone they know and trust and personal relationships are much more important in doing business in the Arab world than they are in western Europe or America. Also, the buying patterns of some countries served by Dubai tend to be unpredictable, creating a need for first class market intelligence and information.
To know more about doing business in Dubai
The basic requirement for all business activity in Dubai is one of the following three categories of licences:
- Commercial licences covering all kinds of trading activity.
- Professional licences covering professions, services, craftsmen and artisans.
- Industrial licences for establishing industrial or manufacturing activity.
These licences are all issued by the Dubai Economic Department. However, licences for some categories of business require approval from certain ministries and other authorities: for example, banks and financial institutions from the Central Bank of the UAE; insurance companies and related agencies from the Ministry of Economy and Commerce; manufacturing from the Ministry of Finance and Industry; and pharmaceutical and medical products from the Ministry of Health.
More detailed procedures apply to businesses engaged in oil or gas production and related industries.
Practising some trade activities (e.g. jewellery and insurance) requires the submission of a financial guarantee issued by a bank operating in Dubai.
In general, all commercial and industral businesses in Dubai should be registered with the Dubai Chamber of Commerce and Industry.
Dubai Ownership Requirements
Fifty-one per cent participation by UAE nationals is the general requirement for all UAE established companies except:
- Where the law requires 100% local ownership.
- In the Jebel Ali Free Zone.
- In activities open to 100% AGCC ownership.
- Where wholly owned AGCC companies enter into partnership with UAE nationals.
- In respect of foreign companies registering branches or a representative office in Dubai.
- In professional or artisan companies where 100% foreign ownership is permitted.
Dubai Legal Structures for Business
In the past, each emirate followed its own procedures governing the operations of foreign business interests. In practice, however, Dubai and the other emirates followed the same general system, whereby foreign companies operated in one of three ways: with a local sponsor, through a partnership with a UAE national or company, or through a private limited company or public shareholding company incorporated by Ruler's decree.
Since 1984, steps have been taken to introduce a codified companies law applicable throughout the UAE. Federal Law No. 8 of 1984, as amended by Federal Law No. 13 of 1988 - the "Commercial Companies Law" - and its by-laws have been issued. In broad terms the provisions of the Law are as follows:
The Federal Law stipulates a total local equity of not less than 51% in any commercial company and defines seven categories of business organisation which can be established in the UAE. It sets out the requirements in terms of shareholders, directors, minimum capital levels and incorporation procedures. It further lays down provisions governing conversion, merger and dissolution of companies.
The seven categories of business organisation defined by the law are:
- General partnership company
- Joint venture company
- Public shareholding company
- Private shareholding company
- Limited liability company
- Share partnership company
Partnership companies are limited to UAE nationals only. The Dubai government does not presently encourage the establishment of partnership-en-commendam and share partnership companies.
Dubai Joint Venture Companies
A joint venture is a contractual agreement between a foreign party and a local party licensed to engage in the desired activity. The local equity participation in the joint venture must be at least 51%, but the profit and loss distribution can be prescribed. There is no need to license the joint venture or publish the agreement. The foreign partner deals with third parties under the name of the local partner who - unless the agreement is publicised - bears all liability.
In practice, joint ventures are seen as offering a suitable structure for companies working together on specific projects.
Dubai Public and Private Shareholding Companies
The Law stipulates that companies engaging in banking, insurance, or financial activities should be run as public shareholding companies. Foreign banks, insurance and financial companies, however, can establish a presence in Dubai by opening a branch or representative office.
Shareholding companies are suitable primarily for large projects or operations, since the minimum capital required is Dh. 10 million (US$ 2.725 million) for a public company, and Dh. 2 million (US$ 0.545 million) for a private shareholding company. The chairman and a majority of directors must be UAE nationals and there is less flexibility of profit distribution than is permissible in the case of limited liability companies.
Dubai Limited Liability Companies
A limited liability company can be formed by a minimum of two and a maximum of 50 persons whose liability is limited to their shares in the company's capital. Such companies are recognised as offering a suitable structure for organisations interested in developing a long term relationship in the local market.
In Dubai, the minimum capital is currently Dh. 300,000 (US$ 82,000), contributed in cash or in kind. While foreign equity in the company may not exceed 49%, profit and loss distribution can be prescribed. Responsibility for the management of a limited liability company can be vested in the foreign or national partners or a third party.
The following steps are required in establishing a limited liability company in Dubai.
- Select a commercial name for the company and have it approved by the Licensing Department of the Economic Department;
- Draw up the company's Memorandum of Association and have it notarised by a Notary Public in the Dubai Courts;
- Seek approval from the Economic Department and apply for entry in the Commercial Register;
- Once approval is granted, the company will be entered in the Commercial Register and have its Memorandum of Association published in the Ministry of Economy and Commerce's Bulletin. The licence will then be issued by the Economic Department;
- The company should then be registered with the Dubai Chamber of Commerce and Industry.<
Branches and Representative Offices of Foreign Commercial Companies in Dubai
The Commercial Companies Law also covers the formation and regulation of branches and representative offices of foreign companies in the UAE and stipulates that they may be 100% foreign owned, provided a local agent is appointed.
Only UAE nationals or companies 100% owned by UAE nationals may be appointed as local agents (which should not be confused with the term "commercial agent"). Local agents -- also sometimes referred to as sponsors -- are not involved in the operations of the company but assist in obtaining visas, labour cards, etc and are paid a lump sum and/or a percentage of profits or turnover. In general, branches and offices of foreign commercial companies are not licensed to engage in importing activity except for re-export or in the case of products of a highly technical nature.
To establish a branch or representative office in Dubai, a foreign commercial company should proceed as follows:
- Apply for a licence from the Ministry of Economy and Commerce, submitting an agency agreement with a UAE national or 100% UAE owned company. Before issuing the licence, the Ministry will:
- forward the application to the Economic Department to obtain the approval of the Dubai government;
- forward the application specifying the activity that the office or branch will be authorised to undertake in the UAE, to the Federal Foreign Companies Committee for approval;
- Once this has been done, the Ministry of Economy and Commerce will issue the required Ministerial licence specifying the activity to be practised by the foreign company;
- The branch or office should be entered in the Economic Department's Commercial Register, and the required licence will be issued;
- The branch or office should also be entered in the Foreign Companies Register of the Ministry of Economy and Commerce;
- Finally the branch or office should be registered with the Dubai Chamber of Commerce and Industry.
Branches and Representative Offices of Foreign Professional Companies in Dubai
Branches and representative offices of foreign professional firms may be 100% foreign owned provided UAE nationals or 100% UAE owned companies are appointed as local agents. Such agents are not involved in the operations of the firm but assist in obtaining visas, labour cards etc and are paid a lump sum as remuneration. The Economic Department is the authority in charge of licensing such branches or representational offices.
Dubai Professional Firms
In setting up a professional firm, 100% foreign ownership, sole proprietorships or civil companies are permitted. Such firms may engage in professional or artisan activities but the number of staff members that may be employed is limited. A UAE national must be appointed as local service agent, but he has no direct involvement in the business and is paid a lump sum and/or percentage of profits or turnover. The role of the local service agent is to assist in obtaining licences, visas, labour cards, etc.
To know more about LLC, please click here. ( information given below - A)
To know more about Free Zones, please click here. (info given below - B)
- Can a sole proprietorship/partnership company be converted into a L.L.C.?
By virtue of the law (Enforced in Dubai) any partnership concern can convert into a Limited Liability Company pursuant to the Commercial Companies Law (8) of 1984 as amended, and the ministerial decrees.
Similarly a sole proprietorship concern can be converted into a LLC by adding one or more partners.
- How many persons can form a company and who can be the partners?
Minimum two and maximum fifty persons can form a limited liability company. However, U.A.E. National's share in the capital should be minimum 51%; at any given time share of the U.A.E. National partner should not fall below 51%. Partners may be natural persons or a corporate body/company.
Each partner shall be responsible only to the extent of his share in the capital for the company's liabilities.
- What are the main contents of the Memorandum of Association?
The Memorandum of Association is a contract between the partners to form a L.L.C. and it contains the following information:
- Name of the company, its objectives and registered office address.
- Name of the partners, their nationalities, place of residence and residential addresses.
- Amount of the share capital, share of each partner, value of each share, names of the partners and method of capital contribution by the partners.
- Names of the directors and their nationalities.
- Date of commencement and period of contract.
- Method of profits or losses distribution and share of the partners in the profits or losses.
- The procedure to be adopted for sending notices to the partners.
- What are the benefits of forming a limited liability company?
Liability of partners is limited to the extent of unpaid capital.
Company attains a corporate entity different from its partners.
The partners can appoint Director(s) who are authorised by the memorandum to carry on the business of the L.L.C. independently without involvement of the U.A.E. national partner.
- Can the expatriate partner sponsor his family?
Any expatriate partner in a Limited Liability Company is eligible for sponsoring spouse and other family members on residence visa if his share in the capital is Dhs. 70,000/- or more, also he should be a director in the company and his salary needs to be stated in the Memorandum of Association (as required by immigration rules).
- Which business activities can be undertaken by the company?
The company may undertake any business activity permitted by the Department of Economic Development except business of banking, insurance and investment of funds for third parties.
By practice, the department does not permit, Two different classified business activities under one license e.g. trading and manufacturing need separate licenses. Or Two different designated classes of activities under one license, e.g. trading of electronics and Jewellery need separate trade licenses.
- What are the capital requirements?
Minimum share capital required for a specific trade license is U.A.E. Dhs. 300,000/- .
The share capital is divided into shares of Dhs. 1,000/- each.
For emirates other than Dubai capital requirement is Dhs. 150,000/- and Dhs. 1,500,000/- respectively. The share capital is divided into shares of Dhs. 1,500/- each
- How is the capital to be contributed?
- Dhs. 300,000/- for Specific Trade License.
Contribution in Cash
- Existing Sole Proprietor or partnership concerns can contribute capital in cash.
- New companies have to compulsorily contribute capital in cash only.
Contribution in Kind
- Existing Sole Proprietor or partnership concerns can alternatively contribute capital in kind viz, by contributing fixed assets and / or stock.
- New companies cannot contribute capital in kind.
- In case of capital contribution in cash, full amount should be deposited in any bank operating in the U.A.E. This amount can be withdrawn only by the director of the company upon submission of proof of the company's formation.
- Kind contribution requires details of contribution in kind and full audited financial statements.
- Dhs. 300,000/- for General Trading License.
Contribution in Cash
New companies or existing Sole Proprietorship concerns converting into a Limited Liability Company have to compulsorily contribute capital in cash.
Contribution in Kind
Only existing partnership companies are allowed to contribute capital in kind.
In case of capital contribution in cash, full amount should be deposited in any bank operating in the U.A.E. This amount can be withdrawn only by the director of the company upon submission of proof of the company's formation.
Kind contribution requires details of contribution in kind and full audited financial statements.
In what ratios are the profits/ losses to be distributed?
The partners in the proportion of their capital generally distribute Profits/ losses after setting aside 10% of net profits to legal reserve. The company has to set aside 10% of net profits to legal reserve till the legal reserve equals to 50% of the capital of the company.
Before distribution of the profits director's remuneration can be charged as expenses as specified in the memorandum of association of the company.
The Department of Economic Development, Dubai presently permits to distribute Profits/Losses in the ratio upto maximum of 20% : 80% (instead of 51% : 49%), in such a case directors cannot be paid remuneration.
Who will manage the business of the company?
The shareholders / partners may appoint themselves or other persons as Directors to run and manage the business of the company. Only the directors have the powers to run and manage the day to day operations of the company, the partners are not given any powers to run and manage the company.
Either there will be one Director or Board of Directors appointed to manage the company.
All Powers of Directors are generally stated in the Memorandum of Association including power to open and operate bank accounts and borrow money from banks.
Even a company can be appointed as a Director of the company.
What are the responsibilities of the directors?
The directors are responsible for the following important matters:
The directors shall convene the annual general meeting of all the partners at least once a year within four months following the end of the financial year to conduct the following business:
- The directors will manage the day-to-day business operations of the company as per the powers given in the Memorandum of Association of the company. His actions will be binding upon the company provided he has acted in his capacity as Director of the company and he has not exceeded his powers.
- Proper books of accounts have to be maintained and audited on a yearly basis. The directors are responsible for preparation of the balance sheet and the profit and loss account and a report on the activities and the financial position of the company including the proposal on distribution of the profits of the company within three months of the closing date of the financial year. The directors within the following ten days to the approval of the above shall present them to the ministry and the competent authority.
It is said that if creditors file a suit for winding up and the court auditors do not find proper books of accounts and are not able to ascertain why the company is not in a position to pay the creditors, then the company's partners and directors would be held jointly responsible to the full extent of their fortunes for the company's liabilities.
Hearing the report of the director and the auditor.
Discussing and adopting the balance sheet and the profit and loss account
Determining the profits to be distributed
Re- appointing the directors and fixing their remuneration
Re- appointing the auditors and fixing their remuneration
The phrase "Limited Liability" should be added to the name of the company in addition to a statement showing the company's capital. If the directors fail to comply with these requirements they shall be jointly responsible to the full extent of their fortunes for the company's liabilities.
A register containing the following information shall be kept at the registered office:
Can the directors' be paid remuneration?
- The names of the partners, their residence addresses, nationalities and professions.
- The number and value of shares owned by each partner.
- Details of share transfers, date of transfers etc.
Directors' can be remunerated in the following manner (and /or): -
- Monthly salary
- Perks viz. fully furnished accommodation, car and its maintenance, medical benefits for self and family, electricity and water, etc.
Leave salary and gratuity.
Fist class return air fare for self and family.
- Management fees based on percentage of sales of the company.
When can the partners lose their limited liability protection?
Partners who are appointed to manage the L.L.C. also run the risk of losing their limited liability protection under the Companies Law where they are a party to deception or abuse or exceed the authority vested in them or violate the companies law or the memorandum of association of the company. Similarly protection can be lost where such partners mismanage the affairs of the L.L.C. Only those partners who have had their objections to the actions giving rise to the liability recorded in the minutes of the meeting at which the actions were considered, or were absent when the decision to take such actions was made, will be exonerated.
Also where partners have provided personal guarantees, they agree to be bound to repay the loans to the extent the L.L.C. is unable to repay. If the personal guarantee is called upon, the partner's liability while limited to the value of the guarantee may well exceed the value of his shares in the L.L.C. As such the advantage of the limited liability could be lost.
Can the partners give interest-bearing loans to the company?
The partners can give loans to the company and they can be paid interest at the commercial rates prevailing in the market. It is advisable to add such a clause in the memorandum of association of the company.
What are the major costs payable to the economic /other government department for forming a limited liability company?
One time charges to Economic Department Dhs. 3,000/-.
Part of license fees are based on - 5% of the tenancy contract value of expatriate Director's residence (located in Dubai or any other Emirate) or AED 1000/- in absence of the Directors residence tenancy contract.
Dhs. 750/- charged for Director being appointed for unlimited period.
10% of the tenancy contract value of office, go down, stores, shop rented by the company.
Note: Expatriate partner's residence is not considered for license fees if he is not a Director in the company. If all partners are U.A.E nationals, their residence, offices, shops, etc. are not considered for license fees.
Notarization fees - 0.25% of capital OR a sum arrived at by multiplying the annual salary of each director with the number of years of his appointment as stated in the memorandum of association, which ever is higher; maximum Dhs. 10,000/- only. No further fees for alteration of capital is payable if initially Dhs. 10,000/- have been paid.
Other miscellaneous fees and Chamber of Commerce fees.
Can a separate power of attorney be issued by the partners to the directors/others?
Separate Power of Attorney can be issued by partners to Directors/ others giving all powers to run and manage the company. This Power of Attorney can be given to government departments / third parties who want to know about the powers of the Director's / others instead of giving them the full Memorandum of Association.
When can the company commence business activities?
The partners can commence business on receipt of the Certificate of Commercial Registration, provided the partners have obtained a residence visa. The partners shall be jointly liable for all acts and transactions performed on behalf of the company prior to its registration.
If the other existing licenses of a local partner are expired will the Department of Economic Development accept the documents submitted to form the L.L.C.?
The Economic Department will not allow a company to be incorporated if any licence issued in the name of the local partner has expired.
Therefore before submitting the name and objects approval form to the Economic Department the investor has to ensure that all the licences issued in the name of the local partner are valid.
Is residential address to be stated anywhere?
The residential address of the expatriate partners has to be stated in the Memorandum of Association and supported by the tenancy contract copy as 5% tax has to be paid on the per annum rental value.
Which are the documents required to be submitted to the Department of Economic Development?
A complete list of documents required to form a Limited Liability Company is enclosed herewith. Refer Annexure A.
After Formation of the Company in Dubai
Can the company open branches in Dubai?
The company can open branches in Dubai by submitting an application alongwith the original trade licence and other documents.
Can the company open branches in other Emirates?
The company will have to incorporate a new company in other emirates with the required capital and with a new Memorandum of Association stating therein that this new company is a branch of the Dubai Company.
Can the staff of H.O. work in a branch or vice versa?
Yes, the staff of H.O. and branch can work at either place as per the current regulations.
Can a L.L.C. of another emirate open branch in Dubai?
Yes, but if the capital of the company is less than Dhs. 300,000/- then it should be raised to Dhs. 300,000/- by an amendment to the Memorandum of Association. The original and the amendment to the Memorandum of Association alongwith other documents have to be filed with the Department of Economic Development, Dubai.
Can the partners admit a new partner?
Existing L.L.C. can admit new partner with full capital contribution in cash or kind. If the company opts for kind contribution the following documents are required:
Sale of shares agreement.
Audited financial statements
Statement of capital contributed in kind by all the partners
Resolution of the partners
Amendment in the Memorandum of Association of the company
Can a partner transfer his shares to any other partner or person?
Yes, the following documents are required to transfer shares by one partner to another partner/ person:
Sale of shares agreement
Amendment to Memorandum of Association
Department of Economic Development will give advertisement in Arabic newspaper for 15 days for no objection by any member of the public.
UAE economy is clearly divided between the 'onshore' sector, dominated by local business interests, with restrictions on foreign ownership, and the 'offshore' sector which consists of a number of Free zones.
There are no taxes to speak of, on or offshore, but 100% foreign ownership and customs privileges make the free zones the most favorable locations in the Middle East for international operations.
We offer our professional services and expertise in the formation of companies in all free zones of UAE including Sharjah Airport International Free Zone (SAIF Zone), Jebel Ali Free Zone Authority (JAFZA), Dubai Airport Free zone Authority (DAFZA), Hamariyah Free zone Authority, Ajman Free Zone Authority, Ras Al Khaima & Fujairah free zone Authorities.
Free Zones in the UAE
Jebel Ali Free Zone
Dubai Internet City FZ
Dubai Media City FZ
Knowledge Village FZ
Dubai Airport FZ
Gold & Diamond Park FZ
Cars & Automotive FZ
Metals & Commodities FZ
SAIF Free Zone
Hamriyah Free Zone
Ajman Free Zone
Ahmed Bin Rashid FZ
Fujairah Free Zone
Ras Al Khaima Free Zone
Dubai Silicon Oasis FZ
Dubai Maritime City FZ
Dubai Aid City FZ
RAK Investment Authority
Dubai Carpet Free Zone
Dubai Auto Parts City FZ
Heavy Eqpt.& Trucks FZ
Umm Al Quwain Free Zone
Dubai Flower Center FZ
Dubai Health Care City FZ
Dubai Textile Village FZ
Int'l Media Production FZ
Dubai Dragon Mart FZ
Dubai Logistics City FZ
Int'l Arbitration Center
Techno Park Dubai
Dubai Industrial City
Dubai Outsource Free Zone
Free Zones offer the following incentives to the investors. Some of the salient features are:
1. 100% foreign ownership
2. No corporate taxation for 50 years; renewable for an additional 50 years
3. Freedom to repatriate capital and income
4. No personal income tax
5. Full exemption from import duties
6. No currency restrictions
7. No bureaucratic red-tapism
8. No recruitment problems
9. Modern efficient communication
10. State of the art infrastructure
11. Abundant energy