Harry Hsing is an Associate in our Abu Dhabi office.
The United Arab Emirates (UAE) is a federation of seven emirates located on the northeastern side of the Arabian Peninsula. Each of the seven emirates governs themselves with local laws, while federal laws govern some specific substantive areas (i.e., intellectual property, labor and employment). While the federal UAE Companies Law (Articles 218-255 of Federal Law No. 8 of 1984) technically governs corporate law in the UAE, corporate entities are registered within each emirate and are emirate-specific. To this end, a corporate entity in one emirate may not do business in another emirate without establishing a related business entity such as a branch office or representative office.
There are several business forms that foreign companies may utilize to do business in the UAE market. Below are several examples along with the criteria required for each business form.
Limited Liability Company (LLC)
- LLCs provide the mechanism for private businesses to limit liability in their business ventures.
- LLCs in Abu Dhabi must have at least two partners and may have a maximum of 50 partners.
- The 51 percent majority partner must be a UAE citizen or a business entity wholly owned by UAE citizens.
- The minimum capitalization requirement was eliminated in 2009. In lieu of a bank letter evidencing the proper deposit of capitalization funds, the Abu Dhabi Department of Economic Development now requires an undertaking letter from the shareholders of the LLC promising to deposit funds for the company if requested to do so by the Abu Dhabi government.
- LLCs are banned from performing certain activities. Examples of proscribed activities include banking, insurance and the investment of money on the behalf of third parties.
- To modify the effects of the 51 percent local ownership requirement, the parties typically enter into a private shareholders agreement that will further define the financial and management rights and obligations of the parties. It is through this structure that foreigners are able to more securely do business in the UAE while limiting their liability to their interest in the LLC.
- This business form is typically used for businesses involved in trading or construction of physical things.
Branch Office
- Branch offices are not a separate distinct business entity like the LLC. Instead, they merely carry out the parent company's business in the parent company's name.
- A branch office in Abu Dhabi or Dubai requires a local sponsor; this sponsor must be a UAE citizen.
- A branch office is permitted to conduct any of the parent company's business activities, including promotion, marketing, offer services and entering into contracts on behalf of the parent.
- Branch offices are more complicated to establish than LLCs in Abu Dhabi or Dubai. Because the branch office is not a separate business entity, the licensing authorities require additional information about the parent company.
- This business form is typically used for consulting and advisory businesses.
Representative Office
- Representative offices are very limited in terms of their activities and are not available in all of the emirates.
- The activities of a representative office are limited to gathering information and soliciting orders and projects to be performed by the parent company.
- Representative offices are also required to retain a local sponsor (service agent) and must also enter into an agency agreement with the sponsor.
Free Zone Entities
- There are many free zones in the UAE that offer industry-specific business venues for foreign businesses.
- One of the primary benefits of free zone entities is that they offer 100 percent foreign ownership.
- Free zone entities may only do business within the free zone and outside the UAE – they may not conduct business in any other part of the UAE. For a free zone entity to do business outside the free zone, an LLC or a branch office needs to be established in the particular emirate.
- Free zones generally have their own regulations and operate under their own laws. Therefore, it is important to fully understand the regulations of the free zone in which you are interested in doing business as there may be nuanced distinctions in its regulations.
Commercial Agency
- The commercial agency relationship involves a foreign principal appointing a local agent to undertake the principal's business endeavors without establishing a formal business presence in the UAE.
- Commercial agencies are defined 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."
- There is no clear distinction between commercial agencies and distributorships in the UAE. This is because the Arabic word for agent, "wakil," refers not only to commercial agents but also to other forms of legal representation of a principal. Practically, this means that the Commercial Agencies Law applies to both agency agreements and distribution agreements. UAE courts have construed distribution agreements as agency relationships despite rigorous efforts by cautious principals to avoid such treatment. This can result in principals having a difficult time terminating a relationship with a commercial agent/distributor.
In summary, doing business in the UAE requires having a formal business presence in the particular country. Setting up a formal business presence can be time consuming, costly and challenging as a result of the bureaucratic and document intensive requirements of the licensing authorities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.