Establishing a legal presence in the UAE is required for investors who intend to undertake business/commercial activities in the UAE. Options available are namely, incorporating a local entity, registering a branch or representative office of a foreign company and establishing a free zone entity.
When incorporating/registering a local limited liability company (commonly known as ‘mainland company’), the foreign investor must appoint a local ‘sponsor’ who will hold at least 51% of the shares. Due to the fact that the foreign investor may only hold a maximum of 49% of the shares, incorporating/registering such a company is not favoured by a majority of foreign investors.
The local sponsor/shareholder does not personally invest in the company’s share capital. In general, the sponsor is remunerated either by receiving an annual fixed fee or a percentage of revenues, as the sponsor does not partake in the profits of the business.
Certain benefits of incorporating a local limited liability company are as follows:
(a) Ease of access to governmental businesses and the local UAE economy;
(b) Limited restrictions on the permitted activities of the company;
(c) Achieving a strong physical presence within the UAE market; and
(d) Ease of opening corporate bank accounts globally.
Foreign companies are permitted in accordance with the relevant UAE laws to establish a branch or representative office within the UAE. This is a popular option for foreign companies to retain 100% foreign ownership. However, such offices do not have a separate legal identity to its parent company and thus, there is no legal protection in the form of limited liability.
Branch and representative offices have similar features as both operate under the authority of a commercial registration and license under the name of the parent company. A local services agent, who must be a UAE national or a company wholly owned by UAE nationals, must be appointed for both a branch and representative office. The local services agent bears no responsibility in accordance with the activities conducted by the branch and representative office and is not involved in the management or ownership of the office. The role of the local services agent is limited to conducting administrative functions such as obtaining licenses/permits, in return for a fee.
A branch may only engage in activities similar to those carried out by the parent company. In general, a branch can engage in commercial activity within the UAE, subject always to carrying out the activities set out in its commercial license, and can earn profits. A representative office, on the other hand, cannot earn profits within the UAE and is limited to undertaking activities related to marketing and/or promoting the products and services conducted by the parent company. A representative office is normally established to gather information on the local market, create relationships and solicit orders that will be performed by the parent company.
As an alternative to setting up within the mainland, it is also possible to establish a limited liability company or branch in one of the many free zones across the UAE and in particular, Dubai. Free zones were introduced with the intention of attracting foreign investment.
Free zones are located in specific areas within the UAE. Each free zone is governed and administered in accordance with its own rules and regulations and focus on specific industries. The key limitation of a free zone entity is that it is generally prohibited from doing business outside the designated free zone area and is restricted to performing the activities specified in its license. However, free zone entities are permitted to trade freely within the designated free zone area and outside the UAE. If a free zone entity intends to engage with onshore UAE clients, then the entity will have to retain a commercial agent or distributor.
A free zone entity will generally take one of the following three forms, namely, a branch or representative office of a foreign company, a free zone company or a free zone establishment.
With regards to a free zone branch or representative office, the concept is the same as that found in the mainland, whereby it is an extension of the foreign parent company. The main difference between a mainland branch and a free zone branch is that a free zone branch is not required to appoint a local services agent.
As to free zone company and free zone establishment, the main difference is the share capital requirements and the number of shareholders. A free zone establishment may be owned by a single individual or corporate entity, whereas a free zone company requires at least two shareholders.