The most common question we get asked at Synergy is what is the correct setup option for my business? Our advice to all potential clients is simply based on the business activity and projected expansion plan for the company.
There are essentially five options available to foreign investors seeking to establish a business or commercial activity in the United Arab Emirates there are:
Fly in Fly Out Trading
This option permits a foreign company to trade in the UAE from their parent or home country. Therefore, there is no need for the company to physically set up a presence. Yet, this form is merely applicable to specialised services and products. One of the main challenges is that the overseas companies may find it hard to start and build the relationships needed to grow and expand their business without having a physical presence in the UAE. Also, UAE based clients may request a registered physical presence locally. The UAE Companies Law requires foreign investors to be registered and licensed by the relevant authorities in the UAE in order to perform business. This is a major restraint on the level of activities which can be provided on a ‘fly in fly out’ basis.
Performing Business via a Agent or Distributor
Foreign companies can benefit by the agent or distributor’s local market networks and contacts. From a cost and risk viewpoint it may be lower because it saves on the costs of physical establishment and uses the third parties’ existing buyers. On the other hand, before stating any arrangement with a local party, caution and thorough due diligence must be taken. The UAE Commercial Agencies Law (Federal Law No.18 of 1981) governs the appointment of registered distributors, commercial agents and sales representatives. A commercial agency is 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.”
The Commercial Code (Federal Law No.18 of 1993) builds upon the Commercial Agencies Law and establishes a framework which regulates the different types of commercial agencies. The contractual agency is the most common type of agency and involves an agent representing the foreign principal in the distribution and sale of products or the provision of services undertaking, on a permanent basis and in relation to a specific activity, to instigate and negotiate deals for the principal in return for a fee. Under UAE law, agency and distribution arrangements are largely treated in the same way as each other. There are several options and types of agents or distributors to choose from and a distinction needs to be drawn between registered and unregistered agreements. A registered arrangement (agency or distribution) is possible where the agent or distributor is a UAE National or a company wholly owned by a UAE national(s). Agents benefit from exclusivity whereby products imported must be exclusive to the agent.
Ceasing registered agency or distribution agreements can be challenging and costly as there are strict rules and restrictions which apply.
Set up of a Local Entity
The key options available to a foreign investor are: Establishment in ‘mainland’ UAE (known as ‘onshore’) or establishment in one of the many economic free zones.
Onshore foreign businesses wishing to operate in mainland UAE usually do so either through a Limited Liability Company (LLC) or a branch or representative office.
Mainland Limited Liability Company
UAE Limited Liability Companies (LLCs) are required to have a local shareholder or (Corporate Nominee) who holds 51% of the shares. Therefore, the maximum shareholding a foreign business can hold in an LLC is 49%. One of the main advantages is Federal Law No. 2 of 2015, the new Commercial Companies Law (New CCL) does not impose minimum capital requirements for an UAE LLC. The Corporate Nominee is not eligible to the profits or revenues generated by the LLC. Also, the Corporate Nominee will not contribute to the share capital or the company’s operations.
UAE Branches of Foreign Companies
The New CCL grants a foreign company to establish a branch in the UAE. UAE onshore branch does not have separate legal identity to its parent company. Subsequently, there is no legal protection to the parent company in the form of limited liability. Onshore branches are generally restricted to carrying out the same activities as the parent company.
While there are no such ownership restrictions in respect of onshore branches a Local/ National Service Agent (NSA) must be selected and either needs to be a UAE National or a company wholly owned by UAE Nationals. The NSA is not eligible to the profits or revenues generated by the branch and only gives certain limited governmental and administrative services, as agreed in the National Service Agent Agreement. Typical services include: license application and renewal and visa applications for the branch.
UAE Free Zones
Free zone company formation is an alternative to setting up in mainland or onshore, it is also possible to establish an LLC or branch in one of the many free zones across Dubai and the UAE. Free zones are specific areas within the UAE and were introduced to attract foreign investment. Each free zone is administered and governed by their own regulatory authorities with their own rules and regulations.
The licensing authority within each free zone is responsible for issuing free zone licenses and registering companies. Typically, free zones are industry focused and are tailored to specific industries and therefore, only license specific types of activities.
Foreign companies intending to expand to the UAE market or progress their current operation further than an agent or distribution arrangement might opt for a joint venture (JV). JV’s allow the foreign investor to take an equity stake and role in the operation and management of their UAE entity and benefit from the involvement of a local partner. The local partner may contribute financially, by use of skills or local networks etc. JV’s are set up using either onshore or free zone limited liability companies. In the case of the former, the previously mentioned requirement for 51% ownership of the share capital by a UAE National or a company wholly owned by UAE Nationals applies. There is no need to license a JV or publish the JV agreement. Selecting the right JV partner(s) is key to ensure that they will be able to contribute to the JV in the way planned.
Merger and Acquisitions (M&A)
Another market entry strategy for foreign companies is to acquire or invest in an existing UAE company or business. Both share and asset purchases are possible in the UAE. Particular factors to note are:
- The very limited amount of publicly available information and so the need for thorough due diligence.
- The impact of the foreign ownership restrictions and need for onshore entities to be 51% owned by UAE individuals or companies owned by UAE Nationals.
- The absence of provisional equivalent to the European transfer of undertaking regulations, and the resulting need to deal with the transfer of employee contracts as part of any asset deal.
- The impact of UAE end of service benefits in the case of assets transfers.
All of the above five market entry options, especially the appointment of agents and distributors, JV’s or M&A raises a need for thorough due diligence to ensure commercial compatibility and avoid future difficulties.
Do you need advice on business market entry into the UAE? Perhaps you are wishing to purchase a UAE business? Synergy Group’s business development team are waiting to speak with you today. Explore your options Contact email@example.com or call +971 4 563 7302.