In order to set up a business in the United Arab Emirates, and hence in Dubai, a foreign investor is required to setup a formal legal presence (directly or through an agent) within the United Arab Emirates through any of the following means:
- Local business setup in Dubai.
- Register a branch or representative office in Dubai.
- Free zone company formation in Dubai.
- Entering into a commercial agency relationship.
We will discuss these various options for Dubai company formation methods in detail.
1. Dubai Company Formation: Local Business setup in Dubai.
A local entity can be formed under either the UAE Civil Code or the Company Law.
Dubai Company Formation under the UAE Civil Code.
Businesses formed under the United Arab Emirates (UAE) Civil Code are restricted from carrying out “non-commercial” or civil activities — these are activities that promote the skills and ability of the people conducting the business. Most consultancy services, the production of works of art or literature and the sale of agricultural products by farmers are examples of activities that may be conducted by a United Arab Emirates Civil Code entity.
A Civil Code entity in United Arab Emirates (UAE) may take one of the following forms:
(i) the professional services entity.
(ii) the speculative venture partnership.
(iii) an Islāmic Shari’a-compliant arrangement known as a Mudaraba.
Although these three entities are generally called companies, legally they are not companies. The only companies which may be formed in the United Arab Emirates (UAE) are those set up under the Companies Law.
The most common form of UAE civil code entity used by foreign investors is the professional business services company. Such entities are only proper for carrying on service businesses.
The primary benefit of a professional business services company is that a foreign person can own 100% of such companies. However, a national agent must be engaged by all such companies. The national agent generally receives a fixed fee. He / she is not liable for the debts and liabilities of the company and has no management authority. The agent is required to sponsor the professional business services company for its license application and interact with government bodies.
A key disadvantage of a professional services company is that it is not a separate legal entity from its foreign owner. So in spite of a great business environment, the foreign owner may face tough legal and economic situations depending on the fate of the UAE Civil Code entity.
Dubai company formation under the Companies Law.
All locally incorporated companies (other than those formed under the UAE Civil Code) must be setup by the Companies Law. The Companies Law requires companies to adopt one of the following forms:
- Limited Liability Companies (Dubai LLC).
- Private Joint Stock Companies.
- Public Joint Stock Companies.
- Joint Participation Ventures (or Private Unlimited Companies).
- Limited Partnerships.
- Partnership Limited with Shares.
- General Partnerships (or Joint Liability Companies).
Of the entities listed above, most foreign businesses choose the option of Dubai LLC (limited liability company). Foreign partners can exert significant control over a Dubai LLC (limited liability company). Moreover it requires a relatively small amount of capital to start a Dubai LLC.
Such an entity may, however, be inappropriate to meet certain business goals. For example, businesses involving banking, insurance or investment activity for third parties may only be conducted by a public joint stock company and not by a Dubai LLC. Limited liability companies may not offer their shares for public subscription, which is a central feature of the public joint stock company.
The key limitation on entities incorporated under the Companies Law is that 51 percent of the capital of a company must be owned by a national of United Arab Emirates. However, it is possible for the constitutional documents of a Dubai LLC (limited liability company) to contain the following provisions designed to protect the interests of a foreign minority shareholder:
- The foreign shareholder may appoint all the directors.
- Foreign shareholder may appoint the general manager.
- Foreign shareholder may veto major decisions of the company.
- Foreign shareholder may be entitled to all the assets of the company on winding up.
- Foreign shareholder may be entitled to more than 49 percent of the company’s profits.
2. Dubai Company Formation: Opening a Branch or Representative Office in Dubai.
Articles 313 to 316 of the Companies Law let foreign companies to open branches or representative offices within the UAE. A branch or a representative office of a foreign company may be wholly owned by foreigners. However, Article 23(1) of the UAE Commercial Code requires non-UAE nationals engaging in “commercial business” in the UAE to partner with a UAE national who owns 51 percent of the capital of the company.
Accordingly, branch and representative offices which are wholly owned by foreigners may typically only engage in non-commercial business.
Further, a branch office must only engage in those activities that are carried out by its parent company. A representative office is more limited than a branch office in the scope of activities that it is permitted to undertake. A representative office may only conduct marketing and administrative functions such as business services for its foreign parent.
3. Free Zone Company Formation in Dubai.
There are many free zones in Dubai where foreign investors can set up their business. It is a fact that the business environment in the country has been benefited and improved with the presence of many free zones. This particular topic will be discussed in our posts later. In this article, we will just discuss the very basic features of a Dubai Free Zone Business Formation.
UAE Free Zones offer an attractive alternative to Dubai mainland business. UAE Free Zones are particularly useful for companies which carry out a major part of their businesses with countries other than UAE. The main benefit of a Dubai free zone company is that it can be wholly owned by a foreigner. A Dubai free zone company can also be granted certain ancillary financial benefits depending on the policies and business environment of the free zone authority.
A Dubai free zone company will generally take one of the following three forms:
- A branch or representative office of a foreign company.
- A free zone company.
- A free zone establishment.
The key limitation of a UAE free zone company is that it is generally permitted to conduct business solely within its relevant free zone and is limited to performing solely those activities specified in its license.
A UAE free zone entity must typically hold one of the following licenses issued by the relevant UAE free zone authority:
(i) Trading license.
(ii) Service license.
(iii) Manufacturing / industrial license.
For a UAE free zone entity to engage legally in sales within the United Arab Emirates (and outside of the relevant free zone), the entity will generally have to keep a commercial agent or distributor. However, UAE free zone entities with service licenses have been known to offer services outside of their free zone without any movement of goods, people and assets outside of the free zone.
More about UAE Free Zones can be read in our articles “Dubai Free Zone Business | Advantages | FAQ” and “Dubai Free Zone Company Formation| Business Setup Procedure“.
4. Commercial Agency Relationship – an alternative to Dubai Company Formation.
If a foreigner wishes to carry out business in the UAE but does not wish to keep up a physical presence in the UAE, it may enter into a commercial agency relationship with a wholly local owned entity or UAE national. Commercial agents are generally used by foreign manufacturers and traders who are engaged in the large-scale importation of goods into the UAE.
Under a commercial agency, the foreign business and the commercial agent agree to the terms of the sales commission, the territory of the distributorship (at least, this would be one Emirate) and the duration of the relationship. If the commercial agent registers the contract with the Ministry of Economy and Commerce, the agent can get the various protections afforded to agents under the UAE Commercial Agencies Law.
These protections include:
- Exclusivity — registered commercial agents have the exclusive right to import the goods which are the subject matter of the agency.
- Commissions — registered commercial agents are entitled to receive commissions on the sales they make as well as commissions on sales made in the UAE by the principal or any other party.
- Termination — the principal may only end a registered commercial agency arrangement unilaterally for “material reasons”. Such reasons must be acceptable to the Commercial Agencies Committee. Further, a principal may not refuse to renew a registered commercial agency agreement after its expiry date without the payment of compensation to the registered commercial agent.
About Cross Border Business Consultants.
Cross Border Business Consultants is a professional team of Management and Business Consultants in Dubai specializing in business setup in Dubai, Free Zone Company Formation, Offshore Business Setup in Dubai, Business Services etc. Our experience working with start ups and small-to-medium sized businesses (SMB) is unparalleled. Our network of partners and industry experts allows Cross Border Consultants to offer our clients with business services and guidance that will help take you to growth and success.
Our services for Dubai company formation includes cost benefit analysis of various locations and business services. In addition to this, Cross Border Business Consultants check the general business environment in the potential UAE Free Zone to decide on the most suitable site for your dream business.
Dubai company formation can be a pleasant and cost efficient experience if you choose the right partners for your business setup process. If you are looking for professional assistance for company formation in Dubai, please contact us.