- July 2, 2019
- Posted by: master
- Category: Business Setup, Legal Article
If you are interested in investing in UAE, you should firstly be aware that the legal forms of companies in UAE vary. The reason for such variation depends on the choice of the investing parties, the legal form requirements and the financial capabilities of the investor.
Before proceeding with article or video please read our legal disclaimer.
As a general rule, the legal forms of the companies in the United Arab Emirates do not differ in from the common forms all over the world. Common legal forms include personal liability companies for partners or an individual partner, limited liability companies (LLC); which means that the partners’ liability shall be within the limit of the share capital. Moreover, there are mixed companies that combine between the personal liability of some partners and limited liability of others, and private joint-stock companies which depend on huge investments, diversity of partners and are managed by a board of directors.
There also are forms of the international expansion of companies which is best represented by the branches of foreign companies, and representation and liaison offices which have fewer powers and advantages than the local companies, except in specific cases.
Hereafter, we will discuss the legal forms of companies in the UAE, their characteristics, advantages and disadvantages compared to the expectations of investors in order to illustrate the available options to obtain the legal form which suits your investment. Furthermore, it should be noted that when using the word citizens, the GCC citizens are treated as the UAE citizens in respect of the shares they should own. We list below the in following six options of legal forms available to individuals and private companies; a partner can be an individual or a company, whether local or foreign (not including public shareholding companies):
1- Sole Proprietorship and Joint Venture
The legal form of sole proprietorship and joint venture depends on the clients’ confidence in the partner, in his reputation, his financial abilities, and his property for paying for any obligations on behalf of the company. Therefore, it is one of the types that related to the person, hence, this legal form is popular among individual business owners (sole proprietorship) or companies of more than one partner (joint venture). In such types, the expenses and the income are considered as part of the partner’s own personal income.
The partner shall be liable for the obligations and debts of the company with his own money in person as the company has a commercial role derived from the confidence in the partner’s reputation. Ownership of this form is limited to citizens; foreigners shall not practice the two legal forms above. The minimum capital shall be specified based on the activities or as determined according to each Emirate where the law does not specify the minimum capital.
Foreigners may establish sole proprietorship companies and joint ventures represented by professional services companies which provide professional services such as legal, administrative or engineering consultations and other services, or craft activities such as knitting, key manufacturing, plumbing and carpentry workshops.
This may take the form of a civil company of more than one partner, provided the availability of the professional experience. . In such case, it is required to contract with a local service agent who shall work on providing services to the company for annual fees.
Sole proprietorship is not preferred due to the partners’ personal liability concerning the company liabilities and debts. Then there is what happens next, as partners should take into their consideration the personal liability with regard to the obligations, compensations for breach of contracts, and professional mistakes which may exceed investment value or the amounts which are thought to cover the costs of investment.
2- Special Limited Partnership
A- Characteristics :
The legal form of a special limited partnership depends on the clients’ confidence in the partner in person, in his reputation, financial abilities and his property to pay for any obligations of the company as the case in the sole proprietorship and the joint venture.
It allows the partners wishing to partner towards any opportunity to create a partnership without providing a personal guarantee, by partnering in the company in the capacity of a limited partner whose risks are limited only to the amount of their investment.
Therefore, the form above consists of general partners and limited partners. It should be noted that 100% foreign ownership of such an entity is not permitted. Under the UAE Commercial Companies Law (CCL), foreign investors are permitted to hold up to 49% equity ownership in UAE companies and 51% of the equity must be held at all times by one or more UAE nationals. The capital minimum limit shall be defined according to the activities or as determined at each Emirate, whereas the law did not provide for such limitation.
The legal form of a limited partnerships depends on the distinction between the general partners and limited partners, knowing that the limited partner shall not manage or participate in management of meetings or voting.
The reason for this distinction is to protect the limited partner from appearing as general partner before clients with the company, so that his assets and personal property will not be subject of confiscation for the company obligations. Moreover, the limited partner’s rights are narrowed to accessing accounts through the partnership contract which regulates such operation, and this aspect is considered as an advantage to the limited partner.
Limited partnership may include risks to the partners through their joint liability in the company property. This means that creditors may claim debts or bonds due to the company from either any or all of the partners regardless of partnership percentages among them.
This establishes equality in liability among partners regardless of their partnership percentages (noting that liability may revert to each partner with their respective share later if they have available funds). Creditors may require receiving the entire debt amount from the partner with the small percentage regardless of his share.
Since the liability of the partners is equal, all partners may bear the responsibility for the mistakes of others in management without a maximum limit of liability, as one partner may lead to plunging all partners into debt intentionally or unintentionally.
3- Limited Liability Company (LLC)
A- Characteristics :
This form is considered the most common business type in UAE, since it is preferred by high-risk entrepreneurs. This business type depends in its legal form on the liability of partners to the extent of their respective shares in the capital, without any personal liability, except in cases of intentional misstep and criminal liability.
All the company’s assets, property and debts with third parties shall be a guarantee of any liabilities or debts owed by the company. In this legal form, UAE law requires the ownership of a UAE national with a minimum of 51% of the company’s equity, while a foreign investor may not own more than 49% of the company’s equity. The capital minimum limit shall be defined according to the activities or as prescribed at each Emirate, where the law did not provide for such limitation.
As a result of being a common type, and given the fact that the citizen partner is not liable except to the extent of his share in addition to the management being conditional and predetermined at the articles of partnership which cannot be violated and since there is no capacity for partner to interfere in the company management as in joint ventures or special limited partnerships and the inability of dismissing the manager except by a lawsuit, investors seek to obtain a dummy partner in whose name shares are registered, who signs on simulated contacts or what is called a side letter or a counter deed which proves that the citizen partner is just a dummy partner for an annual, pre-specified amount of money. Moreover, investors shall also seek to obtain the necessary powers of attorney which allow the foreign partner share transfer and disposal.
Liabilities in the limited liability companies are within the extent of the share of the company capital, as creditors may not claim any debts and obligations from partners based on their financial liability, since the liability of each partner is separate from this of the limited liability company even if the partner is a managing partner, or has signed any of the contracts in his capacity as an authorized partner from the company. In case of company bankruptcy, the company shall be solely liable for paying off its debts.
The limited liability companies require business regulation, especially in the light of company’s liability for payment of its obligations, since the manager shall be responsible for complying with the with laws and regulations, especially in controlling the accounting records based on the required requirements in the country for guaranteeing the creditors’ right. Moreover, partners and/or the manager may be personally liable with regard to their own property if they do not add the phrase “limited liability” to papers, stamps, and the company logo.
Furthermore, the liability of the partners may exceed the capital in case if the company capital is not mentioned in its papers and transactions, as all these requirements are determined by law. The company shall be based on personal considerations among partners, therefore, selling shares is unacceptable prior to presenting the matter before partners and obtaining their consent. It should be noted that the allowable maximum number of partners is 50 partners.
4- Private Joint Stock Company
Private projects of huge joint-stock investment require examples of companies able to realize those projects and objectives, therefore, the legal form of the private joint-stock companies appears as a regulation for big companies which depend, in their legal form, on the partner’s liability within his share of the capital, without any personal liability.
An appointed or elected board of directors shall assume the responsibility of management according to the company’s followed procedures. All company assets, property and debts with third parties shall be considered as a guarantee of any obligations or debts owed by the company.
UAE law requires the ownership of a UAE national with a minimum of 51% of the company’s equity, while a foreign investor may not own more than 49% of the company’s equity. A Private Joint Stock Company has to have a minimum of AED 2,000,000 as share capital, provided that the said amount has to be sufficient to achieve the company’s objectives.
Liability in joint-stock companies shall be to the extent of the share of the company capital, as creditors may not claim any debts and obligations from partners based on their financial liability, since the liability of each partner is separate from this joint-stock company. In case of company bankruptcy, the company shall be solely liable for paying off its debts.
This business type is characterized by its ability to raise private investments from individuals in large amounts. Furthermore, this business type has an organized management structure to cover its obligations.
Private joint-stock companies require a lot of administrative and legal work in order to abide by the laws and regulations concerning the rules of the board of directors meetings, election, holding members accountable, reappointment, holding general assembly meetings of partners, recommendations and their implementation, accounting records, publishing, submitting and approving final accounts and auditing.
There is a low chance of communication among partners due to their number and because of the possibility of selling shares to anyone without the consent of the remaining partners and since partners are affected by the votes of other partners. The number of partners in such business type shall be limited to 200 partners.
5- Foreign Company Branch
Foreign companies tend to open branches inside UAE to make use of the commercial goodwill of the parent company. Branches are considered as a good choice for some fields which rely on previous work carried out by the parent company, such as construction companies, engineering consultancy companies, which some of its huge projects require previous international experience. Branches offer many perks since a branch office is lawfully regarded as part of its parent company and does not have a separate legal identity from that of its parent company. Hence, the name of the branch office will be the same as that of the parent company.
Law requires branch offices to have a UAE national as a local service agent in exchange for an annual fee to register a foreign company branch. The role of the local service agent is defined as agreed between the parent company and the agent; the agent may be an ostensible agent in exchange for an annual fixed fee or, he may participate in marketing the business of the company through his relations, however, the law requires the agent to register the branch only without any further obligations, unless otherwise agreed by the parties. Foreign companies wishing to work under the name of the parent company may enter into a partnership with a UAE national partner on behalf of the parent company to establish a limited liability company, a legal form that differs from branches of foreign companies.
Foreign companies enjoy 100% of the ownership of the full shares within the areas outside the United Arab Emirates and within the region which is the property of the parent company. Moreover, this business type does not need the required capital in most commercial companies, however, it may require budgets of the parent company for the last two years.
There are no restrictions on foreign companies to submit bids for tenders of governmental of formal entities. And mostly , this is the best legal form for those who want to utilize the commercial goodwill of the parent company.
Foreign companies may require board decisions from the parent company in some procedures if the company manager or the foreign company’s agent is not authorized to do so. In addition, some activities are prohibited for foreign companies, while others, such as trading and selling products, restaurants, and cafes, the activity of commercial agencies and other activities are allowed.
D- Notice :
Foreign companies that do not wish to practice actual commercial activity inside UAE may open commercial or financial representation offices for the purposes of studying markets and production potentials, marketing, and reviving business deals in the favor of the parent company without a representation office practicing commercial activity or the appointment of commercial agent for selling products inside the country.
6- Free Zone Company
A- Characteristics :
Investors wishing to work in tax-free zones tend to establish companies in the free zones, which enjoy the privileges of tax exemption for long periods. The activities of the free zones vary according to the area where the company is to be established. There are free zones for manufacturing, media, design, internet and, others as desired. Most of the free zones are located in the Emirate of Dubai.
Free zone companies enjoy the freedom to transfer full profits and funds abroad in foreign currency, many other advantages, rapid completion of transactions in private zones in addition to concessions of land and property for industrial companies engaged in the conversion and re-export of products without going through the customs.
Foreign partners may enjoy the ownership of foreign companies inside the offshore areas in full shares. This legal form does not require the ownership of a UAE national of %51 of the capital of the companies operating within the territory of UAE. This business type has the freedom to transfer capital and full profits abroad without any restrictions. There are no restrictions on ownership, and such companies enjoy a full tax exemption or custom duties unless products are brought into the country.
Moreover, The cost of setting up some free zone companies is extremely low compared to companies within the territory and may amount to only AED 30,000.00.
Offshore companies may not own real estate inside the country except in specific areas. Furthermore, free zone companies shall be obliged to work inside their designated free zones only, as they may not establish headquarters for them inside the country territory.
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