Framework about establishing a business in the UAE

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1 Framework about establishing a business in the UAE 1. Establishing a branch of a foreign company Branches of foreign companies can be set up in the UAE in two different forms. Besides the classical form of a branch, it is also possible to form a representative office. In both cases the companies belong 100% to the parent companies abroad, carry their names and are not considered independent legal entities. For this type of establishment no start capital is required, but it still provides the possibility for a physical and legal presence in the country. In contrast to a joint venture or a local company this company form does not require a local partner, but only a so-called National Service Agent. Therefore, this type of settlement is a straightforward introduction to the local market. Differences between Representative Office and Branch The main difference between the two forms of establishment is that the representative office may not carry out any commercial activities in contrary to the branch. The activities which may be held by a branch depend on the license issued by the local licensing authority. In principle, only activities which are related to the parent company are allowed, except import, export, trade and production activities. In practice, the activities of a branch are limited to service and consulting work. However, this rigid attitude seems to have weakened recently. According to the new practice of the Ministry of Economy, branches for trade activities can be founded and licensed if the parent company is the manufacturer of the goods that are being distributed. It remains to be seen whether those rules will also be applied to other areas. The establishment of a representative office allows the foreign company a permanent representative office on location. According to the basic idea of the law it does not allow the representative office to have an active function. It is therefore prohibited from carrying out commercial activities, to invoice and to receive any revenues from its business activities. The establishment of such an office may however, represent a useful alternative to a company formation with a local partner. Not only the time saving aspect is of importance but also cultural and social realities demand a foreign company to be present on the local market on a more constant basis. On the other hand, companies are using the UAE as a location for their representative office in order to coordinate their business activities of the parent company in the surrounding countries. Following tasks can be taken over by a representative office: Mediation of contracts between local clients and the foreign society Market observations Preparation of project studies Marketing and advertisement of products and services of the company Customer support Service Supervision of sales representatives

2 Engagement in trainings Monitoring of public tenders, etc. Service Agent This person can only be a citizen of the United Arab Emirates. He bears no responsibility for the legal and financial obligations of the company and has no voice in the business concerns of the company. His range of duties refers solely to the assistance in obtaining entry and residence visas and the annually incurring renewal of licenses. A service agent agreement between the company and the service agent is made which governs the legal relations between both parties. Additional activities of the service agent can be attached to the agreement. The service agent receives an annual allowance based on his social position and the economic impact he can bring to the market. For other tasks, such as the acquisition of contracts etc. a commission agreement is made. The service agent agreement may be terminated at any time in accordance with the contract conditions. The service agent has no right of severance and compensation payments at any time. Establishment of a joint venture company If the foreign company is interested in engaging in independent commercial activities such as: direct sales activities, including import and export of products production activities or participation in public tenders or other major projects, a mere representation in the UAE of the foreign company is insufficient. In these cases it is useful to set up a joint venture company. Foreigners and foreign companies can currently only participate as a minority shareholder in locally established companies. This means that at least 51% of the company s capital will belong to the UAE national or a 100% owned legal person in the Emirates. Despite of the announced Companies Act, this rule is not likely to change in the near future. Limited Liability Company (LLC) Due to the limitation of liability of the shareholders on the capital contribution of a Limited Liability Company (LLC), comparable to the German GmbH, it represents a popular company form for foreign investors. Characteristics and activities of a LLC By August 2009, the required share capital for establishment of an LLC was AED In Dubai, however, were in accordance with the established practice of the Department of Economic Development, the necessary amount was AED On 11 th August 2009, His Highness Sheikh Khalifa bin Zayed Al Nahyan, President of the United Arab Emirates, induced a restructuring of the share capital limits. The new regulation does not require a fixed minimum amount of money anymore. Each share capital limit is set by an individual decision of the authorities. By this decision, flexibility of this system should be increased and new appeals for middleclass companies should be created.

3 Shareholders of the LLC can be a natural or legal persons. A one-man LLC is prohibited. The LLC must have at least two shareholders. Their number must not exceed 50. The application for approval and registration of an LLC shall be submitted to the relevant competent authority. The corporate objective has to be defined precisely, since it determines the approved activity. Sometimes, because of the activity, special qualifications are required, e. g. when opening a restaurant, etc. Except for the prohibition of activities in banking, investment and insurance business, there are no restrictions existing regarding the permitted business are of a LLC. A double check of the desired activity of the application in advance with the concerned authority is strongly encouraged. If the intended activity of the company involves industrial production, prior approval of the industry authority in the Ministry of Finance and Industry must be obtained. In contrast to pure trading companies, industrial companies benefit from financial incentives and exemptions, such as subsidized electricity and water tariffs, equipment and raw materials, tariff protection, export subsidies, financial support and preferential consideration in tender participations. In order to obtain benefits, the condition is that the company must be held at least 51% by a UAE nationals and the local value added, the so-called Added Value, is at least 40%. Side agreements to the partnership contract The foreign investor, despite the given law, is usually keen on acquiring the majority of capital and thus occupying the power of decision regarding the LLC. In practice, therefore, often contractual side agreements (so-called sponsorship deals or partners agreement) to the partnership contracts are made in which the true intention of the partners is determined. The foreign investor pays the entire share capital of the society. The local partner acts as a trustee of the shares of the foreign shareholder who becomes the sole owner of the LCC. In exchange for his services, the local shareholder receives a certain annual compensation, and is exempted of internal liability claims. Despite the various prohibitions in UAE company law, such side agreements are customary, according to the former provisions of law; they are at least ineffective against third parties. The so-called "Anti-Sponsoring Law", introduced in November 2004 in all Emirates which should take effect after a transition period of three years in November 2007, bans these special side agreements if they intent to evade the domestic majority ownership. Violations against this law are punishable with fines of up to AED 100,000, and in case of repeated offences even with imprisonment. The specific execution regulations are not yet available, but this law should be taken seriously. Overview of the establishment forms Branch and Representative Office 100% owned by parent company not an independent legal entity no capital investment required no local partner, but "only" service agent required

4 representative office cannot engage in any commercial activities, nor invoice or benefit from collected revenue often used by companies as a location in the UAE, to coordinate the business of the parent company in the surrounding countries in principle a branch can only perform activities which are similar to those of the parent company, but no import, export, trade and production activities (changes possible in part) are allowed essentially only to provide service and consultancy work Limited Liability Company (LLC) similar to the German GmbH may exercise independent, commercial activities needs a local partner who holds at least 51% of the share capital shareholders can be natural or legal persons at least two, but not more than 50 shareholders allowed except for activities in banking, investment and insurance industry, no restrictions regarding the permitted business area exist side agreements to the partnership agreement which aim to circumvent the domestic minority participation, are strictly prohibited from November 2007 through the "anti-sponsoring law

5 2. Establishing a Branch or independent company in a Free Trade Zone The UAE has set up a variety of free trade zones in most of its Emirates. In contrast to branches within the UAE which in principle are subject to the regulations of the UAE Companies Law, Free Zones are partly exempt from the provisions laid down therein. Thus, the establishment offers a free trade area for the foreign investor where he or she can own a 100% trade, services or production company set up, without the requirement of local participation. Corresponding licenses are issued by the respective Free Trade Zone Authority, which have to be renewed annually according to the lease contracts. The companies based in the freezones, though under the Freezone regulations are not completely exempted from the provisions of the UAE business laws. The licenses issued by the Free Trade Zones are basically limited to the territory of the Freezone. Thus, because of their legal qualification, foreign branches founded in a Free Trade Zone have to regard that for exports to the UAE, a commercial agent, a distributor or a (end) customer with an appropriate import license is required. Also participations in public tenders are not readily possible. If the business purpose of a company includes only the provision of services, they can always be done outside of a free trade area. Thus, the decision whether to establish a business within the UAE or in a Free Trade Zone depends on the intended target of the market. Free Trade Zones provide substantially the following investment incentives: 100% capital and profit repatriation exemption of Customs fees no currency restrictions no corporate taxes for a guaranteed period between 15 and 50 years with options of renewal no income tax low labor and energy supply costs appropriate lease and rental payments highly developed infrastructure Company forms There are various opportunities of establishing an office in Free Trade Zones in the UAE: Establishment of a Branch (Branch) Establishment of a Free Zone Establishment (FZE) Establishment of a Free Zone Company (FZCO) If the plan is to establish a company without a legal entity on the market, we recommend the establishment of a Branch. The deposit of an initial capital is not required. The Jebel Ali Freezone( JAFZA) e.g. requires only the submission of appropriate letters of reference, which reflect the liquidity of the parent company. With a planned restructuring, the branch may be easily converted into an FZE or FZCO. The parent company is fully liable for the economic activities of the branch. It can acquire the same license as an FZE or FZCO.

6 In contrast to the Branch, the FZE and FZCO are independent companies with own legal responsibilities. They qualify as limited liability companies (LLC). An FZE can be established as a one-man LLC. This sole shareholder may be both a natural person and a legal entity. In principle an FZCO can be established by several (2-5) foreign shareholders. The amount of share capital varies from freezone to freezone. In more recent established Free Trade Zones in Dubai, the terms FZE and FZCO are no longer used. According to the UAE Companies Law, besides the Branch, Free Zone Limited Liability Companies (FZLLC) can be established, either as single or multiple people societies. The fees for licensing and services vary from freezone to freezone and must be calculated on a case to case basis. The duration of the company foundation process varies also accordingly. This depends on the planned form of establishment and the required documents, which are requested to be submitted partly translated into Arabic and notarized and legalized by authorities in the home country. The licensing process begins - regardless of the type of establishment or the location of the Free Trade Zone - always with a reply to an application form, which provides information about the investor and the project. After a positive decision of the Free Trade Zone Authority, the required legalized documents have to be submitted depending of each type of establishment. Overview of the company forms in Free Trade Zones Branch not an independent company with own legal entity no start capital required can acquire the same licenses as a FZE and FZC need for a reference letter that confirms the liquidity of the founding parent company subsequent conversion to the FZE FZC possible Parent company is fully liable for the Branch Free Zone Establishment (FZE) / Free Zone Company (FZCO) independent, legal entity with own liability qualify as Limited Liability Company (LCC) FZE can be established as a one-man LCC FZCO may have 2-5 partners start capital required amount of share capital varies in the different Free Trade Zones liability is limited to the capital provided in recent established Free Trade Zones is the formation of a FZLLC possible, i.e., single or multiperson companies Although utmost care while preparing this leaflet has been taken, the German-Emirati Joint Council for Industry and Commerce (AHK) accepts no responsibility for the completeness and accuracy of the content.

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