Domestic Company
- Freestyle at the Gulf

 

Basis for companies which shall be established and operated in the UAE domestic (or "mainland"), is Federal Law No. 8 of 1984, "Commercial Companies Law" (CCL), as well - at least for most foreigners negligible - as rules for partnerships in the UAE Civil Code. Opinions differ widely between regulation and deregulation proponents, whether it's an advantage or disadvantage that the UAE CCL is without significant modifications or amendments (the last "Amendment" is from 1988) constant for more than 25 years now.

The fact is - this comprehensive law of 330 articles, which fills about 40 A-4 pages, can be read easily in one evening. This can not just now be said about the relevant corporate legislation in almost every other industrialized country.

Except for professionals such as doctors, lawyers, accountants / auditors as well as engineering and service professionals, for foreign entrepreneurs / investors are overwhelmingly different legal forms of capital companies in the foreground.

 

| Sponsor System

However - and this is criticized internationally for years - the CCL contains a superficial insurmountable flaw:

For domestic corporations it is regulated in the CCL, that at least 51% of the share capital must be owned by one or more UAE Nationals(s).

Important: The law refers to UAE Nationals and not UAE Residents! We know several cases in which foreigners living in the UAE cheated businessmen and investors from outside, they could easily establish such a domestic company with them!

Caution - this usually ends as a dependent division of the "problem solver's" company (which naturally belongs him only to 49%), the entrepreneur is then dependent on him for better or for worse.

The whole "51:49% game" is popularly known as the "Sponsor System". The "Local" traditionally adds to an operating entity not more than "his good name." For this, he can claim at least 20% of the distributed company profits according to the CCL. There is another way, elegant - and quite safe from everything!

But in the UAE also again and again a chain of extraordinary misunderstanding among foreigners happens: Each "Local" has to be a "Sheikh" too, please. The "Sheikh", of course, has "money to burn," which he naturally prefers to inject into his numerous corporations which he founded together with foreigners. The truth is quite different: For the vast majority of "Locals", the sponsorship role is the main source of income. Everything else should be booked confidently as "Tales of 1001 Nights."

More details and background information can be found in our section "International Corporate Law".

 

| Legal Forms in the UAE

The CCL defines the following seven types of entities:

  • General Partnership (GP)
  • Limited Partnership (LLP)
  • Joint Participation (Venture, JPC)
  • Public Joint Stock Company (PJSC)
  • (Private) Joint Stock Company (JSC)
  • Limited Liability Company (LLC)
  • Partnership Limited by Shares (PLS)

Here, at this point, further discussion relates due to simplification on the most important and most widely used legal form for foreigner: the LLC.

 

| LLC - Limited Liability Company

At least two and not more than 50 shareholders can establish a UAE LLC. By the end of 2009, under the CCL the minimum share capital was defined with AED 150,000 (approx € 30,000) - the Emirate of Dubai even defined in deviation AED 300,000 (approx € 60,000) - and had to be paid up in full for establishing the company. However, the proven capital stock could be withdrawn again from the corporation after company's registration - such as in Germany, the CCL requires only one time proof of capital and has no constant deposit capital requirement. The LLC can assign up to five directors, there are no special requirements regarding their nationality. The LLC is, therefore, the predestined legal form for foreigners because through their own management occupancy they can reach the most far-reaching control and options for action under the adverse possession of capital constraints of the CCL.

For the year change 2009/2010 in the UAE, the minimum capital requirements - AED 150,000, respectively AED 300,000 - was eliminated. Now, the founders of an LLC have to lay down "a reasonable, to the business purpose fitting" capital figure - whatever that may mean in practice.

It has to be feared that this removal of an alleged establishment obstacle creates quite different problems on the other side in the daily business operations with third parties.

So far, it was 100% clear for each contractor of a Dubai LLC clear that this is liable with corporate assets of abundantly AED 300,000. Now, an increase is expected, that even for everyday legal transactions initially a kind of due diligence must be preceded - to take initially a closer look to contractors.

In Germany, this conflict between incorporation relief and erosion of confidence in entities is all too familiar since the introduction of the "Unternehmergesellschaft" ("UG" with limited liability), also called "Mini-GmbH".

 

| Branch - without Legal Personality

Besides the seven legal forms the CCL regulates in conjunction with the Ministerial Decision No. 69 of 1989 in addition a further branch form for companies from abroad, but without its own legal personality in the UAE.

The branch of a foreign-based entity - Branch - is often indiscriminately called as "Representative Office" or "Liaison Office".

The Branch has no legal personality and it's not allowed for the branch to execute commercial activities (spongy term) or to move physical goods, by trading (even clearer!). The Branch represents primarily the parent company from abroad. It can at best provide services for existing customers of the parent company in-country, as well as advertise the parent company's products. If it comes to actual sales, the (foreign) parent company is obliged to deliver to the (domestic) customers directly. The customer is so inter alia forced to handle the entire import procedure - moreover, his warranty counterpart is the parent company and not its branch in the UAE.

For the Branch, also a so-called "National Service Agent" (NSA) has to be appointed, who takes over in a figurative sense the role of an even wider sponsor. Among other things, visa, residency and work permit for employees of a Branch, in contrast to the other legal forms, are running directly over the NSA. The NSA is paid an annual sponsorship fee and has no further powers to intervene in the operations of the Branch and, of course, no claim on profit distribution.

The transfer of a sponsorship idea to the LLC as corporation came out of the situation of the "Branch of a Foreign Company". Since the UAE were not as accurate with the trade restrictions of the Branch for many years, the Branch did establish as a "legal status" - which indeed is not really one - especially in numerous European companies relatively well represented. There were virtually no fiscal problems with a branch-model, as there was just as an example till 31/12/2008 an DTTA exemption between Germany and the UAE  (compare our section "Foreign Tax Law").

Since 01.01.2009 you can now expect to see at least for German companies the operation of a branch in the UAE from a tax point of view as pretty much the worst case, what can be imagined.

 

| Licensing an LLC

The licensing of a company (comparable to the commercial permit in other countries) has in UAE a special significance. Responsible herefor are the "Economic Departments" on Emirate level. Licensing takes place with formation of the LLC and then on yearly abse as part of a "License Renewal". Administrative and License fees are generally paid in the UAE for the whole year in advance - "pay or die".

While the public court, notarising the LLC statutes - the UAE has no free notarys - records only the incorporation documents and archives, the Registrar of Companies (comparable to the commercial register) is the respective "Economic Department". By this, with the licensing act there is not only a commercial legal action, but the ultimate physique of the LLC will be established here in combination with a license only.

It appears especially important to us, to give here a note on "lawyers and company formation": For us it is always unpleasant and sometimes even annoying anyway, if we show up together with our clients in the Notary Public with truly individually tailored LLC statutes (and translating then individually into Arabic)  - and receive then from our preferred Notary many reports, how many lawyer "colleagues" walk in fresh-dirty to notarize sample or template articles; But at the same time happily reporting that  the "Drafting of Articles" did cost their clients several thousand euros . . .

The Eco Departments issue roughly structures 4 types of licenses:

  • Industrial License
  • Professional License (Service activities of the LLC)
  • Commercial License (hereunder also Investment Companies, as far as they invest own funds)
  • Tourism License

The licensing of an LLC is partly a slow process, because it includes often the classic "chicken and egg situations". Two of a multitude of examples illustrate this:

  1. For the foremost with the Notary Public newly formed LLC, in the license application corporate phone and fax, corporate P.O. Box  have to be stated - along with the fulfillment of many other conditions, to get the license issued at all. But in order to get business communication ports and business mailboxes, the submission of a valid license copy is mandatory.
     
  2. Also mandatory is the submission of a completed commercial lease contract - the coverage of the property with any other licenses will be examined meticulously, by the way - so that the so-called "market fee", depending on the paid annual rent, can be calculated. But which landlord signs a lease agreement with an LLC, which does not really exist yet?

These problem areas should have brought already people driving crazy - as a foreigner, you will only try it two or three times in the maximum to start with local management logical discussions about these issues. Then you give the "Arab" mentality its way and look either for a very eloquent Sponsor or know bailouts by yourselve or through an experienced companion.

In the license application, you must also select the Business Objects from a classification catalog. Please don't make the mistake to select a NACE code or similar in advance: The Eco Departments each have their own classifications, which they hold updated on their websites regularily or publish them as paperbacks (if not straight out of print again).

Of course, it does not detract from the matter, if you have picked out the appropriate classification description word for word, before you certify the LLC statutes in the Notary Public. Statutes have also the article "business purpose" - at least. Thus, a business object has to be specified, where several activities can be summarized in one license. Experience has shown that up to three activities will cause, due to good negotiating skills, no additional licensing costs - beyond that, we are talking about a maximum of approx. AED 300 (approx € 60) more or less for additional activities.

If an unlimited business purpose is wanted, you can apply for a General Trading License, which costs you also roughly double the annual license fee. Here, of course, the usual activities like banking, insurance, medical practicioning, food production, etc. are separately subject to approval - like everywhere else in the world.

The review of the Trade Name of an LLC is regulated in the UAE very efficiently. First: Of course there are exclusions for various parts of trade names such as government, kingdom, banking, insurance, trust, etc. But before you go to the notarial certification of the statute, you must apply in any case a so-called "Trade Name Approval". This not only confirms your chosen Trade Name - it allocates and protects that name at least for 30 days.

 

| Publicity, Compliance and Management of an LLC

The publicity of the LLC is given through the publicly available business license registers (also via internet!) with the Eco Departments. The license is directly accessible only with its core data - company name, license number, license expiration date, license status, business purpose, address (which is already in Arabic), and PO Box / Phone / Fax (if entered into the database). Searchable are only company name and license number - but not after individual names as it is possible e.g. at Moneyhouse Switzerland.

Already the search for people - be it the search for the actual detection of a person, or person's listing as manager or shareholder in separate companies - requires a complicated login registration procedure, where first legitimate interest must be acknowledged. Individuals can ​​only be found if you know their personal DED serial number or (for UAE nationals) their Edbara number. Finally, individual search requires both, Arabic language and writing skills as well as sufficient imagination, as for example the respective translator may have translated the name "Smith" into Arabic.

Formally, actually to be submitted annual reports (in practice you will not be asked) are not published and it is also not possible to access them in direct procedure with the authorities.

Management and maintenance of business books are not explicitly tied to the location UAE, so they can be exercised at first harmless from anywhere. But the presence of the manager is expected by the administration. You would definitely get no tolerance, if you state as CEO, "to be back in country again after one year".

However, the LLC is free to appoint a Public Relations Officer (PRO), provided with adequate powers. Experience has shown that it is scratching anyone that the CEO drops by in his LLC once per year. A duty to take residence is not required for shareholders and managers of an LLC.

 

| Cost of an LLC

The Cost of an LLC can roughly generalized be set as follows:

  • Governmental Fees - 3.500 € approx.
  • Office Rent (you are forced to take office) - depending from individual requirements, NN €
  • Out of office rent calculated "Market Fee" - 5% of annual rent, NN €
  • Contracted / mutually agreed profit share of the "Local" - NN €
  • Consulting and support expenses - depending on your taste, NN €

In subsequent years, the public charges are reduced to about 1,500 €. Always included is - before you get happy too soon - for Industrial and Commercial Licenses, the compulsory membership in the respective Chamber of Commerce and Industry. Finally, an annual flat fee for the auditor, prescribed by the CCL, has to be considered. This can start at around 250 € and is upwards limited only by your intensity of taking this obligation seriously.

 

|  Services by MCI CLT

MCI CLT can refer on a a variety of successfully performed LLC-Setups as well as conversions of Branches in LLCs. At the Economic Departments and the Notary Public, there is no attorney or agent constraint. By this, any entrepreneur can do the formalities himself.

It seems always appropriate to mandate a Setup Agent, when the following points apply:

  • There is still no "sponsor" fixed, and this must be sought
  • The investment protection (out of the 51% issue)
    shall be solved properly and legally
  • There is no or little overview of the legal,
    licensing and labor regulation of UAE domestic
  • The LLC incorporation has to be integrated into
    a complex context right from the beginning:
    Group network, license rights, endogenous or exo-
    genous trade restrictions, foreign tax law, etc.
  • There are setup obstacles, e.g. "critical" nationalities
    or business objects (such as financial services, high-tech trade, etc.)
  • There is only a limited time budget for an on-site presence
    of approx. 3 weeks - necessary if self-formation - available
  • The incorporation is in a hurry

MCI CLT operates primarily as a full-service advisor and incorporation companion.

 

| Announcement

MCI CLT is actually preparing a substantial Investment Guide UAE.
Expected launch date of the E-Book: October 2012.

 

You need further information?
Just drop us an
E-Mail or use our Contact Form.

 

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