Foreign investors can carry out activities in the UAE only after being registered and licensed by the relevant authorities in the UAE. In general, a foreign investor can establish a suitable business presence on either the UAE mainland, commonly known as onshore, or a business presence, also known as offshore. An offshore business typically refers to a registration in one of the UAE free trade zones. In terms of the legal forms, UAE Company Law provides the regulations governing the operations of foreign business. The Federal Law provides seven categories of business organization: limited liability company (LLC), branch, partnership, joint venture company, public shareholding company, private shareholding company, and share partnership company. However, owing to certain restrictions, the choices commonly adopted by foreign companies are generally limited to a LLC or a branch. The other options, for example partnerships and joint ventures, are usually not favored by foreign investors. As per the UAE Commercial Companies Law, the foreign ownership of a LLC may not exceed 49%, with the balance of 51% to be held by a UAE national. The UAE Commercial Companies Law is currently being re-drafted, and the new law is expected to allow 100% foreign ownership (subject to approval from the relevant authorities) for specific industries set up onshore. However, there are no further details at this time as to how this new law will apply. A branch is an extension of the foreign parent company. As such, it is wholly owned by its parent company, and there is no requirement for UAE nationals to take an equity interest in the business of the branch. A representative office is broadly similar to a branch, except in that a representative office is only permitted to promote its parent company’s activities and is not permitted to undertake any income earning activities.
FORMING A BRANCH OFFICE
A foreign company may establish a branch in Abu Dhabi provided it has been approved by the Executive Council and the Federal Ministry of Economy and Commerce, it is granted an appropriate license from the Abu Dhabi Municipality, and has been accepted as a member of the Abu Dhabi Chamber of Commerce. Additional specific approvals may be required from various Federal Ministries and local government departments depending on the intended activities of the branch.
APPOINTING AN AGENT
Foreign companies wishing to establish a branch office in Abu Dhabi must appoint a local agent by entering into a national service agency agreement with a UAE national or a company wholly owned by UAE nationals, which, for an annual fee, will act as its national agent. The national agent will not be liable for any of the obligations or liabilities of the foreign company’s branch operations. The role of the national agent is usually administrative only, for example obtaining and renewing the necessary licenses, which are required to enable the branch to carry on its business. The national agent may agree to provide additional services on an ongoing or ad hoc basis for an additional fee. National service agency agreements usually provide for the payment of a fixed annual fee, a commission to an agent, or a combination of both.
In addition to entering into an agency agreement, certain procedures must be followed involving the provision of prescribed documentation, board minutes and company accounts, and the depositing of $68,000 in a local bank account to serve as the “capital” of the branch before the branch is registered. The branch capital is frozen until the branch is registered after which it may be used to fund the activities of the branch. The registration procedure may take some months to complete. A registered Abu Dhabi branch office of a foreign company is not required to appoint a commercial agent as well as a national service agent or have a local UAE partner or shareholder, as the case may be. Branch offices cannot sell or distribute goods but can provide a service; unless they are branch offices of UAE registered companies. Once established, the branch must prepare local accounts, which must be audited by local auditors. Audited branch accounts should be filed with the Abu Dhabi Ministry of Economy and Commerce on an annual basis as part of the license renewal process. These accounts will not be published.
The registration of a branch office will enable a foreign company to establish a local presence in Abu Dhabi and to obtain a trade license in its own name. All branches of foreign banks must obtain the approval of the UAE Central Bank before they can commence operations. No new licenses have been granted to foreign banks for some time.
LIMITED LIABILITY COMPANIES (LLCs)
LLCs can be established in Abu Dhabi by foreign companies to conduct most types of business provided that the foreign investor holds not more than 49% of the shares. At least 51% of the company’s share must be held by one or more UAE nationals, or by a company wholly owned by UAE nationals. There is a minimum of two and a maximum of 50 shareholders. The liability of shareholders is limited to the amount unpaid on their share capital. The minimum share capital is $41,000 fully paid up. Shares must be of a nominal value of at least $272 each. Because of the local ownership requirement, it is advisable for the foreign company concerned to enter into various ancillary agreements with the local shareholder(s) to regulate the management of the company, payment of capital, ownership of intellectual property rights, and the distribution of profits. Some such agreements may be of uncertain legality. It is important that professional legal advice be sought in this regard at an early stage. LLCs need a trade license, as well as other licenses and registrations, to enable them to carry on business in Abu Dhabi. An LLC is not permitted to carry on the business of insurance, banking or the investment of money for third parties. There has been considerable speculation that the local ownership requirement may be relaxed. No firm proposals have yet been issued.
Investors also have a choice to set up operations in one of the free trade zones in the UAE. A free trade zone is a geographical area within the UAE that has been established by the UAE government to generally encourage FDI into the UAE, and, as such, there are generally no foreign ownership restrictions, unlike onshore entities. That is, foreign investors can set up 100% fully owned entities in the free trade zones. The principle drawback of a free trade zone is that entities registered in the free trade zone are not permitted to conduct commercial activities in the UAE, outside of the free trade zone. Currently, there are over 25 established free trade zones in the UAE. Abu Dhabi has established a free zone on Saadiyat Island, which is run by the Saadiyat Free Zone Authority (SFZ). Other famous free zones in Abu Dhabi include, TwoFour54, Khalifa Industrial Zone Abu Dhabi (Kizad), and Masdar Free Zone.
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