Registration of a Mainland Company in the UAE – set up or buy a ready-to-operate Mainland Company in the UAE
RAVAD ZAKHR EDIN
Senior Business Consultant
Today, the United Arab Emirates is one of the most secure and attractive jurisdictions for doing business. Incorporation of companies in the territory of the UAE is not only popular because of the progressive economic policy aimed at attracting foreign investors and its constant development but also because of the diversity of forms of incorporation available under the local legislation. Among others (offshore and free zone companies), it’s worth paying attention to the possibility of incorporation of a local company (Mainland Company) for the following reasons:
- No required minimum authorized capital;
- Corporate and personal income tax rates are 0%; full repatriation of income is also possible;
- No restrictions regarding obtaining work visas and simplified employment procedure for individuals;
- No restrictions regarding company’s activities, including possibility to work with state authorities and participate in tenders;
- Possibility to conduct business with no restrictions throughout or outside the UAE;
- No restrictions regarding partners;
- Lower probability of bank’s negative decision when opening a bank account compared to offshore companies.
I. Main features of mainland companies in the UAE
In order to form a complex understanding of mainland companies, we need to consider their key characteristics.
Mainland companies are companies registered by one of the Departments of Economic Development of the UAE. Therefore, it is necessary to apply to the Department of Economic Development of the chosen emirate at incorporation of a mainland company for a license to conduct business.
The term “mainland” means that the company is incorporated outside free zones.
2. Main forms of incorporation of mainland companies
If a mainland company needs to be formed in the UAE, the following forms of incorporation are used most often:
- Sole proprietor / entrepreneur;
- Limited liability company
- Branch of a foreign company
- Branch of a company incorporated in a free zone
3. Kinds of licenses
Mainland companies have the right to conduct business both in the territory of the UAE and in the territory of the free zone. The legislation provides for the possibility to obtain the following kinds of licenses:
Moreover, there are kinds of activity that, besides a license, require additional permissions of regulatory authorities, for example, in the field of tourism, consulting or trade in food.
4. Office requirements
An office is required in order to incorporate a mainland company. Furthermore, an office lease agreement will have to be provided, which must be registered by the UAE Land Department of the respective emirate.
II. Forms of incorporation of mainland companies
In the case of a sole proprietorship, the owner is an individual but not a company. Such an owner also controls all operations of the entity and is entitled to 100% of its profit. A company or legal entity may not own a sole proprietorship. It also may not have more than one member.
Advantages of sole proprietorship
- Possibility to keep 100% share of foreign ownership in the business;
- Such an entity may legally provide professional services in any part of the UAE, including the territories of free zones;
- No restrictions regarding the location of the entity (whether the office premises are taken on lease or owned by the entity);
- No corporate taxes. The owner of the business must only file a personal income tax return;
- No requirements regarding minimum amount of the authorized capital.
Disadvantages of sole proprietorship
- The owner is personally liable for business debts and any other financial obligations of the entity. This liability cannot be limited to the amount of the capital paid by the owner as the company is inseparable from the owner and their financial position;
- The process of its formation takes more time than that of a company in a free zone;
- A real office is required in order to incorporate such an entity.
Who can form a sole proprietorship in the UAE?
UAE citizens, citizens of member states of the Cooperation Council for the Arab States of the Gulf (hereinafter referred to as the GCC) as well as foreign citizens can form sole proprietorships in the UAE. However, the conditions and requirements will be different for them.
If you are a UAE citizen or a citizen of a member state of the GCC, you can form a sole proprietorship of any type. Such an entity will be able to conduct industrial, commercial, touristic or professional business. You will also be able to provide consulting services in a number of areas of business according to your professional license.
If you are a foreign citizen, you can only apply for a professional license for a sole proprietorship. In such a case, you will be able to conduct any kinds of professional activity provided for in the professional license. You will also be able to do consulting business. However, some consulting services may only be provided to UAE citizens. As a foreign citizen you must have a local service agent (LSA) to incorporate a sole proprietorship.
A foreign citizen was previously required to have a local service agent to register a sole proprietorship. A local service agent did not incur liability or financial obligations in connection with the business or activity of a branch or representative office of a foreign company within the state or abroad and was necessary to comply with the formal requirements of the law regarding presence of a UAE citizen.
On 1 April 2021, in connection with coming into force of the Federal Decree Law No. 26/2020, in particular article 329 of the UAE Federal Law No. 2 of 2015 on Commercial Companies, which required presence of a local service agent, was abolished.
Procedure of incorporation of a sole proprietorship
The Department of Economic Development is a state agency responsible for registration and issuance of trade licenses to new entities in the UAE. The process of incorporation of a sole proprietorship in the UAE is quite simple.
However, some additional requirements or steps may appear, depending on your business activity, which have to be met or taken in order to complete the incorporation process. Nevertheless, this procedure is very cost-efficient as the form of incorporation of a sole proprietorship does not require memorandum and articles of association.
Limited liability company
Limited liability company is a flexible form of doing business that most resembles a western limited liability company and comprises elements of a partnership and corporate structure.
This form of business is suitable for small entities as minimum formal requirements are imposed on it.
A limited liability company can obtain licenses to conduct manufacturing, commercial, trade, professional or touristic activity. However, some kinds of activity, in particular, banking, insurance or investing of third-party funds, will be prohibited for such companies according to pieces of legislation of the Department of Economic Development. Some other activities in turn require additional permissions of state agencies regulating those activities.
Formation of a limited liability company
A limited liability company must have 2 to 50 members, each of whom is only liable within their share in the company’s capital. However, the law provides for formation of a limited liability company with one member. All provisions of the law applicable to limited liability companies apply to a company with one member to the extent that they do not contradict its nature.
The name of a company must indicate the purpose of its activity or consist of the names of one or more members and end with the words “with limited liability” and the amount of the authorized capital. In the case of a company with one member, the company’s name must contain the member’s name and the words “sole proprietorship with limited liability”.
A limited liability company cannot invite the general public to subscribe for its shares in order to increase its capital or receive loans, or issue floating stock.
A limited liability company can change its form of incorporation to any other form, except for public shareholding company. The authorized capital of the company must be fully paid through a UAE bank. The procedure of company incorporation is initiated by submitting an application to the UAE Ministry of Economy. The company must also be included in the proper municipal commercial register and may not start its business until the registration is complete.
If the number of members exceeds the allowed maximum, the directors must inform the Department of Economic Development within 30 days of the date when the maximum is exceeded. The company must solve the issue within 3 months of the date of notification. This time period may be extended by the Department to 6 months. If the issue is not solved, the company will be struck off from the commercial register. Members of the company are personally and jointly liable for the company’s debts and obligations since the increase of their number. However, those members who can prove that they did not know that their maximum allowed number had been exceeded or that they objected to it shall be exempt from such liability.
A limited liability company can have one or more branches. Each branch can engage in one or all activities included in the company’s main license.
The law does not prescribe a minimum amount of the authorized capital for limited liability companies. However, a minimum amount of the authorized capital may be prescribed by resolution of the Cabinet of Ministers of the UAE. The authorized capital of a company may be increased (or decreased) by resolution of members holding in aggregate 75% share in its capital or more, unless members preliminarily agreed on another percentage. A unanimous resolution of members is required to increase financial obligations of the company. The company must annually create a financial reserve amounting to 10% of its annual net profit until the amount of such reserve becomes equal to one half of the company’s authorized capital.
Capital of a limited liability company is divided into shares, which may not be further divided. However, one share may be held by more than one member provided that one of the members is chosen to be a representative of the company. Members can transfer their shares to other members or third persons provided that such a transfer does not contradict any provisions of the law or the articles of association.
Members who wish to sell their shares must inform the other members through directors. Members have 30 days during which they can use their preemptive right to buy such shares on the same conditions. If more than one member wishes to acquire the shares on sale, the latter shall be divided in proportion to the existing shares of those members. If the other members do not agree to the set price, they can request an independent assessment of the cost of shares.
Both individuals and legal entities may be members of a limited liability company. According to the previous rules, in a local limited liability company, UAE citizens had to own a share of at least 51%, and citizens of the GCC countries could own a share of up to 100%.
Starting from 1 June 2021, due to implementation of the Federal Decree Law No. 26/2020, foreign citizens can own 100% share in a local company unless such a local company conducts activity of “strategic importance” that is subject to additional regulation. For this purpose, the Federal Decree Law No. 26/2020 provides for establishment of a special committee consisting of representatives of the Departments of Economic Development of each emirate. This committee shall make decisions on activity that is of strategic importance to the UAE as well as on licensing requirements for companies engaged in such activity.
The Department of Economic Development of Dubai published a list of activities that allow 100% foreign ownership. Against expectations, this list also includes such activities as oil & gas, transportation, telecommunication, etc.
You can see the full list of activities allowing 100% foreign ownership in Dubai by clicking on the link to the website of the Department of Economic Development of Dubai.
The status of currently valid licenses for those activities that now allow 100% foreign ownership and where there is a local partner shall remain unchanged in accordance with the Memorandum and Articles of Association and resolution of partners. The Department of Economic Development of Dubai specified that “decrease of the share of the emirate partner below 51% or their withdrawal from the company is possible in accordance with the established legal procedures”.
Full foreign ownership does not change in any way the existing procedures or licensing requirements, except that having a local partner or stating a fixed share ratio for them is no longer required.
The Department of Economic Development of Dubai also clarified that even though in accordance with the current legislation it is impossible to reorganize a limited liability company into a sole proprietorship with a foreign name, a license can be transferred to a limited liability company that has one person in its structure.
B) Abu Dhabi
The Department of Economic Development of Abu Dhabi also published a list of activities that allow 100% foreign ownership starting on 1 June 2021.
In its resolution dated 23 May 2021 the Department determined 1,105 registered business and industrial activities where non-UAE citizens, whether individuals or legal entities, have the right to acquire an economic license and form commercial companies with 100% share or any other percentage to conduct activities at the level of the Emirate of Abu Dhabi.
Announcement of the list of economic activities available for foreign ownership confirms that the government of Abu Dhabi is striving to attract more direct foreign investments, facilitate creation of open and flexible business environment, promote the private sector and strengthen the position of the Emirate of Abu Dhabi on the global investment map.
You can see the full list of activities allowing 100% foreign ownership in Abu Dhabi by clicking on the link to the website of the Department of Economic Development of Abu Dhabi.
1. Existing companies
Foreign investors holding shares in existing limited liability companies who would like to take advantage of the new rules should:
- check if the licensed activity they conduct gives them the right to fully own shares in the company;
- assess whether membership of a local shareholder is advantageous to the business;
- review the existing agreements with the local shareholder concerning withdrawal provisions; and
- discuss the conditions of purchase of the shares with the local shareholder.
After the above actions have been taken, the foreign investor should purchase the company’s shares from the local shareholder and register the new corporate structure with the Department of Economic Development of the respective emirate.
2. Formation of new companies
Foreign investors wishing to incorporate a new limited liability company in the UAE will not need a local shareholder if the above conditions have been complied with. Furthermore, foreign investors will be able to form a limited liability company with only one shareholder.
Managers of a limited liability company
One or more (up to 11) managers must be elected in a limited liability company. Members may be elected managers.
They may be appointed by the articles of association of the company, separate agreement or resolution of a general meeting of members. A manager may be removed from office by a court decision at the request of one or more members if the court considers it justified. Managers have powers to directly manage the company’s activity subject to limitations provided in its founding and other corporate documents.
Branch of a foreign company
In accordance with Article 327 of the UAE Commercial Companies Law No. 2 of 2015, foreign companies are granted the right to conduct business in the UAE only in accordance with the provisions of the law.
Article 328 of the Law specifies that any foreign company opening a representative office or branch in the mainland UAE must obtain a proper license from the Department of Economic Development with the consent of the Ministry of Economy of the UAE; otherwise it has no right to conduct business.
Normally, foreign companies open a branch for the following purposes:
- promotion of goods or services of the foreign company;
- conducting business similar to that of the foreign company;
- entering into transactions and contracts on behalf of the foreign company;
- offering services to clients of the foreign company in the UAE.
Besides obtaining a license from the Department, in order to conduct business in the UAE on a temporary or constant basis, a branch of a foreign company must register with the Chamber of Commerce of the UAE.
A rule of article 329 of the Law on Commercial Companies previously applied to branches of foreign companies in accordance with which foreign companies had the right to establish their own branches or representative offices in the territory of the UAE provided that the local service agent of the foreign company is a UAE citizen or a company owned by one or several UAE citizens.
As we said before, this article was abolished on 1 April 2021. The Department of Economic Development of Dubai has already started to apply this change in the procedure of issuance of licenses:
1. Existing branches of foreign companies can take advantage of the new legal environment and remove the local service agent from the license and the register.
This will require a letter from the local service agent confirming that there is no debt on contributions and that they agree to the removal, after which such a letter shall be sent to the Department of Economic Development and the Ministry of Economy.
2. Establishment of new branches. Foreign companies that plan to open a branch in the UAE no longer need a local service agent. But it is worth noting that all the other requirements as to registration and licensing remain the same. In particular, the requirement regarding registration with the Ministry of Economy subject to all conditions shall remain in force.
General requirements for a branch of a foreign company are as follows:
- Bank guarantee: an automatically renewed 50,000 dirham bank guarantee paid for the benefit of the Ministry of Economy is required.
- Liability and taxes: a branch is not a separate legal entity, so the foreign company incurs 100% liability for the branch’s actions, and the branch’s income will be taxed in the country of tax residency of the foreign company as the company’s own income.
- Business: a branch is not considered a legal entity separate from the foreign company, so its business activity has to be identical to that of the foreign company.
- Period of existence: a branch of a foreign company is opened for an unlimited period.
- Manager: the board of directors of a foreign company must appoint a manager that will open a branch and represent the interests of the company; there are no requirements regarding manager’s residency.
Therefore, companies wishing to open a branch in the UAE no longer need a local service agent, which will save their money and make management of the branch easier and more flexible; existing branches of foreign companies in the UAE should consider terminating agreements with their local service agents.
Branch of a free zone company
First of all it is worth noting that in most cases free zone companies are not allowed to conduct business in the mainland UAE. However, free zone companies can open a branch in the mainland UAE by its registration with the Ministry of Economy and the Department of Economic Development.
A branch must conduct the same business as the free zone company and must have the same name.
Just like in the case of a branch of a foreign company, the requirement to have a local service agent does not apply starting on 1 April 2021.
A branch of a free zone company can conduct commercial, manufacturing and professional business provided that the main company’s business is allowed in the mainland. However, a number of restrictions are imposed on such business. Free zone companies cannot set up branches engaged in the following activities:
- trade and any related activity that is basically purchase and sale of products and goods (trading business);
- running restaurants, cafes and catering services;
- organization of pilgrimage (hajj and umrah);
- hiring workforce;
- opening trade missions;
- opening social institutions, such as:
- disability care centers;
- rehabilitation centers for the disabled;
- elderly care centers;
- social services centers.
General requirements for a branch of a free zone company are as follows:
- Registration: a branch of a free zone company must be registered with the Ministry of Economy.
- Bank guarantee: an automatically renewed 50,000 dirham bank guarantee is required.
- Licenses: a branch must obtain all necessary permissions connected with its activity. The penalty for violation of this requirement is 100,000 dirhams.
- Name: the name of a branch most coincide with that of the main company.
- Capital: there is no requirement as to a minimum amount of capital.
III. Procedure of incorporation of a mainland company in the UAE
A similar procedure of incorporation is prescribed for all the above forms of doing business in the mainland UAE, which can be broken down into the following steps:
- Determination of the company’s kind of activity: main kinds of activity are professional, trade, industrial or consulting. It is possible to choose several kinds of activity within one of the said groups.
- Selection of a form of incorporation: choose the optimal option depending on the selected kind of activity and general business necessities.
- Trade name: the company’s name must be clear, contain indication of the form of incorporation and purpose of its activity or consist of the names of one or more members. A branch’s name must coincide with that of the main company.
- Preliminary confirmation of the Department of Economic Development: a necessary step is obtaining preliminary confirmation from the Department of the possibility to incorporate a company, entity or branch with a certain name.
- Memorandum and articles of association: it is necessary to prepare and notarize these founding documents to get them approved by the Department afterwards.
- Office lease: since a real office is required in order to incorporate a company in the UAE, it is also necessary to enter into a premises lease contract (Ejari) in the territory of the respective emirate.
- Obtaining additional permissions (if necessary): some kinds of business require preliminarily approval and a number of permissions of state agencies, such as the Ministry of Health, Police, etc.
- Obtaining a license: after all founding and corporate documents have been prepared and approved, all permissions have been obtained and all state duties have been paid, the Department of Economic Development issues a license to conduct chosen activities.
In conclusion it should be noted that incorporation of a mainland company in the UAE is a quite clear and promising alternative to free zone companies in the UAE and a much more attractive option in terms of organization and reputation compared to offshore companies both in the UAE and in classic offshore jurisdictions.
Subject to the latest amendments made to the federal Companies Law by the Federal Decree Law No. 26/2020, formation of a local company in the UAE has become even more accessible in connection with abolishment (from 1 June 2021) of the requirement concerning 51% membership of a local investor and (from 1 April 2021) the requirement to have a local service agent.