UAE Legal and Regulatory Environment
Business Structures and Processes – 1
The UAE is a growing economic hub with foreign and local individuals opening up their businesses. By the first quarter of 2019, the number of businesses had increased by 29% compared to 2018. The economic growth is attributed to Abu Dhabi’s government, creating better business conditions for these businesses to thrive regardless of the origins of the owners. Additionally, entrepreneurs that are willing to open up businesses in the country need to work towards the Abu Dhabi Economic Vision of 2030. This Vision focuses on achieving a useful transformation in the country’s economic base and achieving world-wide integration and benefits for everyone. In this case, the entrepreneur engaging in web-development services ensures that the short-term and long term strategies they incorporate are aligned with this Vision.
The first important decision that will align the business with its desired objectives and the Abu Dhabi Economic Vision of 2030 is on the types of companies it chooses to open. This research paper intends to appraise the different types of companies in the UAE, together with several provisions that should be adhered to as stipulated by the relevant laws and regulations. The procedures that are to be followed by SMEs as per the UAE Commercial Companies Law No 2 of 2015 will also be discussed in conjunction with other relevant laws. This extensive analysis will inform the recommended business structure that is suitable for the web-development entrepreneur.
UAE’s Corporate Law outlines respective regulations related to the governance, financing, and the powers granted to corporations set up in the country. A company could be established under the Commercial Companies law or be a Civil Company regulated by the Civil Code. Any business formed in the country will fall under three jurisdictions: mainland, free zone, and offshore jurisdictions. The new entrepreneurial business of web development services falls under mainland jurisdiction, which houses various legal entities that can operate commercial and professional legal entities in the UAE. Deciding on the type of business structure one should set up is followed by an examination of the laws that guide the legal entity as they also determine how successful the business becomes.
The different legal structures discussed under the Commercial law include a sole proprietorship that is owned entirely by an individual who controls all the operations, holds 100% shares to any profits and is also liable for the debts or financial duties. In the UAE, sole proprietorship, commercial, or industrial, is to be set up by only UAE and GCC nationals (IBGME, 2018). The Local Service Agent (LSA) is responsible for opening up a sole proprietorship for the web-developer who is not a UAE national. The LSA will look into the license requirements and other related business matters before coming into agreement with the owner. The agreement has to be attested and certified by the UAE’s Notary Public Court. The second type of legal business structure is the General partnerships that are also limited to UAE nationals (IBGME, 2018).
The third type of company is the Limited Liability Company, which has become a preferred choice for foreigners planning to engage in commercial activities in the UAE. This is a private company, and so its shares are not offered to the public (Vinod, 2016). The reason it is preferred is the maximum legal ownership it grants to the owners through a trading license. The LLC can be formed a minimum of 2 and a maximum of 50 individuals with their liability limited to the extent of their capital shares within the company. Another legal business structure is the public and private joint-stock companies. The public joint-stock company is similar to the public limited company, which requires a minimum share capital of AED 1000000, a minimum number of 10 founders who will have the responsibility of incorporating the company. Its shares are offered to the public with its subscription notices published (Vinod, 2016). The Private Joint Stock Company requires a minimum share capital of AED 200000, a minimum number of 3 founders and its shares are not to be offered to the public. These joint-stock companies have been suited for companies handling large projects such as financial operations.
The joint venture is another legal structure that entails having a contractual agreement between two or more individuals or entities (Vinod, 2016). The joint venture can be international or local determined by the jurisdictions of the involved parties. The final legal structure is the Branch and Representative Office of foreign companies. According to Article 314 of the Companies Law, these branches’ operations can wholly be owned by the foreign entity. Still, a UAE national needs to be selected as its local partner. This branch is registered by the Dubai Chamber of Commerce and industry.
Steps Involved in Registration of Companies
Federal Law, No 2 of 2015 on Commercial Companies, has established the regulations for individuals opening up companies in the UAE, including the SMEs (Doe, 2019). To open up a company in the UAE, one must first ensure that they comply with the UAE Commercial Law and other relevant laws applicable. The company registration procedure in the UAE, as per the Company Law 2015 has several requirements. They include the selection of a business structure acknowledged by the Company law and registering it as per the stipulated provisions, provision of all necessary documents to the Dubai Economic Department as per the type of business chosen, obtaining the necessary business license according to operations to be done on the Dubai market; free zone companies should adhere to the Federal Law No 8 on Free Trade Zones in Dubai (Doe, 2019). Apart from the Company Law and some free zone cases, companies also have different laws to be considered, such as the Dubai International Financial Center Free Zone.
The procedure of setting up a business in the UAE begins with selecting a trading name (Austria Business Center, 2020). The local Free Zone Authority or the Department of Economic Development advises on what kind of trading names are advisable. According to the UAE law, the names should not be a violation of public values, have not been registered previously, and should comply with the business’s legal status and required activities. After selecting the name, the owner is to apply for a business license depending on their engagements (Austria Business Center, 2020). The license is either commercial, professional, industrial, and tourism. Registration and licensing of business in the UAE happen at the same time. Therefore, the documents to be provided include completed application forms, business plan, passport copies of directors or the shareholders, signatures, an intent letter, share capital information, power of attorney granted to manager or director, memorandum and articles of association among others.
Partnerships With Foreign Investors
According to the Federal Law No. 2 of 2015 on commercial Companies incorporated outside the free zone, Article 10 indicates that all the joint partners to any of the companies need to be UAE nationals who should hold at least 51% of the company’s share capital (Catling, 2018). Therefore, for a company looking to partner with foreign investors, it needs to ensure that the latter hold a maximum of 49% share capital in the company. Nonetheless, there is a potential future relaxation of the law through the Federal Decree No. 18 of 2017 that seeks to have the activities and companies that have partnered with foreign investors owning the entire or majority of the company’s share capital.
Until Article 10 is amended, the law is considered not to consider the business interests of the foreign partners. This is especially when this partner is bringing on expert knowledge, management efforts and financial resources to the company (Rod’l & Partner, 2018). Notably, to counterbalance the circumstances of UAE’s Commercial Companies Law, the involved partners could come into agreements to cater for these interests through other company matters such as fixed annual payments or particular percentages on profits.
SMEs in the UAE
For any SME set up in the UAE, their activities are to be regulated by the Federal Law No. 2 of 2014 on SMEs (The SME Law). This regulation concentrates on offering incentives to the businesses for their development and also continually monitors them to ensure that they are abiding by the law. Additionally, the Competition Law or Federal Law No. 4 of 2012 has provided an exemption for the SMEs (Shah et al., 2014). The exemption seeks to protect the businesses from large organizations that could enter into restrictive agreements and abuses of dominance.
For the SME entrepreneur to align themselves with Abu Dhabi Economic Vision 2030, the business will primarily identify its key priority areas for economic development. It will then set realistic goals, both macroeconomic and socioeconomic, and come up with the right strategies to achieve the predetermined objectives, identify and utilize the critical resources in their implementation. The business is also to conduct regular policy reforms to ensure that they remain in line with their objectives, which will also allow the owners to be held accountable (Government of Abu Dhabi, 2008). The Vision requires long term strategies to be translated to economic plans of shorter durations. Therefore, the business will utilize this strategy to ensure that they are on the same track.
The Preferred Choice: the Limited Liability Company
Before the registration and licensing, the selection of business structure comes first for the web-development entrepreneur. The right structure will demonstrate strengths that could be exploited for better profits and weaknesses that can be managed. While the sole proprietorship could be the simplest form of business to start, it is only applicable for the UAE nationals. This is also the case for general partnerships where it is applicable to only UAE nationals. The owner, together with the business, is one legal entity, hence making the partners liable for business’ accrued debts. Partnerships have also not illustrated success in Dubai, which is also the case in global contexts due to the uneven commitment from partners (Alliance Business Advisers, 2020).
The Limited Liability Company (LLC) is one preferred business structure, especially for the business being a separate entity from its owners. The separation means that the owners are not liable for the business debts. The limit on personal liability makes it ideal, especially in running an unstable business, which can also use large debts to stabilize. However, it is a complex structure considering its additional reporting requirements, bureaucracy, and administration fees. Conversely, the public and private joint stock Companies have proven to be effective for large organizations dealing with large projects. Considering the case here is for an entrepreneur starting an SME, the stock companies are not ideal, mainly due to its capital requirements.
It is recommended that the SME entrepreneur looks to open up an Limited Liability company (LLC) for its business operations. The UAE LLC is a popular legal entity in the UAE specifically for the flexibilities it provides in its running. Apart from the numerous strengths it provides as a business structure, the LLC has been granted the authority by Company law to conduct any legal activities except insurance, banking, and investment of money for other parties (Mena Report, 2000). The LLC will be mainly governed by the UAE Commercial Companies Law of 2015.
Article 22 of the CCL requires that the local majority ownership should be at least 51% of both shares and share capital. Other business structures will demand higher local ownership percentages. The LLC profits and losses could be distributed in different ways, such as the foreign entrepreneur taking 80% of the profits. In contrast, the UAE national takes the remaining 20%. The business could improvise other compensation methods such as paying a fixed annual fee and having the foreign owner get 100% of profits or paying them a particular percentage of sales. Notably, the ownership restrictions are not applicable in legal structures formulas in the country’s free zones (Abuljebain 2018).
The responsibility to manage the LLC could be on a foreign party or a third party. The UAE national partner and the foreign nationals could come up with a scheme of arrangement for the protection and definition of the interests of minority partners, especially in situations where the latter provides all capital for the company (Abuljebain, 2018). Notably, Article 10 of the CCL has indicated that any attempts to transfer shares that will affect the minimum threshold of 51% for the UAE nationals are considered invalid.
An LLC’s flexibility lies in its business ownership, taxes, operations, protection of assets, management structure, and the required formalities (UpCounsel, 2020). Currently, Dubai Licensing Authorities require no minimum share capital (McKenzie & Al Mulla, 2017). Previously, they demanded a share capital of AED 300000, but it doesn’t need to be paid before its registration. However, the company needs to have enough share capital for it to achieve the reason for its incorporation. Additionally, an analysis of the financial implications of the LLC will primarily consider its tax implications. Numerous tax issues are considered when deciding on a legal structure such as federal income tax, fringe benefits, state income tax, retirement plans, and self-employment taxes (UpCounsel, 2020).
The LLC enjoys flexibility on how they are taxed, which makes it one of its significant advantages. One could decide to file taxes as a “disregarded entity” or choose to get corporate treatment. The disregarded entity receives similar treatment as the sole proprietor where their incomes are considered personal income corporate taxation entails being taxed as a corporate but at the lower rates. Both approaches present significant advantages depending on the income the owner wants to take and the business’s reinvestment plans. The LLC is also allowed to have retirement funds and life insurance policies with higher contribution limits, thus allowing savings for its future.
Notably, the economic development desired by the UAE, as demonstrated by the Abu Dhabi Economic Vision 2030, illustrates a country willing to create better business environments for SMEs and large companies. Through the Commercial Companies Law and other related regulations, the country provides foreign entrepreneurs with a range of business structures they could start. However, these should be conducted as per the stipulated laws regardless of the companies the parties choose to open up. One needs to analyze each of the business forms, its features, strengths and weaknesses to discern the right structure for their operations. The company is to ensure that as it complies with the set regulations, and its strategies are aligned with Abu Dhabi Economic Vision 2030 as required by the UAE government.
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