Business vehicles in The United Arab Emirates

Out-Law Guide | 04 Dec 2012 | 11:37 am | 10 min. read

This guide was last updated in December 2012.

Economic activity in the UAE is regulated by the individual Emirates and at a Federal level. The availability of business vehicles will depend upon the activity proposed to be conducted. This is a summary of the most commonly used business vehicles in the UAE.

Mainland Purpose Restrictions

Commercial Agency

Distribution or Agency?

A distributor is, by definition, a person who buys goods from a principal and sells them to his own customers, at his own risk and expense. Conversely, a commercial agent represents and acts on behalf of his principal. A commercial agent solicits orders for the principal’s goods, and enters into contracts on behalf of the principal.

Although the terms agent and distributor denote distinct commercial relationships, in practical terms UAE law tends to treat both types of arrangement in the same way.

Franchises

In recent years franchising has become an increasingly popular business model in the UAE, particularly for large international companies wanting to enter the market, but maintain a high degree of control over the brand. The concept suits the appetite of UAE distributors to represent, and be associated, with high value brands and the fast moving consumer goods (FMCG) Market.

Perhaps surprisingly, given its popularity, there is no specific franchise law in the UAE, and the concept of franchising is often treated in the same way as a commercial agency. In practical terms this means that foreign companies wanting to appoint a franchisee often use the commercial agency structure.

Registered and unregistered arrangements

For the purposes of this guide, reference to an agency shall also include distribution and franchise arrangements.

There are two types of agency arrangements in the UAE; registered and unregistered.

Registered agency arrangements are regulated by Federal Law No. 18 of 1981 promulgating the Commercial Agency Law (as amended by the Federal Law 14 of 1988, the Federal Law 13 of 2006 and the Federal Law 2 of 2010) (the Agency Law). The Agency Law gives certain legal protections to local agents. Consequently, many foreign companies in the UAE may attempt to avoid the registration of agency arrangements. In practice, local agents are likely to want to register an agency arrangement. However, as the appetite for western brands increases, local agents are increasingly accepting that in order to win these brands, they may have to compromise on this issue.

Registered agency arrangements - points to note

  • Registered agents must be a UAE national or a company 100% owned by a UAE national;
  • Dispute under a registered agency will be subject to a specialist Commercial Agencies Committee in the UAE, irrespective of whether the parties agree otherwise;
  • An agent is entitled to territorial exclusivity in at least one of the seven Emirates that make up the UAE;
  • An agent shall be entitled to commission on any sales carried out by the principal itself, or other third parties, in the Emirate(s) assigned for the agents' activities, regardless of whether the agent had any input into those sales;
  • A principal will only be entitled to exit from a registered agency arrangement in the following cases:
  • Termination is by mutual consent (the agent will often ask for a fee to be paid to it in return for it agreeing to terminate the agency arrangement);
  • the principal obtains a court order or the approval of the Commercial Agencies Committee to exit the agency or distribution arrangement;
  • If an agency agreement is terminated, and such termination causes one party loss or damage, then that party may claim compensation from the other party for such loss. In practice, a foreign principal can expect to make a compensation payment to a local agent on termination of a registered agency.

Unregistered agency/distribution arrangements

Where an arrangement is not registered, the UAE Federal Law No. 5 of 1985 promulgating the Civil Transactions Law (the Civil Code), and the UAE Federal Law No. 18 of 1993 promulgating the Commercial Transaction Law (the Commercial Code), provide the basic principles of law that apply to agency agreements.

Registered agency/distribution arrangements –points to note

  • Unlike the Agency Law, the Commercial Code does not provide any specific requirement for agency agreements to be exclusive;
  • The Commercial Code provides both parties with the ability to terminate the agency contract at any time;
  • Termination may give rise to compensation if termination occurs without notice, or at an inappropriate time or, where the agency contract is for a fixed period, the termination is not justified by a genuine and acceptable cause.

Limited liability company in mainland UAE (LLC)

Established pursuant to Federal Law No. 8 of 1984 (the Companies Law), an LLC is a separate legal entity and can be formed by a minimum of two, and a maximum of fifty, shareholders (individuals or corporate entities), commonly known as "partners".

The Companies Law requires that an LLC must have a UAE national, or a UAE owned company, as at least one of its partners. The law requires that the minimum equity participation by UAE nationals, or UAE company, must be 51%, although:

  • a different ratio can be established in the Memorandum of Association for the distribution of profits and losses;
  • the foreign shareholder will usually have the right to appoint the manager of the LLC, who will be granted a broad power of attorney to manage the LLC on a day-to-day basis;
  • it is common practice for foreign companies establishing an LLC to enter into side agreements with the local shareholder providing that, amongst other matters, the foreign shareholder will be responsible for the management of the LLC.

Scope of business

An LLC is not permitted to carry out certain consultancy or professional activities, such as medical services, accountancy, and audit services and engineering. It is therefore important to check with your local adviser to determine if your proposed activity may be conducted by an LLC.

Capital Subscriptions

The capital requirements for an LLC are prescribed by the local law of the Emirate in which it is to be incorporated.

Under current law, there is no minimum capital requirement.

The share capital should be divided into equal shares of a minimum value of AED 1,000 each.

Management

The management of the LLC is entrusted to up to five directors (called “managers”), who each have authority to operate independently within their designated areas. The managers may, if desired, be formed into a board, which takes management decisions collectively. However, certain matters are reserved, as a matter of law, to the shareholders. Alternatively, a General Manager may be appointed (who will also be a director) to manage the day-today affairs of the LLC.

The director is liable to the LLC, the shareholders and third parties for all acts of fraud, abuse of authority, any violation of the Companies Law, any violation of the LLC’s Memorandum of Association and mismanagement.

Constitutional Documents

The constitution of the LLC is contained in the Memorandum of Association (notarised and attested in the UAE).

Liability

An LLC has a separate legal identity, can sue and be sued, in its own name. Its liability is limited to the value of its assets, and each shareholder’s liability is limited to their respective share capital subscription.

Mainland branch of a foreign company

A foreign company can set up a branch office in the UAE. A branch office is not a separate legal entity, but rather an extension of the company that is establishing it. As such, a branch office will, when conducting business in the UAE, be acting on behalf of the foreign parent and bind it to all contracts entered into in the UAE.

In order to establish a branch office, a local services agent will need to be appointed. The local services agent must be a UAE national (or a 100% UAE owned company). The agent is normally in charge of dealing with local, and Federal authorities for the purposes of obtaining necessary documentation for the branch office and its staff; such as approvals, licences (including their renewal), labour cards and visas.

The local services agent is not a shareholder and does not have any rights in the company. The agent will enter into a service agreement with the branch office, under which the agent will provide services in consideration of the payment of a fixed annual fee, or percentage of the profits or transactions undertaken by the branch office. This is a matter for negotiation.

Scope of the business

In principle, a branch office can be licensed to undertake one, several, or all activities that are already undertaken by the foreign company, provided those activities are not restricted by the Companies Law to UAE nationals only, as, for example, is the case with Real Estate Brokerage activities.

In Dubai, the competent authority for registration and licensing of a branch office is the Department of Economic Development. In Abu Dhabi, the competent authority is the Department of Planning and Economy.

To determine if a proposed activity is acceptable, the relevant authority will scrutinise the foreign company’s articles of association (or other constitutional documents) to ensure that the business activities that the foreign company is intending to carry out fall within its main objects and scope of business, and that it is competent to carry out the activity in the UAE.

Financial investment

There is no capital requirement for a branch of a foreign company.

However, the Ministry of Economy requires that the foreign company places a bank guarantee in its favour with a value of AED 50,000. This must be valid for the period the branch remains registered, and will be called upon if the foreign company leaves the country without undertaking the formalities required before public authorities for the de-registration of a branch office.

Management

A branch is managed by a manager who will operate the branch pursuant to a power of attorney.

Liability

A branch is an extension of the parent company’s corporate entity and will be 100% owned by the parent company.

A branch does not have limited liability.

Branches of a mainland LLC

It is possible, and quite common, for foreign investors who have already established an LLC in one Emirate to use that company as the parent of branches in one or more other Emirates.

Mainland representative office of a foreign company

The Companies Law permits a representative office to be established by a foreign company. A representative office may only conduct representative, marketing and other promotional activities and may not trade.

A representative office must be sponsored by a UAE natural pursuant to a formal agreement.

Due Diligence

For companies setting up for the first time in mainland UAE the right sponsor will be critical to the success of the venture. Due diligence should therefore be a key part of the process and should cover:

  • The corporate affairs of the partner;
  • Market reputation – what do people who have done business with your potential partner say about them?
  • Anti-corruption – what policies and procures are in place to prevent corrupt practices?

Free Zone business vehicles

Free Zones are specially designated areas within the UAE established to attract foreign investment by encouraging companies to set up businesses, and locate their operations in the UAE. Each Free Zone has its own administration and licensing authority responsible for issuing Free Zone licences and registering companies.

There are currently in excess of 15 Free Zones in Dubai alone. Many of the Free Zones have been established to target specific sectors or industries, for example:

  • Dubai Technology and Media Free Zone – comprising a number of Clusters such as:
  • Dubai Internet City (technology sector);
  • Dubai Media City (media sector);
  • Dubai Knowledge Village (education sector);
  • Dubai Outsource Zone (outsourcing);
  • Dubai Biotechnology & Research Park (biotechnology);
  • Enpark (energy);
  • Dubai Health Care City (healthcare);
  • Dubai Maritime City (marine sector);
  • Dubai International Financial Centre (financial sector).

Notwithstanding the targeting of specific sectors, in practice, these Free Zones host a diverse range of businesses, including businesses operating in the service sector.

Other Free Zones do not focus on a specific sector of the economy, but target companies from various industries.

These include:

  • Jebel Ali Free Zone;
  • Dubai Airport Free Zone;
  • Sharjah Airport Free Zone;
  • Fujairah Free Zone;
  • Hamriyah Free Zone;
  • Ras Al Khaimah Free Zone.

Corporate entities

Although there are minor variations between the type of corporate entity offered by the Free Zones, generally speaking, the options available are:

  • a Free Zone limited liability company (FZ LLC);
  • a branch office (FZ Branch).

Free Zone Companies

There are two types of FZ LLC:

  • A Free Zone Establishment (FZE);
  • A Free Zone Company (FZC).

There is very little difference between FZEs and FZCs other than the number of shareholders and share capital that they must have. Both FZEs and FZCs:

  • provide limited liability to their shareholders, whereby liability in respect of the entity's debts and liabilities is limited to the contribution to the FZ LLC’s share capital;
  • can be wholly owned by foreign investors (i.e. shareholders who are not UAE nationals or companies owned by UAE nationals).

Capital requirements differ from one Free Zone to another. Broadly an FZE can only have one shareholder and must have a minimum share capital of AED 1,000,000 (approximately US$274,000).

An FZC must have at least two shareholders and must have a minimum share capital as prescribed by the relevant Free Zone Authority (Typically between AED 50,000 and AED 500,000 – approximately US$ 14,000 – US$137,000, depending on the Free Zone).

In each case the share capital must be deposited at the newly formed FZE/FZCs bank account. However, the minimum share capital can then be withdrawn at any time after the FZE/FZC has been incorporated and the trade licence has been granted to operate in the specific Free Zone.

Free Zone Branch

As is the case for mainland branches, an FZ Branch office is an extension of the overseas parent company and is not a

separate legal entity. As a result, an FZ Branch:

  • does not have its own share capital; and
  • its parent company will be liable for the actions and liabilities of it.

An FZ Branch is permitted to trade, but may only be engaged in activities similar to those of its parent company.

Unlike mainland branches, an FZ Branch will not have to appoint a local services agent.

Restrictions

In principle, FZ LLCs and FZ Branches can only "do business" within the Free Zone designated area. This basic restriction has different implications depending on the type of company, activity and Free Zone in question, and therefore should be discussed with the relevant Free Zone Authority on a case-by-case basis.

As far as distribution or trade is concerned, the restriction means, for example, that a company established in a Free Zone cannot retail its products, or have a showroom, in the 'mainland' UAE. Generally, the Free Zone entity will be permitted to import, stock and re-export (or sell) goods to entities located in the UAE having a suitable licence (for example a distributor or agent with a licence that allows them to import that particular type of goods). 

Contact

Björn Gehle, Partner

[email protected] / +971 4 373 9642

Alison Hubbard, Partner

[email protected] / + 971 4 373 9693