Overview
- Deciding where to establish a company is a major decision that depends on the planned business activities, required infrastructure, and the costs of obtaining and maintaining the new company’s license.
- The two predominant options available to foreign investors in the UAE are to set up either in the mainland or in a free zone.
- Setting up on the mainland offers the investor a wider base and requires the investor to partner with a national.
- Setting up in freezones offers extensive privileges to the investor in terms of ownership and tax exemptions.
- While free zone registration requirements may differ from one another, there is a foundational/basic procedure that can be followed to assist the investor in the preparation of registration in the preferred free zone.
Definitions
- Emirate: A political territory, which forms part of the confederation that is the UAE.
- Free Zone: A special economic zone offering complete foreign ownership of an entity and import and export tax exemptions.
- DED: The Department of Economic Development is the government entity that oversees economic development and regulates the registration of companies in the mainland.
- Mainland: The territory of each Emirate except the free zones.
- LLC: Limited Liability Company.
- SPV: A separate legal entity formed by a company or organization to undertake a specific and typically limited set of activities, investments, or projects.
- Offshore company: A legal entity that is incorporated or registered in a foreign country or jurisdiction.
Where to set up a company?
The investment environment within the UAE has witnessed significant changes over the past year and has improved the relevant legal and administrative framework substantially. There are seven emirates and over 40 free zones, all of which offer a variety of options to foreign investors who wish to set up a company. In the UAE, investors must select a suitable legal form and business structure that aligns with their business requirements. The UAE offers several prevalent types of business structures, including:
- Free Zone Entities
- Mainland Companies
- Offshore Companies and Special Purpose Vehicles (SPVs)
This article primarily centers on business structures designed for commercial activities, with a primary focus on mainland and free zone companies, as registration of Offshore Companies and SPVs is executed by Corporate Service Providers.
Key factors in choosing the jurisdiction for a new company
When deciding where to establish a business in the UAE and whether to opt for the mainland or a free zone, several key factors come into play. These factors encompass:
- Required License Type and Approved Business Activities: The nature of your business and the specific activities you intend to carry out determine the type of license you need and the feasibility of those activities in your chosen jurisdiction.
- Infrastructure: The proximity to vital infrastructure, such as airports and sea-ports, can greatly impact the efficiency and logistics of your business operations.
- Prestige and Customer Traffic: The desirability of your chosen location, including its potential to attract customers and foot traffic, can be a significant factor, especially for retail or service-oriented businesses.
- Ownership: Consider the ownership regulations, including whether you require a local sponsor for selected activities or can maintain full ownership, as this varies between mainland and free zone options.
- Tax Implications: Evaluate the tax implications, in your chosen jurisdiction to ensure they align with your business objectives.
- Costs: Analyze the overall costs associated with your chosen jurisdiction, including rent, license cost, and other operational expenses.
- Accessibility and Appeal to Employees: Assess the attractiveness and ease of access of the location for potential employees to ensure you can attract and retain the talent your business requires.
The constituent Emirates of the UAE are Abu Dhabi (which serves as the capital), Ajman, Dubai, Fujairah, Ras al-Khaimah, Sharjah and Umm al-Quwain. The economically strongest and most popular emirates are Dubai and Abu Dhabi. Although there is federal legislation such as UAE Federal Decree-Law no. 32 of 2021 on Commercial Companies, each Emirate can exercise its own sovereignty and is independent both from an organizational and legal perspective. Furthermore, there are financial free zones that follow Common (English) law, it as Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC).
Company in Mainland
A foreign investor may choose between various opportunities when setting up a new business. The first and most important decision to make is whether to set up in the “mainland” or one of UAE’s free zones.
Depending on where the investor plans to set up its business, the rules, regulations and requirements of the chosen emirate need to be considered. The licensing process can vary widely from one emirate to another. The most relevant corporate forms available for investors are:
- Solo Establishment
- Limited Liability Company ( LLC)
- Partnership Company
- Private Join Stock Company
- Public Join Stock Company
- Branch of a foreign company.
- Branch of a free zone entity.
The choice of a company’s legal form of incorporation is closely linked to the type of business activities it wishes to partake in.
Prior to 2020, all forms of companies on the mainland required the participation of an Emirati citizen. In the case of an LLC, an Emirati partner had to legally hold at least 51% of that LLC. In the case of a branch, the branch could be wholly owned by a foreign company or a free zone entity; however, a UAE national was required to be appointed as a Local Service Agent. The Local Service Agent managed licensing requirements and other government-related matters for the branch in exchange for an annual fee. The Local Service Agent had neither any civil responsibility nor financial obligations to the business of the branch nor did he or she have any legal interest in the management, business, profits or assets of the branch.
However, both of these requirements have now been removed as part of the changes in foreign ownership pursuant to amendments made to the Commercial Companies Law (Federal Law No. 2/2015) in 2020 with Federal Decree-Law No. 26/2020. The relevant regulator authority of each Emirate has released a list of activities within which complete foreign ownership would be allowed. It is worth to note that these changes will not apply to certain companies on basis of them having a ‘strategic impact’ or being wholly owned by federal or local governments or their subsidiaries.
Company in Free Zone
The UAE’s broad system of free zones or trade zones provides modern facilities and infrastructure for doing business and are industry-specific free zones. Free zones are zoned areas in the territory of the UAE where import, export and re-export to countries other than the UAE are duty-free.
The UAE law applies in these special economic zones to a limited extent only. In fact, each free zone authority has issued its own rules and regulations determining the requirements and procedures for setting up a free zone entity.
Each free zone is designed around one or more business industry categories and only offers licenses to companies within those categories. An independent free zone authority governs each free zone and is the body responsible for issuing operating licenses and assisting companies with establishing their business in the free zone. Most common freezone corporate forms:
- Freezone establishment (LLC with one shareholder).
- Freezone company (LLC with two or more shareholders).
- Branch of a foreign company.
- Representative office.
Offshore company – overview and registration
Offshore companies and Special Purpose Vehicles (SPVs) are typically used as tools for succession planning. An offshore company is a legal entity registered in a country or jurisdiction outside the country where its primary business operations are conducted. Offshore companies serve various purposes, such as asset protection, tax optimization, confidentiality, and facilitating international business operations. These companies can only be established in specific jurisdictions, including locations like Jebel Ali Free Zone (JAFZA) in Dubai, Ras Al Khaimah International Corporate Centre (RAK ICC), and Ajman Free Zone (AFZ), among others.
It’s important to note that offshore companies can only engage in activities outside mainland UAE and foreign jurisdictions, except for real estate purchases and holding shares in other UAE entities.
Offshore companies and SPVs must be registered and managed by a Registered Agent or Corporate Service Provider (CSP). These entities are not permitted to have physical offices; their registered company address is provided by the CSP. Additionally, offshore companies and SPVs are unable to hire employees and do not grant eligibility to their shareholders or directors for obtaining a residency visa.
The steps to register an operating company in the UAE
Each authority governs the procedure for registering a company. The procedures to establish a company are broadly similar, but each jurisdiction applies different conditions. The main steps to follow in the setting up of a company are as follows:
- Initial approval and trade name reservation
- Obtaining approval for regulated activities
- Finalizing lease agreement
- Issuance of license
1. Initial approval and trade name reservation, business activities
To obtain initial approval for company registration in the UAE, investors should apply to the relevant authority (mainland or free zone registrar) with the following documents:
- Completed application form
- Proposed Company names (Preferable to have 3 options)
- Business Plan
- Selected business activity
- Identity documents of the Manager, Director, Shareholder, and UBO.
- Resolution or Power of Attorney to incorporate a new company/ branch.
Compliance regulations regarding KYC (Know Your Client) requirements are stipulated by every registrar. Typically, the documents sought are a passport copy, Emirates ID, and visa copy, an NOC (No Objection Certificate) from the current sponsor (if UAE resident), proof of address, and a business profile. If the new company or branch will be owned by another corporate entity, the registrar will request all relevant corporate documents of the organization and board resolution. If the parent company is registered outside the UAE, all documents should be legally translated into Arabic or English and with the consulate’s attestation and an attestation from the Ministry of Foreign Affairs.
There is a comprehensive list of business activities and different types of licenses offered by every registration authority, including – Professional, Industrial, and Commercial licenses. However, different authorities have varying rules when it comes to consolidating various activities into a single license. For instance, if your business model involves both manufacturing and trading products, you might need an Industrial and Commercial license. In some regions, you can combine these activities on a single license, while others might require separate licenses.
Another difference from one jurisdiction to another pertains to the management and operation team of a company, including roles like Director, Manager, Secretary, or Authorised Signatory. Typically, in the case of a Limited Liability Company (LLC) with a single owner or a Sole Proprietorship, the shareholder can assume these necessary positions.
Once your application is successfully reviewed, you’ll receive an initial approval certificate and confirmation of the reservation of your desired trade name. This certificate indicates that you can move on to the subsequent steps of the company registration process, such as applying to the relevant authority for any regulated activities in order to obtain the trade license.
2. Obtaining approval for regulated activities
To obtain approval for a regulated license in the UAE, applicants must adhere to specific procedures and comply with the regulations established by the respective regulatory authority. Regulated activities are typically associated with various business sectors, including real estate, financial services, insurance, healthcare, education, aviation, automotive transportation, and more. The exact process can vary depending on the type of regulated activity involved.
Before proceeding with external approval, it is crucial to identify the relevant regulatory authority responsible for overseeing the specific activity you intend to undertake. For instance, if you plan to establish a real estate services company, applicants should approach the Real Estate Regulatory Authority. If registering a medical facility, an additional license from the Dubai Health Authority or the Department of Health in Abu Dhabi is necessary. It’s important to note that each emirate in the UAE has its own regulatory authority for the aforementioned business sectors.
The regulatory authority will necessitate the initial approval granted by either the DED or the relevant free zone, accompanied by supporting documents. These documents should include a business plan, evidence of financial capability, and professional qualifications, as well as any other regulations, guidelines, and licensing prerequisites that must be adhered to. In certain instances, the regulatory authority may carry out site visits or conduct interviews with key individuals to evaluate their suitability and ensure compliance with the regulations.
If the application successfully fulfills all the stipulated requirements and gains approval, applicants will receive an official approval letter or certificate from the regulatory authority. With this document in hand, they can then proceed to complete the final stages of the licensing process.
3. Finalizing lease agreement
Most jurisdictions require companies to have a physical presence within their registered jurisdiction. Different options are available with varying prices and size, such as flexi-desk, dedicated desk, physical office, warehouse, and plot of land. An important aspect to consider is that jurisdictions grant visas based on the size of the office facility (for example, one visa is issued per every 9 square meters).
4. Issuance of license
Upon the successful completion of the previous steps, the trade license will be issued and can be utilized for conducting business. Subsequently, the typical next steps for new companies involve obtaining an Establishment Card, which allows them to sponsor employees’ visas, open a bank account, and apply for TAX and VAT registration.
Regulatory authorities often offer the option to issue licenses for multiple years. Failure to renew a business license in a timely manner can result in the accrual of fines and penalties for late payment.
Setting up a company in the United Arab Emirates offers a wealth of opportunities for international investors. Benefits of UAE company formation include easy access to global markets, a robust infrastructure, tax advantages, and a strategic location. Whether it’s the Mainland or Free Zones, the UAE’s progressive business environment beckons entrepreneurs with promise and potential.
Related Content
Legislation
- UAE Federal Decree-Law no. 32 of 2021 on Commercial Companies
- Cabinet Decision No. 55/2021 On the Determination of the List of Strategic Impact Activities
Marharyta Harashchenko
Business Consultant
Elnaggar & Partners