Pre-Direct Investment Law (DIL) 2018, an expatriate who seeks to set up a business was required to have a registered business license on the mainland under the Department of Economic Development of a respective emirate. To conduct the business of a commercial, industrial, or trading activity, fifty-one per cent of company shares must be prescribed to an Emirati sponsor. Following the introduction of the DIL, it was introduced a list of sectors and activities eligible for one hundred per cent foreign ownership.[1] This reform affected the advantages and disadvantages of Emirati sponsorship.
This article will shed light on expatriates seeking clarity on Emirati sponsorship’s effects. The two types of sponsorship available to expatriates are (a) partnership with an Emirati or a company one hundred per cent owned by an Emirati. This occurs when an Emirati partner has a minimum of fifty-one per cent of the shares. Alternatively, (b) service agency by an Emirati, or a company one hundred per cent owned by an Emirati. This occurs when a service agent does not have shares with the sponsored business but serves as a representative of the business to official government entities.[2] These two types of sponsorships are commonly known as ‘local partner’ for the former, and as ‘local agent (LSA)’ for the latter however, for the purposes of this article we will refer to them as partnership and service agency.
In both scenarios, the business sponsor is either an individual or a corporate entity. Fundamentally, there is no restriction on gender, and naturally, the individual must be above the age of 18 years; otherwise, their legal guardian will remain, custodians, until the age criteria is met. The choice between an individual or corporate entity is marginal. The role your sponsor or agent accepts to perform would be based on the business agreements. Similarly, the financial payment will vary on a case-by-case basis. There is no minimum legislative requirement to pay your Emirati partner or agent, but there is a customary etiquette and possibility for negotiation. For instance, your business can benefit due to the name that provides value by association. It would, however, be essential to anticipate and consider circumstances to mitigate against death, breach, and/or time management.[3]
Before proceeding with your sponsorship choice, obtaining advice from expert legal professionals is vital. The partner’s intentions are by default silent unless the partner’s and service agent’s responsibilities are provided in a written agreement. The sponsor does not have any civil responsibility or monetary compulsions to the business unless otherwise agreed upon in a written agreement.[4] Furthermore, rights awarded to Emiratis that sponsor businesses are not waived, even if silent. This is particularly relevant in partnerships where your sponsor could theoretically remove you from your own business.[5]
Irrespective of the sponsor’s rights and the legislative requirement to have an Emirati sponsor in the form of a partnership or service agency, the expatriate business owner does have rights. Such rights could even provide for substitution and replacement of the sponsor through the means of buying and/or selling shares of the business.[6] Moreover, in certain circumstances of breach the sponsorship may be dismissed and replaced where there are serious reasons for justifying the dismissal of the sponsor.[7]
Nonetheless, to incorporate your business with the appropriate sponsor choice has never been more relevant to business planning and opportunity cost. Recent reform, legislation, and commercial practice builds the foundation for businesses and business owners to thrive in the UAE economy, whilst balancing the demands of foreign direct investment with requirement for macro-Emiratisation policy. It remains essential to understand the steps, the effects, and the costs associated with your business sponsorship choice before entering into any legally binding agreement.
[1] The list of sectors includes space, renewable energy, agriculture, manufacturing, road transport and storage, hospitality & food services, information & communication services, professional scientific & technical activities, administration & support services, education, healthcare, art & entertainment, and construction.
[2] Notary public, court, economic department, immigration, and labour.
[3] This could be considered succession planning.
[4] The remuneration, role, responsibility, liability, cost breakdown, and succession planning must be considered during term negotiation.
[5] Legal consultation > selection of sponsorship > negotiation of terms > creation of written legal documents > procedure & attestation of documents > conduct business.
[6] Commercial Companies Law of 2015 provides the procedure a business must execute to change its legal structure.
[7] Failure to perform duty because unavailability, non-cooperative and misuse of funds.
By
Cyrus Izibili
Legal Consultant
