- John Martin St Valery, CEO, The Links Group
- Mohammed Khan, CEO, MIK Legal
- M Ali Farahat, founding partner, Farahat & Company
For companies considering setting up in the UAE there are a raft of decisions to be made, from the location, to the company structure, to the type of facilities required. Business incorporation expert Mohammed Khan, chief executive officer (CEO) of business consultant MIK Legal, recommends starting with the type of licence. “People must make sure they understand the difference between an economic department licence, a free zone licence and an offshore company. These are the three main areas that people need to understand. Then you should work out where you should go and what you should do,” he says.
Investors [avoid] having a local partner, thinking [they] are also a risk … In general it is safe
M Ali Farahat, Farahat & Company
All companies that set up onshore, and not in a free zone, must be licensed by the economic department of that particular emirate, regardless of the company structure (from a Limited Liability Company [LLC] to a representative office). From here, the relevant economic department will issue a licence according to business activity – commercial, industrial or professional. Inside a free zone, the authority will also issue a licence according to activity.
A company that operates as an offshore entity is a different proposition, as it is very limited in the work it can undertake. “All you can do with an offshore [company] is hold a bank account, hold investments and trade internationally, but it is illegal to actually do business in the UAE. There is a difference between offshore and a free zone company,” says Khan.
Once the licence arrangement is decided, businesses should then consider the types of company structure available to them. But whatever the form, a foreign company that wishes to be based onshore will require either a local sponsor, who takes a 51 per cent ownership stake, or for foreign branches and professional service companies that retain 100 per cent ownership, a local agent must be employed.
“I notice investors are avoiding having a local partner, thinking that the local partner is also a risk,” says M Ali Farahat, founding partner of Farahat & Company, a certified accounting and auditing firm based in the UAE. It also advises on setting up new businesses and works with firms in Qatar and Bahrain. “It is a common issue for foreign investors and I notice most of them like to set up in the free zones. We always recommend trusted and high-profile people. This is the most important advice that I am giving investors. In general, it is safe.”
There are amazing opportunities in the UAE for foreign companies … [They] can do extremely well
John Martin St Valery, The Links Group
The CEO of The Links Group John Martin St Valery, agrees that international firms can be deterred from onshore formation by the sponsorship requirements. “That is one of the main barriers to entry for businesses in the UAE. It is the nervousness or, in some cases, misunderstanding of how it works with a local partner, because there are some super individual local partners, there is no doubt about that,” he says.
However, he acknowledges that there can be challenges associated with using a local sponsor, particularly if that sponsor is an individual rather than a company. “Foreign companies don’t often consider the ramifications of a local partner dying or becoming incapacitated. From a Links advisory perspective, we spend a lot of time unwinding unsuccessful relationships when foreign companies become stuck,” he says.
The answer according to The Links Group is the formation of a vehicle that meets the local ownership requirements, but allows independence for the foreign owner. “What we have created under the Companies Law is a vehicle that allows independence for the foreign party and effective ownership, management and control of the foreign party,” he says. “In conjunction with the companies law, which dictates profits’ percentage split, we enter in to a commercial agreement on behalf of the local company to the foreign party to agree a fair and equitable fee for that involvement.”
In effect, this creates a local partner with no direct involvement in the business, but ensures compliance with the company law. Other companies also offer this “nominee sponsor” service.
For firms that choose the free zone route allowing it to retain 100 per cent ownership, there are other issues to consider. Firstly, there are more than 30 free trade zones in the UAE. Khan agrees there are a lot of options, but says the zones tend to be focused on certain types of activity. “Internet City won’t license you to trade potatoes. That is your starting point. From then companies need to ask which free zones can I work with,” he says.
By the end of this year, we have been promised there may be an amendment to … sponsorship arrangements
Mohammed Khan, MIK Legal
Although the free zones are intended to encourage inward investment and boost trade, they do not mean a company has a free pass to work throughout the UAE. “There is a misconception as to what a free zone is. It is, in effect, a foreign company. Yes, it is on free zone soil, but the audience for their goods or services should be within the free zone or international, not necessarily onshore. If they wish to operate onshore they should have some sort of local agent or representation,” says St Valery.
Of course, the audience for the free zone services again depends on the location and the strategy of the free trade zone. In Ras al-Khaimah, for example, the RAK Free Trade Zone decided to integrate with the city from the outset. Its business park is directly in the centre of the business district. “The emirate really needed services, there were no engineering companies, no consultants, no designers, nothing to support the development of new projects,” says Oussama el-Omari, CEO of the Ras al-Khaimah Free Trade Zone Authority. “So we built the business park right in the heart of town, we can use the hotels, the conference and exhibition centre. Clients have access to everything they need, the Ruler’s Court, the different departments they need across the government.”
Just as the free zones all promote different economic activities, they also have varying requirements for licensing. Capital requirements for company formation differ from zone to zone, but this is one area where onshore companies have an advantage. The minimum capital requirement for forming an LLC onshore was abolished in 2009, but free trade zones continue to demand this security. The capital requirement varies from zone to zone and is as low as AED50,000 ($13,600) in Dubai Internet City and as high as AED1m in Jebel Ali Free Zone. “Personally, I feel that if the free zones were to adjust, certainly on their capital requirement, and bring their rental rates more in line with where the market is, then they would do a lot more business,” says Khan.
Annual rental rates in free zones tend to be higher. Dubai International Financial Centre (DIFC), for example, charges the highest rents in Dubai at up to $3,000 a square metre. But for many firms, the advantage of retaining 100 per cent ownership and dealing with the free zone authority, rather than untested local sponsors or agents, and the longer-term support that some free zone authorities provide, far outweigh the cost.
One of the major selling points of the free zone model is the quick approval process, but Khan warns there is still administrative effort involved. “Initial approval is basically an application form, a passport copy, an education certificate and sometimes a utility bill. Then you have approval, but that is the easy part. After that, there are the legal documents, bank account openings, capital deposit. People get very confused about how it all varies,” he says.
Farahat believes that the onshore set-up is actually faster than free zone incorporation. “As a business consultant, I believe that the mainland is always faster and I have my reasons. The mainland is older than the free zones and have longer experience in advising and directing the client and handling the tasks itself,” he says.
After the free zone gives initial approval, the company must still be licensed and demonstrate that it meets the minimum capital requirement. Khan, who has worked with every free zone, describes the process: “For a single investor, you usually submit an application form and a small business plan of what you intend to do, relevant education certificates, passport copies, utility bill, and so on,” he says.
“Then they come back with approval and an invoice and they issue a bank account opening letter. Then you open an account and submit the capital. The bank confirms that you have submitted the capital in a letter. You take that letter back [to free zone authority] and they issue a trade licence, you take that back to the bank and they will unfreeze your money.”
However, it is sometimes not so straightforward. Any problem with the licence, for example, means that the capital is frozen. “Once the licence is issued, the capital is free. But if there are problems with the licence and it doesn’t go ahead, then you can have problems with the bank where your capital is stuck, so you have to be careful, especially when you are playing around with AED300,000 or AED500,000 in capital,” he adds.
Looking ahead, there could be changes on the horizon with the establishment of a regulatory body within the Federal National Council (FNC). Regarding onshore businesses, the government is also reviewing the investors’ requirements, in addition to bankruptcy processes.
“By the end of this year, we have been promised there may be an amendment to the sponsorship arrangements,” says Khan. “In the UAE, I would suggest they cancel the local sponsor requirement completely and just increase the fee, then that can be used for compensation in loss of sponsorship revenue.”
Although the UAE has experienced major economic challenges in recent years, it is now seeing an increase in licensing activity both in free zones and onshore, as companies seek to benefit from the lower costs and relative stability of the UAE.
“We have seen a lot of incorporations in the last month [July]. Companies are coming from financial advisories from Singapore and Asia, which is very promising, and a lot of companies are shifting from the US,” says Khan.
St Valery agrees. “There are amazing opportunities in the UAE in its entirety for foreign companies,” he says. “There is no doubt that if a business is established correctly it can do extremely well.”
John Martin St Valery, CEO of The Links Group, says there are three main costs to starting a business in the UAE
- It sometimes comes as a surprise to foreign companies, but first is the level of documentation and contractual work required in order to protect the business. In other words, if it is a foreign company, establishing a branch, or even an LLC, things such as the drawing up of the articles of association, looking at the articles from the foreign company and notarising. The whole legal process is quite an expensive part of the set-up, which is why, rather unfortunately, some companies try and take shortcuts. Within this I’d include licence and visa costs.
- Fees – free zone, local partner or agent fees.
- Commercial office space. Commercial space must be obtained to have a commercial trade licence. Obtaining commercial space is an expensive part of the business set-up, however, prices have come down over the past couple of years.
Businesses Beware: Potential Pitfalls
The Links Group has had to deal with ownership issues that could have been avoided if the correct precautions had been taken from the outset. “There have been instances that we have dealt with where a business has been successfully built up by a foreign party with no interference from the local partner over a three to four-year period,” says St Valery. “Then the local partner has come in and said, ‘Thank you for running my business, you can go now, I am getting another partner.’ Literally as quickly as that, because the right documentation had not been put in place. If you are cutting corners in the beginning, these things can go horribly wrong if you are not well-protected.”
Any UAE national has the right to act as an agent, but finding a good one can be challenging. Business incorporation consultants, legal firms, economic departments and chambers of commerce can all assist firms in finding a reliable agent.
Beware of contractual differences between languages. “All contractual documentation through the notary or the court is dual Arabic and English,” says St Valery. “We have had instances where the Arabic text does not concur with the English text. When it comes to payment terms, the duration of the agreement, or termination clauses, Arabic text will always take precedence in court if there is a dispute. Sometimes foreign parties have just read the English text and are happy with it, but the fact the terms are completely different on the Arabic side has landed them in hot water.”
The Links Group
Tel: (+971) 4 332 5777
Tel: (+971) 4 442 5513
Farahat & Co
Tel: (+971) 4 266 2801