As a place to do business, and as a hub for the region and beyond, the United Arab Emirates (UAE) continues to be increasingly important, relevant and attractive to businesses from around the world. If you wish to be part of the ecosystem, you must have a physical presence on the ground.
There are three main options that could be pursued to carry out the business in the UAE:
1. establishing a corporate entity in the mainland;
2. establishing an offshore company; or
3. establishing a free zone entity.
I- Establishing a corporate entity in mainland Dubai:
If local UAE market access is required, then the limited liability company (LLC) is the suitable vehicle. LLC is the most widely used form of company by foreign investors wishing to conduct commercial activities in Dubai.
The problem with an LLC is that at least 51% of its shares must be held by UAE nationals. In such cases, the foreign investor may enter into certain side agreements with the UAE partner pursuant to which the latter agrees to assign his profits to the foreign shareholder in an LLC in return for an agreed annual fixed fee. The enforceability of such side agreements is not certain, and the prudent view is that a UAE court might consider such side agreements an attempt to circumvent UAE ownership requirements in breach of the UAE Companies Law and UAE Federal Law No. 17 of 2004 concerning the Combating of Commercial Concealment, as amended (the UAE Anti-Fronting Law) which technically entered into force on 31 December 2009.
The minimum number of shareholders in an LLC is two and can go up to 50. There are no minimum share capital requirements to register a limited liability company in Dubai, except for the sufficient capital test enabled by the Department of Economic Development (DED). In most cases, the licensing and registration procedures of an LLC will entail, inter alia, (i) obtaining a trade name reservation certificate and an initial approval from the DED; (ii) executing and notarizing the articles of association of the company before the notary public; (iii) obtaining a commercial or an industrial license and a registration certificate from the DED; and (iv) obtaining a membership certificate from the Dubai Chamber of Commerce & Industry. Each of these steps will require the foreign investor to submit certain documents and to carry out certain procedures.
d) Cost and Timeline:
The total time required to form a company could be anywhere from 2 weeks to 3 months from the date of receipt of all the documents. The incorporation fees can vary between AED 30,000 and AED 60,000. Indeed, professional fees and miscellaneous charges should be added.
II- Establishing an offshore company:
In the UAE, there are two offshore jurisdictions:
– Ras Al Khaimah (RAK), commonly referred to as RAK Offshore, under the jurisdiction of Ras Al Khaimah Investment Authority (RAKIA); and
– Dubai Offshore, under the supervision of the Jebel Ali Free Zone Authority (JAFZA).
a) Advantages of forming an offshore company:
Both offshore jurisdictions upon first glance appear to offer many of the same services, giving the Client many of the same advantages such as:
• 100% foreign ownership
• Reduced tax liability
• Few reporting requirements
• No minimum capital requirements
• Absence of public register
• Stringent confidential policies
• Permitted to maintain a bank account in Dubai
b) Differences between JAFZA offshore and RAK offshore:
There are several fundamental differences between JAFZA and RAK offshore. For instance, in order to incorporate through JAFZA in Dubai, the director must sign the company formation documents in person, while in RAK one may do so remotely. RAK also has more flexible regulations, which only requires one director (instead of two), allows corporate directorship and is far less expensive. But RAK offshore companies are not allowed to own real property in Dubai since January 1, 2011.
c) Disadvantages of forming an offshore company:
It is worth mentioning that an offshore company cannot carry out business with companies or individuals resident in the UAE, and no residency permit or any kind of visas can be issued to an offshore company. An offshore company is also required to appoint a registered agent approved by the free zone authority.
d) Cost and Timeline:
Incorporating in JAFZA will cost around AED 30,000 while incorporating in RAK can be cheaper by half the amount. It takes approximately 10 business days to register a RAK upon receipt all of the necessary registration documents from the client. A JAFZA offshore company will take approximately 4 weeks to register.
III- Establishing a free zone:
A free zone license will give the investor 100% ownership and complete control of the business. The investor can be the sole shareholder of the free zone and can open a bank account in any UAE bank. Incorporating a business in a free zone also tends to be a cheaper and easier process. However, the investor will have to appoint a local distributor in case he/she wishes to do business in the UAE mainland. Employees with visas from free zone companies are expected to work only from the company’s offices or other buildings within that free zone.
b) Choice of free zone:
The choice of the free zone will depend on many factors such as the cost, the type of activity the physical presence, the office requirement, etc.:
1. For instance, Dubai World Central – Business Park Free Zone (DWC) also known as Dubai South, offers the benefit of its location which is close to Jebel Ali Port and gives direct access to Al Maktoum International Airport as well as warehousing facilities. The rates are very competitive in comparison to other free zones. The shareholder is not required to be physically present in Dubai to start the company.
The cost of issuing a commercial trading license is AED 10,000 to which should be added other charges such as the registration fee, visa fees, virtual desk or rent for office space, professional fees, yearly renewal fees, etc. The Dubai South Authority also offers lump sum packages depending on your business needs.
2. Another free zone is JAFZA which is primarily targeted at import and export businesses. The main advantage of setting up a free zone in JAFZA for the investor is that in case the investor also wants to distribute the products locally, the JAFZA (which is located inside the Dubai port) would offer greater facility for clearing the goods. However, JAFZA requires a proper office space (no option for virtual desk). The fees involved when setting up a free zone establishment in JAFZA are registration fees (around AED 10,000), license fees (around AED 9,000 for a trading license), rent for office space, visa fees, professional fees, yearly renewal fees and other miscellaneous charges.
3. The Client can also incorporate a free zone in Dubai Multi Commodities Centre (DMCC). The set up process is very simple and no physical office is required. However, the DMCC does not offer warehousing facilities. The fees include the license fees (around AED 21,000 for a commercial trading license), incorporation charges, desk fees, visa fees, professional fees, yearly renewal fees and other miscellaneous charges.
4. RAK could also be an option. They offer warehousing facilities and discounts in payments if you choose to pay for three years in advance.
In a nutshell, the costs for setting up a free zone company in the UAE vary from free zone to free zone. It normally comprises of one time registration fee, yearly trade license fee, yearly lease rent and sundry costs such as post box rent, card charges, name approval charges, and notarization. On the other hand, the timeline for setting up the company depends largely on the authorities involved in the process but in general you should allow for around 6 weeks to set up the free zone entity.
To sum up, the advantage of setting up an LLC in Dubai with a local DED mainland license is that this type of license allows the Client to freely operate in any area of the UAE. Even though a local Emirati sponsor who would have 51% ownership of the company is required, certain businesses work better with a non-free zone license. Alternatively, free zone and offshore companies allow for 100% foreign ownership. Free zone companies are used for operating businesses in the UAE while having a physical presence, while offshore companies have only office address and registration in the UAE without being entitled to operate business activities directly in the UAE. Moreover, shareholders and employees of free zone companies are entitled to get UAE residency visas, while this is not the case with offshore companies. However, offshore companies have its own advantages as well such as eligibility to own real estate, less setting up costs and no requirement to lease an office.