Setting Up an Entity in the UAE
Written by Yair Geva, Ben Pask and Shadan Jabareen.
As relations between Israel and the United Arab Emirates rapidly develop following the signing of the Abraham Accords and the Normalization Agreement, there is increased interest within Israel about the prospect of doing business within the UAE. The type of legal entity adopted, and the location in which to establish such entity, will be determined based on the nature of the intended activities of the business. Some of the factors are considered below.
The most commonly used corporate structures in the UAE are a limited liability company (“LLC”) and a branch office (“Branch”), with respect to which we will elaborate below. These entities can generally be established either on mainland UAE (“Onshore”), or in one of a number of free zones focused on different business industries (“Free Zone”). While entities established in the Free Zone generally have no restrictions on foreign ownership — a drawback of establishing an entity Onshore — one of the principal disadvantages is that activities of such entities are restricted to the Free Zone in which they are established. For this reason, the Free Zone may not be a viable option for many businesses for which the mainland presents the most attractive commercial opportunities.
Generally, a foreigner establishing an LLC Onshore cannot hold more than 49% of the shares in the LLC, and so they would need to rely on a UAE national to hold at least 51% of the shares. In this regard, the UAE national may be a business partner for all intents and purposes, and the parties can work together accordingly. Alternatively, a foreigner may engage a local service company to hold the minimum 51% threshold, which would not have such an active role in the business. Naturally, there are some risks associated with this structure, however there are ways to mitigate these risks through implementation of contractual protections between the shareholders of the LLC.
Earlier this year, a list of certain economic activities in the agriculture, manufacturing and services sectors was adopted in the UAE, with respect to which an LLC is eligible for an increased foreign ownership, creating the possibility of a foreigner owning a majority of the interests in an LLC established Onshore. However, there are other shortcomings that may outweigh this benefit, including a minimum capital requirement of between 2 million Emirati dirham (USD 0.5 million or NIS 1.8 million) and 100 million Emirati dirham (around USD 27.2 million or NIS 92.1 million), depending on the economic activities of the LLC.
Unlike an LLC, a Branch, as the name indicates, is an arm of another legal entity (the “Parent”), meaning that it does not have its own separate legal identity. This means that the Parent is accountable for the Branch’s liability, and the Branch must perform the same activities as the Parent. Additionally, where established Onshore, there is a requirement that there be a local “Sponsor” appointed to act as agent of the Branch for regulatory purposes. Although the Sponsor is not formally involved in the operations of the business, establishing a Branch Onshore does not eliminate the need to rely on a local party.
The process of establishing the selected legal structure for a foreigner can take a couple of months, taking into account that certified identification documents, together with Arabic translations in certain regions, need to be submitted to the local authorities with the incorporation documents. Therefore, anyone wanting to conduct business in the UAE should be conscious of making a decision as to their preferred legal structure swiftly to avoid any delay in making the most of the new opportunities presented by the friendly developments between Israel and the UAE.
