1. Common entity types or other entity choice considerations specific to foreign ownership.
The United Arab Emirates (UAE) is a regional trade hub and a key destination for international investors looking to tap the Middle East markets. The UAE comprises of a federal union of seven Emirates, the Emirate of Abu Dhabi and Dubai make up the majority of the trade & commerce in the UAE with the other remaining Emirates of Al Ain, Ajman, Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain also contribute to the national economy as members of union.
Each of the seven Emirates have their own local emirate level municipal authorities in the mainland (Mainland) which are able to issue commercial licenses under UAE Federal Decree Law No. 32 of 2021 on Commercial Companies (CCL).
In addition, to the onshore jurisdiction, almost all of the Emirates have their own special designated free trade zones (Free Zone) with their own licensing authorities holding the power to issue and regulate Free Zone commercial licenses under their own bespoke licensing regime & framework which are aiming to emulate the Mainland. At the time of writing this brief, there are around forty (40) Free Zones across the UAE.
Limited Liability Company
A limited liability corporation either under the Mainland or any of many Free Zones is by far the most popular and commonly used type of corporation in the UAE. Foreign ownership of limited liability companies under the Mainland has been relaxed to a large degree around 2020, however foreign ownership restrictions may, for certain economic sectors, be limited up to a maximum of 49% in the Mainland.
The foreign ownership restrictions under the Mainland is a key reason why investors will choose to be licensed within a Free Zone which automatically permits 100% ownership as well as freedom from import duties. A key disadvantage of setting up in a Free Zone is that the physical movement of goods outside the Free Zones can be subject to restrictions and will typically require import duties to be deposited with the relevant customs authority.
Investors looking to establish a business in the UAE typically have to decide between the Mainland and the Free Zone both of which offer limited liability structures for a sole shareholder or multiple shareholders, which could be natural persons or body corporates themselves.
| Mainland | Free Zones |
Relevant Authority | Department of Economic Development (DED) - additional approvals may be required subject to activity. | The relevant Free Zone authority in the Emirate
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Types of legal entities |
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Timeline for incorporation | Incorporation takes between 4 to 6 weeks for most activities, full set up may take between 8 to 12 weeks for most business activities. | Incorporation takes between 4 to 6 weeks for most activities, full set up may take between 6 to 9 weeks for a majority of commercial activities. |
Foreign ownership Limits | 51% shareholding from nationals generally required however exceptions are available for most business activities. | 100% foreign ownership is permitted in all activities. |
Minimum Shareholders | Minimum of 1 shareholder is permitted. | Minimum of 1 shareholder is permitted. |
Minimum share capital | Unpaid share capital can be any where between AED 150,000 to 300,000 depending on the Emirate and the business activities. | Unpaid share capital can be a minimum of AED 50,000 to depending on the Free Zone & business activities. |
Trade restrictions | No restrictions apply in general. | Free Zones corporations and entities may be restricted in terms of supplying goods & services to the Onshore jurisdiction. |
Corporate Tax considerations
There is currently no obligation on corporations to pay corporate tax however there have been formal declarations from the UAE Ministry of Finance in January 2022 confirming that federal legislation levying corporate tax will be in effect as early as June 2023. The taxation rate will be 9% for taxable income exceeding the threshold of AED 375,000 (approx. USD 102,000). For large multinationals with consolidated revenues exceeding AED 3.15 billion (approx. USD 850 million), taxation at a higher rate in line with ‘Pillar 2’ of OECD guidelines under the Base Erosion and Profit Shifting (BEPS) project would be determinable. Dividends paid by foreign companies, and capital gains from the sale of shares in both UAE and foreign companies will also be exempt. Double Tax Treaties between UAE and other countries (DTT) will provide protection to foreign companies against taxation both in the UAE and as well as their home country. As of current, the UAE has DTTs with more than 120 countries.
2. Registration formalities, information publicly available in relation to each entity structure, average time needed to incorporate.
Depending on the type of activity being sought by the applicant, the processing time and incorporation timelines would be subject to the size of the operations. Incorporation itself will take anywhere between 2 to 3 months which includes document processing and legalisation if the parent company is registered in foreign jurisdiction.
The memorandum & articles of association of the company must be signed by the shareholders (or their representatives) which can be through a power of attorney. In case of the Mainland, all critical documents must be translated into Arabic which is the official language and further apostilled. In contrast, all of the Free Zones accept documents in English however key documents may still require apostille from the originating jurisdiction. Following incorporation of the company, a number of formalities may need to be fulfilled for most operational companies which depend on whether the company is incorporated in the Mainland or in the Free Zone:
Establishment Card – permitting the company to recruit employees and issue the residency visas of foreigners;
Registration Certificate for Value Added Tax as per UAE Federal Law for companies crossing the threshold of AED 375,000 (approx. USD 102,000) which is separate from the Corporate Tax;
Information relating to the company can be available depending on the place of incorporation. Particularly under the Mainland, the license name, number and registered address of the company can be verified through the relevant Department of Economic Development. A few, but not all, of the Free Zones also make company information, name of the shareholders & the authorised persons’ details publicly available for transparency. However, such information sharing is only available with a few Free Zones and the majority of Free Zones maintain the confidentiality of the shareholders of the companies registered with them.
3. Minimum (and maximum) Share Capital.
There is no maximum limit for the share capital of a company however the minimum share capital of the company is subject to place of incorporation, a company cannot be incorporated with zero share capital. For LLCs the minimum share capital ranges between AED 150,000 to AED 300,000 depending on the Emirate where the company is incorporated whereas for FZEs or FZCOs the minimum share capital can be AED 50,000 or higher depending on the Free Zone or the selected activity. The share capital requirement is typically stated in the company’s constitutional documents and does not require to be paid up except in case of special licenses for regulated activities such as financial services or other similar professional activities.
For branches of a foreign company, the stated share capital of the parent company is factored in and as long as the parent company’s share capital is adequate for the UAE share capital requirement, no further capital requirement is mandated.
The currency for the stated share capital is UAE Dirham (AED) which is the official currency of the UAE and is pegged with a fixed rate, to the US Dollar at AED 3.6725 equivalent to 1 USD.
4. Any restrictions on foreign shareholders?
Mainland
Foreign ownership of limited liability companies under the Mainland has been relaxed to a large degree over the past two years. Foreign investors are able to set up new companies without the requirement of a local (UAE national) partner for the vast majority of activities. The law was relaxed in accordance with passing of the CCL in 2021, however some restrictions remain for critical sectors and for regulated activities under the law which prevents full foreign ownership of a company conducting the prescribed activities. The restrictions may vary from one Emirate to the next and for large scale set ups and investment plans the relevant Department of Economic Development is open to considering proposals in exchange for further relaxation on the requirements however these proposals are considered on a case by case basis. For licenses that remain subject to restrictions, the maximum share capital that can be held by a foreigner is limited up to 49% and is typically documented in the company’s memorandum & articles of association. The executive management of the company can be fully controlled by the foreign shareholder or their designated representative as per the agreement and the understanding between the parties.
Free Zone
There are no restrictions to ownership of share capital by foreigners in the Free Zones and there are no requirements to have a local (UAE national) shareholder.
5. Common board/management structures.
LLC, FZE, FZCO
Pursuant to the company’s Memorandum and Articles of Association the shareholders are free to determine the governance structure of the company and the distribution of powers between the executive management and the non-executive management. There is usually a minimum requirement of at least one director (or manager) for all companies whether in the Mainland or the Free Zone which is confirmed and stated on the commercial license issued by the licensing authority.
The appointment of a board of directors is not strictly required however for large groups and organisations, one or more directors can be appointed as a non-executive functions to oversee and supervise the management.
6. Restrictions on foreign directors, requirement to have local directors/managers?
There are generally no restrictions on appointment of Directors (non-executive) and the manager (executive) on the license. The manager (fulfilling the executive role) accordingly becomes the legal representative of the company for all government departments and is responsible for fulfilling the statutory role of designated manager on the license. The powers of the manager can be controlled and subject to the company’s internal governance and can be limited in line with the constitutional documents of the company. Directors (non-executive) of the company can be appointed as per the company’s preference. There are no restrictions on foreigners or expatriates being appointed as directors or managers of private companies for the vast majority of the activities, there are a small number of exceptions which are applicable to a select number of activities however these are typically the exception and not the norm.
For a number of Free Zones, the appointment of a company secretary is mandatory however there are generally no restrictions on the same individual conducting multiple roles under one company. For special licenses and regulated activities, a single individual fulfilling multiple statutory roles may be restricted and can be subject to approval on a case-by-case basis. In our experience, the regulators and licensing authorities are generally keen to accommodate all reasonable requests.
It is not compulsory for the appointed manager to obtain a residency visa under the company which is employing the manager, however banking and account opening processes in the UAE are stringent (especially for SME and retail) and it is generally recommended for such reasons that the manager hold a valid UAE residency visa so as to facilitate a smooth process for opening of the company’s bank account.
7. Shareholder’s/Director’s liability.
Shareholders liability
Shareholders are responsible up to the liabilities of the company in so far as the registered or declared share capital of the company and in proportion to each shareholder’s respective share in the overall share capital. However, such limits to the shareholders liability can be superseded and the shareholder can be held liable whereby a personal guarantee has been provided by the shareholder to a creditor.
Directors or Managers liability
Directors and managers have various responsibilities under a number of UAE laws. The position is tantamount to a fiduciary role which is enforced through multiple legislative enactments. The liability for acting as a manager and director is usually twofold in this jurisdiction which is either a civil liability or a criminal liability.
Generally directors and manager powers are granted to them pursuant the articles of association or the memorandum of associations or alternatively through powers granted to them under a general assembly resolution. As such directors and managers will only be liable for acting outside the authority granted to them under their service contract or a specific power of attorney granted to them. Statutory powers granted to director and managers can be through a number of legislative instruments including the UAE Civil Transactions Law, the UAE Bankruptcy Law, the UAE Commercial Companies Law and the Companies Regulation issued by the competent Free Zone authority.
The general obligations of all directors and managers include the following:
To comply with all legislation and laws issued in the UAE and to comply with the company’s constitutional documents as well as the employment/management contract between the company and the incumbent director or manager;
To register the company’s constitutional documents and any amendments with the competent authority;
To act in the best interest of the company and preserve the company’s rights and to act in a prudent manner in accordance with the objectives and powers given to them by the company;
To not be conflicted in taking any actions for or against the company;
To ensure proper accounting, book-keeping and maintenance of statutory records of the company in accordance with applicable law and to make available such records to shareholders of the company;
To call for the company’s annual general assembly at least once a year or such other extra-ordinary general meeting of the members as required;
To register the winding up or dissolution of the company with the competent authority in accordance with the applicable law.
In case of violation of the above general obligations and any other specific obligations under the UAE Laws, a director or manager can be held personally liable and can be made subject to fines, penalties or sentenced to time. While the aforementioned punitive tools are reserved for the most serious offences, fines can range between AED 10,000 to AED 1,000,000 and can be combined with custodial sentences of up to 3 years for breaches under UAE Law.
8. Parent company liability.
Under UAE law, a parent company is not automatically liable for the liabilities of its subsidiaries; however, in specific circumstances, a parent corporation can be held to account for the actions of the subsidiary under the CCL. Such instances of piercing of the corporate veil are not generally applied under UAE Law save for where the shareholder has acted in a manifest manner and even then such instances il are unusual and not common occurrence under UAE law.
In case of a branch of a parent company which branch is duly registered in the UAE, the parent company is fully responsible for all liabilities of the branch as per UAE Law.
9. Reporting requirements and filing of accounts.
All companies under UAE Law are required to make a number of statutory filings with the local authorities. A list (non-exhaustive) of the common filings which are relevant to most limited liability body corporates are provided as follows:
Filing of notifications under Economic Substance Regulations;
Filing of periodic reports related to Value Added Tax;
Filing of register of Ultimate Beneficial Owners;
Filing of reports related Corporate Tax (2023 onwards);
Filing and maintenance of Data Protection registers;
Filing of Financial Statements with the competent registration authority as applicable;
Registration of changes to the shareholding of the company;
Registration of amendments to the company’s articles or memorandum of association;
Registration of amendments to the company’s share capital;
Filing and registration of liquidation, dissolution or winding up of the company.
*This executive summary should not be considered legal advice. It may not include details relevant to you on a number of other body corporate types such as representative offices (which are not UAE corporate entities but extension of the foreign company) or sole proprietorships, partnerships and civil companies which are not detailed in this summary. If you require comprehensive legal advice to guide you in your set up requirements and assistance in selecting an appropriate type of corporation suited to your requirements, please contact a member of our law firm’s corporate department.