Forms of Business Enterprise Permitted In UAE
Types of business entities
There are mainly three types of business entities permitted by law in the UAE and they are:
Professional License is issued to professionals, artisans and craftsmen. The Professional License is for rendering professional services which entirely depends on the skills, knowledge and experience of the professional concerned. The holder of professional license is not permitted to import or export any goods and thus is not permitted to engage in any trading or manufacturing activity.
Commercial License is issued to business entities which are involved in commercial activities of buying and selling of goods, imports and exports, transportation and all other commercial activities which are performed with the intention of making profits. Commercial License is generally taken for business activities like trading, retail, hotels, warehousing, transporting, etc. In trading business, the license can be for specific trading or general trading. The General Trading License will allow the licensee to deal in any product whereas specific trading will be restricted only to specific products. For example, a Business Entity which has a specific food items trading license can deal only in food items and not in building materials. On the other hand, a General Trading License permits the business entity to deal in both food items as well as building materials.
Industrial License is issued to business entities which are involved in the manufacturing or industrial activity which involves value addition or conversion of the input into a different output. The manufacturing or industrial activity involves transforming the raw material into semi-finished or finished goods. The transformation can be in the structure or usage or appearance or stage of finish etc. The manufacturing process could involve use of machinery or could be manual.
The following are the three jurisdictions that are recognized and practiced in the UAE:
a. Mainland Business is located in the UAE mainland and can conduct business across mainland of UAE. The businesses in the mainland are regulated and licensed by the Department of Economic Development.
b. Free Zone Business is located in a specific free zone and can conduct business within the designated free zone. If they want to do business, in the main land, their additional regulations are to be followed. The Free Zone businesses are formed, regulated and licensed by the various Free Zones that are existing in the UAE.
c. Offshore Business is located in one of the Free Zones and conducts business only offshore. In other words, the offshore company will do transactions outside the jurisdiction of UAE and its free zones. The Offshore Business license is generally issued by the various Trade Free Zones in the UAE and are governed by the respective Free Zones. An Offshore Company can open and operate a Bank Account in the UAE.
Forms of Business Enterprise permitted in UAE
The various forms of business enterprises permitted in the United Arab Emirates are as follows:
- Sole Establishment
- One Person Company
- Civil Company
- Representative Office
- SME License
Sole Establishment - Sole proprietary Organisation which can be formed only by UAE Nationals or GCC Citizens. Sole Proprietary Establishment is generally formed in the name of the individual owner. The liability of the Sole Owner is unlimited and hence the owner needs to meet all the obligations of the business.
One Person Company - A One Person Company is also like a Sole Establishment as it is owned by one individual. One Person Company can be formed by a UAE National or GCC Citizen. It is a Limited Liability Company formed with only one person and hence the owner’s liability is limited to the extent of the share capital of the company.
Civil Company - A civil company is formed for professionals like Doctors, Lawyers, Accountants and Engineers. A Civil Company can be owned by a person of any nationality but if the owners of the Civil Company are other than UAE National or Citizen of GCC then the Civil Company should have a UAE National as its 'Service Agent'. In the case of Civil Company in Engineering business UAE National should be a Partner owning minimum 51% of the Share Capital.
Company - A company incorporated under the Commercial Company Law (CCL). Article 9 of the CCL has prescribed five different forms of companies, viz.,
- Joint Liability Company;
- Simple Commandite Company;
- Limited Liability Company
- Public Joint Stock Company and
- Private Joint Stock Company.
With the exception of Joint Liability Company and Simple Commandite Company, which shall be entirely owned by UAE Nationals, every Company shall have one or more UAE Nationals holding at least 51% of the Share Capital of the Company.
The Joint Liability Company will have two or more partners who shall be UAE Nationals and they are jointly and severally liable for all the obligations of the Company.
The Simple Commandite Company is a company which will have one or more UAE
Nationals as partners. This is a form of company where it is permitted to have silent partners whose liability is limited to the share capital contributed by them. The active partners will have unlimited liability and will be jointly and severally liable for all the obligations of the Company. The General Partners whose liability is unlimited should be UAE Nationals and the Limited Partners can be nationals of other countries.
Limited Liability Company in short called as 'LLC' - which can be formed by two or more partners of whom one shall be UAE National holding minimum 51% of the share capital of the company. This is the most popular form of organisation in the mainland. The LLC should have minimum two shareholders/partners and can have a maximum of 50 shareholders/partners. The Liability of a Partner/shareholder is limited to the extent of the Share Capital contributed by him. While it is compulsory to have one or more UAE Nationals holding minimum 51% of the share capital, the partners can agree to have a differential profit sharing ratio. In other words, though the UAE Nationals are holding 51% of the Share Capital they may be eligible for a much lesser share of profits as the business is predominantly managed and run by the other partners.
A Public Joint Stock Company is a company where the shares are offered to public for subscription. The shares are listed in the Stock Exchange, for example the PJSC in Dubai will have the shares listed in Dubai Financial Market (DFM) whereas a PJSC in Abu Dhabi will have the shares listed in Abu Dhabi Securities Exchange (ADX). The Liability of the shareholder is limited to his share of the Share Capital of the Company. Five or more persons can form a PJSC and as Promoters/Founders they shall contribute 30% to 70% of the Share Capital and the rest shall be offered to public through a Public Issue of Shares. However, the Founders are not allowed to subscribe to the shares offered in the Public Issue. A PJSC shall be managed by an elected Board of Directors and the Chairman and majority of the Board members shall be UAE Nationals.
Private Joint Stock Company is a company where the number of shareholders is minimum two and maximum of two hundred. The Capital of the company is divided into equal shares to be paid in full but not offered to public. A shareholder shall be liable only to the extent of his share of the Capital of Company. The minimum issued capital of Private Joint Stock Company shall be AED 5 Million.
All the five forms of companies under Commercial Company Law are titled as Partnerships as the Shareholders are referred to as Partners in the Act.
1. Partnership - A Partnership Company is a form of organization where there are two or more partners who are contributing to the business. The name of the company shall have the name of the one of the partners in addition to a word that signifies the nature of business.
2. Branches -
- Branches can be established for Foreign Companies. The branch office shall carry on the activities of the Parent Entity. The Branch Office should have a local agent who shall be a UAE National.
- Branch also includes branch of a UAE based company where the branch is 100% owned by the parent company.
- Branches can also be branch of GCC based company where the branch is 100% owned by the parent company which is headquartered and based in one of the GCC countries.
- Similarly, a Free Zone Company can have a branch in mainland.
3. Representative Office - office set up in the UAE to represent a Foreign Company which can only perform the liaison function and is not permitted to import or export goods. The Representative Office can solicit business and do business promotion but cannot directly engage in any trading activity. A UAE National should be appointed as 'Service Agent' for the Representative Office.
4. Intelaq - Home Office owned by a UAE National for conducting any type of professional, trade or artisan business. The business must be such that can be operated from a residential unit without causing any harm to the environment. The legal form of the business can be Sole Establishment or LLC or Civil Company or Partnership.
5. SME License - UAE National can also obtain SME License which is valid for 3 years for any activity.
Forms of organisation with limited scope to undertake trade
- A Civil Company with professional license cannot undertake trading activities unless it is registered as an Engineering Company.
- A Representative Office which is in UAE for liaison, order procurement and mere local presence to be in touch with the clients and prospects cannot undertake trading activities.
- A Free Zone entity is expected to do trade on within the Free Zone or with the outside world, i.e., outside UAE. In other words, the Free Zone Entity cannot have trade with the mainland companies. However, the Free Zone Entity can obtain its services from a mainland company.
- A Trading Company with specific objectives cannot undertake trade in other commodities or products unlike a General Trading Company.
- A Limited Liability Company which is formed with specific activities listed in the Trade License cannot embark into other areas of business unless the relevant activity is added to the list of activities in the Trade License.
Defacto and Dejure Role of Local Arab Partner in Business
UAE laws require that majority of the stake holding in any company operating in UAE should be in UAE nationals’ hands.
- This requirement is only mandatory in the Mainland and is not applicable to Free Zone entities.
- If the Business Entity is being set up by a GCC National.
The requirement of UAE National as the local partner is applicable only to Non-GCC Nationals who want to set up business in the mainland for either Commercial or Industrial activity.
I. Professional Services
The UAE National is needed only as a 'Service Agent' and hence 100% of the ownership rests with the professional.
Profit sharing ratio can be different:
Though the UAE National holds 51% of the Share Capital in a Commercial or Industrial entity owned by Non-GCC Nationals, there is no requirement for the company to share the profits in the same ratio of the share capital. Companies generally resort to a differential arrangement whereby even the UAE National who holds 51% of the Share Capital gets only differentially agreed portion of the share of Profits.
Day to day management:
The day-to-day management of the business is with the expatriate partner. Bank Account operation and dealing with all Government Agencies can be handled by the Expatriate Partner without any interference of the UAE National.
Sponsorship fees: The UAE National is paid a sponsorship fee every year which gets reflected in the face of the Statement of Profit or Loss as 'Sponsorship Fee'.
The 51% share capital contributed by the UAE National is generally covered by a Loan Agreement between the Expatriate Partner and the UAE National. This interest free loan is given by the Expatriate to the UAE National to facilitate his contribution to the share capital of the company.
Concept of Free Zone Enterprises
- The Concept of Free Zone Enterprises was introduced to protect the interests of Business Owners who wanted to use UAE as a Trading Hub or Transhipment Centre.
- It is a secluded area which is properly fenced and the goods that are imported into the Free Trade Zone are brought in without payment of any Customs Duty. The goods are meant for other countries outside the UAE and are destined to leave the shores of UAE and hence are allowed to be brought in without any payment of Customs Duty.
- The Free Zone Enterprises are also given immunity from Tax and enjoy tax free existence as the Free Zone area is considered as being outside of the UAE. However, if the goods are moved from the Free Zone into Mainland then it would attract Customs Duty.
- Free Trade Zones exist in all the 7 Emirates in UAE. The Business activities that can be performed by the Free Zone Enterprises is decided by the respective Free Trade Zone Authority.
- However, the Owners and Employees of Free Zone Enterprises are given residence visa of UAE so that they can live in the UAE and conduct the business out of the Free Zone.
- The Free Zone Enterprises do not generally have any trade ties with the mainland and hence the requirement of having a UAE National as 51% partner does not apply to Free Zone Enterprises. Thus, a Free Zone Enterprise can be set up with 100% foreign ownership.
Transactions between the free zone entities:
The Free Zone entities in different Free Zones can have transactions within the rules and regulations of the respective Free Zones. For instance, if the entity in Jebel Ali Free Zone wants to transfer goods to Hamriyah Free Zone in Sharjah then the documentation should be made as per the JAFZA requirements for exit of goods and similarly proper documentation should be made as per Hamriyah Free Zone for the goods to enter that Free Zone area. If the particular goods are not allowed to be transferred on a Duty Free basis then the goods have to be brought through the mainland by payment of customs duty.
Free Zone entity and mainland transactions:
- The Free Zone Entity is not permitted to deal with mainland companies to offer and sell its products and services.
- The Free Zone entities can transfer goods to the mainland at any stage by payment of customs duty as the transaction is treated as an Import into UAE when it enters the mainland, provided it is permitted by the respective Free Zone Authority.
- If the goods in the mainland had already suffered Customs Duty, they can be transferred to Free Zone as it will be treated as an Export from the mainland to the Free Zone.
- If the Trader is aware in the beginning that the goods imported into mainland is destined for the Free Zone, then he could bring the goods into the mainland on 'Import for Re-export Bill of Entry' whereby 180 days’ time is available for re-export of the goods. In such cases the importer need not pay Customs Duty on the goods as it is meant for re-export. However, if the importer fails to re-export the goods within 180 days then the customs duty has to be paid on 181st day.