Introduction
All United Arab Emirate (UAE) countries have similar procedures for setting up a commercial entity. There are different commercial incorporations that any aspiring entrepreneur can choose from among the available options. There are at least six commercial incorporations in the UAE.
The UAE founded its Federal Commercial Company Law in 1984. Each country had its own procedures and practices regarding starting a business within the UAE countries. The Federal Commercial Company Law stipulates that UAE must have 51 percent of the private, public, or limited company. At the same time, these federal laws provision allows UAE nationals wholly own institutions such as banks and insurance companies. Factors that influence the compositions and structure of business entities in the UAE are terms related to shareholding, directorship, minimum capital requirement, and procedures of establishing a corporate. This law also caters to issues concerning merger and acquisition and company dissolution.
We must note that in all these commercial structures in UAE, UAE nationals must never go below 51 percent. Thus, it is necessary for those aspiring to conduct business in UAE to consider both the advantages and disadvantages of every commercial structure before starting operations.
Starting a Business in the UAE
There are internal structures that an aspiring entrepreneur in the UAE must establish so as to run a smooth and compliant business. The first principle is that any new business must get registration from the local Economic Department and the Chamber of Commerce in every UAE state. The entity must also state its activities in the emirate. When starting a business in the emirates, there are provisions to register a company, which include fees payable, duration, minimum capital as per the type of commercial entity, and the allowed minimum and a maximum number of shareholders.
Types of Commercial Structures
Sole Proprietorships and Professional Licenses
This commercial entity can be 100 percent foreign ownership. Sole traders and civil entities have the freedom of 100 percent foreign ownership in UAE commercial laws. The entities can perform artisan or professional duties with a limited number of employees of up to five people. However, a UAE national must act as an agent of the business but has no direct control of the entity. The agent mainly gets a share of the profit. Their key functions are assisting foreigners to get trade licenses, work permits, and visas among other necessary documents.
The Company Law does not provide any provision for Sole Traders. However, they must work within the existing rules. Dubai and Abu Dhabi do not allow foreigners to establish a sole proprietary of 100 percent ownership. Professional artisans also are not within the Companies Laws, but they operate under the local Municipality or Economic Department.
The minimum capital for investments associated with “financial, banking, and investment consultancy is AED 1 million” (UHY Saxena 3). In this case, a UAE national must “own the minimum share capital of 51 percent” (UHY Saxena 3). They must also be the “majorities in the board of directors and provide the entity’s Chairman” (UHY Saxena 3).
Foreign stock and financials brokers need a capital base of AED two million and AED one million respectively. Still, traders in the money markets would need a minimum capital of AED three million, and the UAE nationals must own a minimum of 60 percent of the commercial entity’s capital.
Joint Venture Company
A joint venture takes place between a local party and a foreign party under a contractual agreement to carry out a licit business of their choice. Sometimes we refer to it as a consortium. The UAE local party must have a minimum of 51 percent of the total share capital. However, both parties must work out the modalities of sharing profit and loss. Joint ventures do not require publishing as the local party deals with a foreign partner. It is the local party that must bear the liabilities of the venture. The contract can be oral or written. Joint ventures provide opportunities and suitable structures for entities to work together on a given project. This type of commercial entity does not requires any Commercial Register. The company can conduct business using the name of the shareholder who is UAE national (Intuit Management 5).
Branch Office of a Foreign Company
This is a straightforward way of enabling foreigners to take advantage of 100 percent of foreign ownership in the UAE. The UAE Commercial Laws treat a branch office as an extension of the parent company. This is because the branch office will not have a new name, but operates under the name of the parent company. Still, the branch office must have a “UAE national as a service agent” (UHY Saxena 4). These local agents do not run the business, but get a substantial sum of revenues or profits.
The UAE Commercial Laws stipulate a condition that the branch office can only perform similar business as the parent company. The branch office can import products or services of the parent company so long as these products or services remain the same as those of the parent company.
Representative Offices of Foreign Companies
A representative office of a foreign business entity is not the same as the branch office of the parent company. The difference is that the branch office can only promote services or products of its parent company and also engage in the production of similar products as the parent company, whereas a representative office can perform product or service sale promotion of the parent company. In addition, it can also enhance the acquisition of contacts in the UAE.
Further, representative business offices cannot acquire credit facilities or offer any shares to the public. Still, the law demands that any representative office must also appoint a local service agent to cater for the provision of services needed for the business.
Limited Partnership
A limited partnership “consists of more than one general partner” (UHY Saxena 2). These partners are liable for the company’s debts jointly. The members have limited liabilities; thus, their contributions limit their liabilities in the company. The law does not prescribe any minimum capital for the venture. However, “all partners must be of UAE nationals” (PKF 25). A partner cannot take part in the management or act on behalf of the company. A foreigner can only own up to 49 percent of the shares. All directors of the company must be UAE nationals. In this type of commercial structure, unlike a general partnership, “death, insanity, bankruptcy, withdrawal or dismissal of a limited partner does not result in the dissolution of the partnership unless otherwise provided in the partnership agreement” (PKF 25).
General Partnership
General partnership type of business establishment is only available to UAE nationals of more than two persons. These individuals control the company’s books and are also liable for the company’s debts either separately or commonly. Partners must present their actual names for inclusion in the company name.
Usually, partners agree on most terms. This is the simplest means of conveying each partner’s interests. Still, partners can approve each other’s “interest as stipulated in the partners’ agreement” (UHY Saxena 3). However, the management of a General Partnership firm must be all UAE nationals. The management team may consist of partners or not.
Dissolution of a general partnership may occur only in the case of four conditions such as “death of a partner, bankruptcy, insanity or if a partner withdraws” (UHY Saxena 3). On the other hand, the partnership may continue if the other members unanimously endorse the idea. Partners must record decisions of such nature immediately in the Commercial Register.
Limited Liability Company
This is the most common commercial entity in the UAE. It requires a “minimum of two persons and a maximum of 50 persons to start” (PKF 27). Shareholders’ liabilities correspond to their shares. Dubai requires a minimum capital of AED 300 thousand to set up a Limited Liability Company, whereas other UAE countries need AED 150 thousand (PKF 27).
Limited Liability Company has no restriction on foreign ownership of shares. However, a foreign national cannot own more than 49 percent of the total company’s shares. The UAE allows its limited liability companies to engage in any licit business, but any business related to money investment such as banking, and insurance among others on behalf of another entity. The company directors can either be UAE nationals or foreigners with majorities being UAE nationals.
Public Shareholding Company
In the UAE, public shareholding companies allow for the most majorities to as partners or shareholders. The rule stipulates that such ventures should not have a minimum of ten founders. However, exceptions may only be in cases where the government is a part of the incorporation. In this case, the founders may be less than 10.
Public Shareholding Company must have a “minimum of three directors in the Board of Directors and utmost of 12 directors” (PKF 25). However, the provision allows “the chairman and other majorities among the directors to be UAE nationals” (PKF 26). Foreign nationals can only have up to a maximum of 49 percent shareholding.
Public Shareholding Company must avail a “minimum of 55 percent of its shares to the general public” (PKF 26). The incorporation must have a “minimum capital of AED 100 million where the founders must pay 25 percent of this capital on subscription” (PKF 26).
Still, like in any other limited company, members have limited liability to the company depending on the share of their contributions. Founders must enter their share of equal rights in the share registry. It is the nominal value that guides the minimum price of shares issued. In this case, the nominal value acts as the minimum price.
In cases where the company incurs considerable financial loss and difficulties, or in situations where the company loses a “minimum of 50 percent or more than this of its capital, the directors must call a meeting to deliberate on the future of the company i.e. whether to continue with it or dissolve it” (PKF 26).
However, if the board of directors or shareholders cannot call a meeting or fail to reach a solution, then any interested person can “challenge the directors or shareholders in a court of law for the company’s dissolution” (PKF 26).
Private Shareholding Company
A private shareholding company should not have “less than three shareholders” (Intuit Management 3). This is similar to a public shareholding company. The minimum capital requirement for this type of commercial entity is AED two million. Private companies “cannot offer their shares to the public” (Intuit Management 3). As a result, the UAE rules are strict on this condition. It requires any private corporation to rule out in advance any possibilities of offering shares to the general public.
Private and Public Shareholding Companies
Private and Public Shareholding companies make a lot of profit in most cases. However, shareholders must share these profits among themselves in terms of their share contributions to the capital. This dilutes the profits which is not the case in personal ventures. Some of these corporations may have up to a maximum of 50 shareholders (Klein, John and Partnoy 98).
These companies must also maintain flawless records reflecting their profits and losses. The companies must also have their income and expenditure records up-to-date.
The UAE law requires that the company keep the records for at least “seven years and use them to file tax returns annually” (UHY Saxena 3). These companies are also under the law to remit “employee’s taxes and cater for their insurance” (UHY Saxena 3).
Unlike the public Shareholding Company, “private company do not have the right to sell, offer, or transfer their shares to the general public” (UHY Saxena 3). Private companies do not trade in the stock exchange market. Thus, shareholders must keep their shares.
These companies are expensive to start in the UAE. Still, the costs of running such businesses are high as the companies must pay some “legal fees, employees insurance, and high taxes” (PKF 28). These corporations also have complex structures and setups. They need professionals like accountants and lawyers, which only serve to increase the operating costs.
These companies lack privacy. Private limited corporations cannot trade in the stock exchange markets, but these companies must make their information available to the public. The company’s records must show particulars of “directors, contact details, and sometimes made available upon request” (PKF 27). This also applies to the Public Shareholding Companies.
The idea of IPO (Initial Public Offering) has lured a number of public shareholding corporations. However, it is a complex initiative, expensive and equally risky. However, this is the best method to raise additional capital among such corporations.
Private company owners enjoy complete control of the companies. They have the power of controlling the business and do not have to consider shareholders in decision-making or worry over shareholders interferences and expectations in terms of profits and returns. Private corporations are also not a party to power struggles or hostile acquisitions. Private company owners cannot allow their investments to be sold under their watch. On the other hand, shareholders of public companies normally focus on profits maximization and increase of values of their shares. Consequently, they can use pressure to force the executives to deliver their expectations. Still, such shareholders’ demands are usually short-term goals. These interferences and demands affect the long-term objectives of the executive management.
The UAE laws allow private entities “not to disclose information that can be of use to competitors” (PKF 29). However, public corporations must give details of their operations such as undergoing research, analysts’ views, investors’ opinions, and discussions of the shareholders. Private companies do not have to reveal their financial records to the public. Conversely, public companies must release their financial performances every quarter to the public for shareholders and public scrutiny.
Public companies must reveal all their operations. The public can assess various expenditures, income, and compensation among others. This implies that such companies cannot keep their sensitive information private. This is according to SEC requirements on disclosure.
The taxation structures of privately held companies favour them. Limited liability companies, private companies, and other entities have “flexible structures that can only serve the interests of corporations in terms of taxes” (PKF 41). They have learnt to structure their income to “flow through to the shareholders, or owners, who are then taxed at lower rates than corporations” (Intuit Management 3). However, it is the private entities that have this advantage as “their owners avoid double taxation” (Intuit Management 3).
Public companies are more prone to lawsuits than private entities. This is because of reporting and disclosing all information. It gives shareholders opportunities of challenging their figures. Occasionally, public companies may involve themselves in unethical practices such as manipulating books of accounts to deceive shareholders. Some studies indicate that UAE public companies have high rates of experiencing lawsuits than private companies. Research conducted by the Professional Liability Underwriting Society between 2000 and 2003 revealed: “61 percent of all securities fraud cases were settled out of court and the mean settlement amount was $48 million”(PKF 26). There were also 34 percent of the litigations dismissed. The research estimated that the average costs of legal defence could exceed $1 million (PKF 26).
Shareholders Agreements
In the UAE, the courts enforce shareholders’ agreements as to private contracts. However, issues regarding governments and third parties are difficult to enforce in the courts. Shareholders’ can get protection from third parties if such rights are in the memorandum and articles of associations of the entity (Amjad Ali Khan, Afridi & Angell 128).
The entity does not have to disclose its shareholders’ agreement to the public. Public and joint ventures can pledge their shares. Conversely, limited liability entities cannot issue transferable share certificates.
Shareholders get priorities in case of an issue of new shares. Any other provision apart from this is void. Allocations of new shares take the proportion of the existing shares. New allocations may also not exceed the shares applied. Any remaining shares go to the public.
Changes in the capital structure require veto by minority shareholders possessing 25 percent or above of the company’s shares capital. However, any amendment to the company’s memorandum of association regarding share capital requires inputs from all shareholders. The Ministry of Economy has to approve any reductions in the capital of the company. Sometimes, such requests warrant the Ministry and related local authorities of the Emirates to review the entity’s compliance with the law.
Shareholders Protection from Liabilities and piercing the corporate veil
Shareholders do not have any special rights to protect them from any sale of all or significant amounts of the entity’s assets. Any merger needs the consent of shareholders bearing at least three-quarters of the business’ capital. Shareholders may convert the entity from one form to another with an endorsement of at least three-quarters of shareholders at GM.
After the liquidation of the entity’s assets, shareholders have the right to get their contributions of the share. Members can only get proceeds after clearing the company’s debts. Limited liability entities can get proceeds after paying the company’s debts in a manner they share the company’s profits. At least shareholders that represent three-quarters of the company’s capital may decide to liquidate the company in a special GM.
Works Cited
Amjad Ali Khan, Afridi & Angell. United Arab Emirates. 2010. Web.
Intuit Management. “To know more about doing business in Dubai.” Dubai Company formation and Registration (2008): 2-6. Print.
Klein, William, John C. Coffee, Jr. and Frank Partnoy. Business Organization and Finance, Legal and Economic Principles, 11th (Concepts and Insights). New York: Foundation Press, 2010. Print.
PKF. “A Business and Tax Profile.” Doing business in the UAE, 1 (2010): 14-75. Print.
UHY Saxena. “Business in Dubai.” Company Formation (2009): 1-3. Print.