Doing Business in UAE | Foreign Direct Investment (FDI) in UAE | Mercans
Doing Business in UAE | Foreign Direct Investment (FDI) in UAE | Mercans2021-04-22T08:04:56+00:00
Mercans Country Intel
Doing Business in the UAE
What you need to know to do business in the United Arab Emirates (UAE)
Do business in the UAE and reduce costs with Mercans HRM and payroll outsourcing services
As an in-country payroll outsourcing, PEO GEO, employee leasing, recruitment, local compliance, and BPO outsourcing services provider in the United Arab Emirates, Mercans helps you to successfully do business in the UAE. No need to worry about setting up an entity, recruiting, and payrolling staff in the UAE. For your security and your peace of mind, Mercans guarantees full compliance with all the Emirati labor laws and employment regulations. Outsource payroll, PEO, human resource management, recruitment, and/or business process and mobilize any number of resources quickly and focus on building your business in the UAE while we take care of the rest.
1Current context in the UAE – The economic growth expected to return by 2021
The United Arab Emirates’ economy looks set to lose further momentum in the first half of 2020, after decelerating for two consecutive quarters in the second half of 2019. Analysts forecast the UAE GDP to shrink 2.7% in 2020, which is down 3.7 percentage points from last month’s estimate, and to grow 3.1% in 2021.
Growth in 2020 is subject to major uncertainty due to the COVID-19 pandemic and low oil prices. Given the UAE’s status as a global logistics and reprocessing hub, a global slowdown and disruptions in supply chains will weigh heavily on the UAE’s non-oil sector, which was already facing persistently weak business sentiment and a prolonged real estate downturn. Mitigating the economic fallout from COVID-19 is the UAE’s immediate challenge given its impact on sectors into which the UAE had successfully diversified (through flight disruption, lower transit trade, and tourism).
Despite being relatively diversified compared to its GCC neighbors, the UAE remains dependent on regional oil-driven liquidity and is thus also vulnerable to the crash in oil prices. The Emirati government has introduced a policy of fiscal easing to enable economic recovery. Structural reforms stepped up, along with the announcement of a new plan for a fiscal stimulus over the next years and increased public investment ahead of World Expo 2020. By the end of 2019, the government approved a zero-deficit federal budget for 2020, of which 38% has been allocated for social development and social benefits programs, 14% for infrastructure and economic resources, and almost 15% for public, higher and university education programs.
The introduction of a 5% VAT in the UAE in 2018 had prompted a moderate rise in inflation, however in 2019 the country experienced deflation (around -1.9% according to the IMF), mainly due to a continued decline in housing costs. The inflation rate should remain negative in 2020 and increase to a positive rate of 1.5% in 2021, according to the latest World Economic Outlook of the IMF (April 2020).
The UAE has one of the highest per capita income levels in the world and a highly developed welfare system. It also has one of the lowest rates of unemployment in the Middle East (while Dubai enjoys the lowest unemployment level in the world, at around 0.5%) and depends heavily on foreign labor (more than 85% of the workforce). A policy of ‘Emiratisation’ has been launched to encourage the employment of the local workforce.
2Entity Registration & Incorporation Requirements in the UAE
It is easy to understand why doing business in the United Arab Emirates (UAE) is such an attractive concept. A predominately liberal trade regime has contributed to sustaining an impetus for growth in the UAE – which comprises of seven emirates: Abu Dhabi, Dubai, Ajman, Fujairah, Ras al Khaimah, Sharjah, and Umm al Quwain. Doing business in the UAE is considered a fairly easy process by the World Bank’s standards, whilst the Index of Economic Freedom classifies the country as ‘mostly free’ from excessive administrative interference in business matters.
Reforms have created an efficient and well-functioning regulatory system with flexible employment regulations. In comparison to countries in the surrounding region, the United Arab Emirates is considered one of the least corrupt nations. Dubai and Abu Dhabi (Abu Dhabi is also the capital city of the UAE), are the most common emirates to set up a business. The 30 Free Trade Zones in Dubai, which propose benefits of tax exemptions, property ownership, and confidentiality amongst other advantages, is another reason why doing business in the UAE is an appealing prospect.
2.1Establishing a legal presence in the United Arab Emirates (UAE)
In order to conduct business in the United Arab Emirates, a foreign investor is typically required to establish a formal legal presence in the UAE which will typically be through any of the following means:
Incorporating a local entity
Registering a branch or representative office of a foreign company
Establishing a free zone entity or free zone branch, or
Entering into a commercial agency relationship with a local agent
2.2Different legal entities to do business in the UAE
Limited Liability Company (LLC) in the UAE
The most preferred commercial entity by those wishing to conduct commercial activities in the United Arab Emirates is the Limited Liability Company (LLC) and is the commonly used commercial entity for companies with a non-UAE national element. This is a private company and its shares are not offered to the public. The main fact that attracts the expatriates is that this gives maximum legal ownership (49%) to them for a trading license. The local sponsor or UAE national’s participation shall be up to 51% and the minimum capital required shall be AED 300,000 which should be contributed in cash and paid-up fully on the establishment. A minimum of two and a maximum of 50 persons can form a Limited Liability Company. The liability of these persons shall be limited to the extent of their shares in the capital of the Company. The Company can be formed in less than a month after receiving all the documents and complying with the procedures.
You will also be given a license which will serve as an indicator of what services you are allowed to conduct and provide in the said place. It is known that the more activities for setting up a business in the UAE that you apply for, the more fees you are about to pay. Therefore, you should be definitely prepared for that. However, you may not engage in the business of insurance, banking, or investment of money on behalf of a third party.
Following are the requirements for setting up an LLC in the United Arab Emirates:
Trade name approval and approval of the Memorandum of Association by the Licensing Department of the Economic Development
Attesting of the Memorandum of Association of the Company by a Notary Public in the Dubai Courts
Applying for entry in the Commercial Register of the Companies and getting approval from the Department of Economic Development
Getting the License from the Department of Economic Development
Resolution of the Board of Directors, specifying the Representative and his powers
Power of Attorney to the Representative, and
Memorandum and Articles of Association and Certificate of Incorporation have to be duly notarized at the place of incorporation, legalized by UAE Embassy, attested by UAE Foreign Ministry, and the Arabic translation authenticated before the Ministry of Justice have to be submitted in case of foreign body corporate.
Once the approval is granted, the Company will be entered into the Commercial Register and have its Memorandum of Association published in the Ministry of Economy and Commerce’s bulletin. Once the Company gets the License issued by the Department of Economic Development, the Company will be registered with the Dubai Chamber of Commerce and Industry.
Private Joint Stock Company in the UAE
A Private Joint Stock Company is defined as an organization whose capital is divided into negotiable shares of equal value and a partner therein shall be liable only to the extent of his share in the capital of the company, in accordance with the UAE’s Commercial Companies Law (the ‘Law”).
A Private Joint Stock Company has to have a minimum AED 2,000,000 share capital. Shares of a Private Joint Stock cannot be offered to the public. A minimum of three founder members are required to incorporate a Private Joint Stock Company and fifty-one percent (51%) of shares shall belong to a UAE national. A Private Joint Stock Company is formed to carry out commercial or industrial business activities but is not allowed to conduct professional activities.
A Private Joint Stock Company is subject to all the rules and regulations that are applicable to Public Joint Stock Companies, except for the rules and regulations relating to public share subscription. A Private Joint Stock Company can be converted into a Public Joint Stock Company after two years of its formation by fulfilling certain requirements.
Public Joint Stock Company in the UAE
Public Joint Stock Company (PJSC) is defined as an organization whose capital is divided into negotiable shares of equal value and a partner therein shall be liable only to the extent of his share in the capital of the company, in accordance with the UAE Federal Commercial Companies Law (the ‘Law”). The Law requires a minimum share capital of AED 10,000,000 of which a minimum of twenty-five percent (25%) must be settled on subscription. In addition, fifty-one percent (51%) of shares of PJSC shall belong to a UAE national and a minimum of fifty-five percent (55%) of shares must be offered to the general public.
Furthermore, PJSC should have at least 10 founding members, except in cases where the government entity is involved. Also, any company in which the State or Public Institutions hold any share should be formed as a Public Joint Stock Company. The Board of Directors must have a minimum of three and no more than twelve board members. The chairman, as well as a majority of the board, must be UAE nationals.
Limited Partnership Company in the UAE
A Limited Partnership company in the UAE is a company which consists of one or more joint partners liable, severally and jointly, for the obligations of the company and having the capacity of traders, and one or more silent partners not liable for the obligations of the company other than to the extent of their respective shares in the capital. Silent Partners shall not have the capacity of a trader. Any natural person or corporate person may be a Silent Partner in a Limited Partnership.
The name of a Limited Partnership Company in the UAE shall consist of the name of one or more of the joint partners with the addition of such an indication of the legal form of the company. The name of a Silent Partner may not be included in the name of the company. If such a name is added with his consent, the Silent Partner shall be deemed as a Joint Partner to bona fide third parties.
The management of the company in the UAE shall be limited to the Joint Partners. Decisions shall be unanimously passed by the Joint Partners unless the Memorandum of Association of the company provides for the majority. No variation of the nature of the business of the company or amendment to its Memorandum of Association shall be valid without the consent of all the Acting and Silent Partners.
General Partnership Company (or Joint Liability Company) in the UAE
A Joint Liability Company in the United Arab Emirates is a company that consists of two or more partners who are natural persons, to be jointly responsible in all their monies for the obligations of the company. In the UAE, a joint partner shall have the capacity of a trader. Such a partner shall be deemed to conduct the commercial activities in person in the name of the company. The declaration of the bankruptcy of a Joint Liability Company means the declaration of bankruptcy of all the partners by the power of the Law.
The name of a Joint Liability Company in the United Arab Emirates shall consist of the name(s) of one or more partners in addition to the expression “and partners” or any similar meaning, provided that the name of the company shall end with the expression “Joint Liability Company”. In addition, in the UAE, the company shall have its own trade name, provided that the name of the company shall be accompanied by such a trade name. If the name of a Joint Liability Company contains the name of a person other than a partner in the company and that person is aware of this, that person shall be jointly responsible for the company’s obligations against any person that deals with such company in good faith.
The management of the company shall be undertaken by all the partners. Every partner in a joint liability company shall be deemed as the agent of such company and the other partners in connection with the business of the company unless such management is delegated under the Memorandum of Association of the company or an independent contract to one or more partners or to any person who is not a partner. A partner who is not a manager may not interfere in the management affairs unless agreed otherwise. However, such a partner may demand to inspect the works of the company and its books and documents and to make notes thereon to the manager of the company. Decisions in connection with the business of the company shall be issued with the unanimous consent of the partners unless the Memorandum of Association of the company provides otherwise.
Other Legal Entities in the UAE
Company Branch in the UAE
A branch has no separate legal personality and is an extension of the foreign parent company. According to Law number 13 of 2011 free zone companies are allowed to set up branches in the wider Emirate, provided they obtain the proper license from the Department of Economic Development and the approval of the Ministry of Economy. Branch registrations may not be available to all businesses (in broad terms they are permitted for service providers and contractors) and the trade license limits the activities of branches to specified permitted activities only.
A branch is wholly owned by its parent company and there is no requirement for UAE nationals to take an ‘equity’ interest in the business of the branch.
A UAE national service agent sometimes referred to as a ‘sponsor’ must, however, be appointed to represent the branch in all administrative dealings with Government departments (such as immigration formalities). The remuneration of the sponsor is normally agreed on an annual fixed fee basis, and is a matter of commercial agreement and can vary depending on the prominence of the sponsor and the precise contribution he makes to the business of the branch. It takes approximately eight to twelve weeks to establish a branch.
Representative Office in the UAE
A representative office is broadly similar to a branch except, as mentioned above, it is not permitted to undertake any income-earning activities. A representative office, however, is also required to recruit the services of a UAE national services agent or sponsor. It takes a similar amount of time to set up a representative office as it takes to set up a branch.
Free Zone Entity in the UAE
A key feature of a free zone entity is that it is not subject to the foreign ownership restrictions imposed by the Companies Law in the wider UAE (although issues of foreign ownership may still be relevant if the free zone entity is used as a holding company for assets outside the relevant free zone). Free zone entities are also typically granted certain ancillary financial benefits.
A free zone entity will generally take one of the following three forms: a branch of a foreign company, a free zone company, or a free zone establishment. There are no minimum capital requirements for branches, while in most free zones, a free zone establishment and a free zone company are typically required to have sufficient capital to conduct their licensed activities (e.g., US$ 50,000 for DIFC Limited Liability Company). A free zone establishment may be owned by a single individual or company, whereas a free zone company typically requires two or more shareholders.
The key limitation of a free zone entity is that it is generally only permitted to conduct business within the relevant free zone or internationally and is limited to performing solely those activities specified in its license. A free zone entity must typically hold one or more of the following licenses: (i) trading license, (ii) service license, and/or (iii) manufacturing/ industrial license. In order for a free zone entity to engage in sales within the UAE (outside the relevant free zone), the entity will be required to retain the services of a commercial agent or distributor or establish an onshore entity.
2.3Accounting and Reporting in the UAE
The UAE Commercial Companies Law No 2 of 2015, which came into force on 1 July 2015, requires all companies to apply international accounting standards and practices when preparing their accounts. The previous Companies Law had required compliance with internationally accepted accounting practices, which had been interpreted to mean IFRS Standards. There has never been a local GAAP in the UAE. All entities that meet the definition of an SME in the IFRS for SMEs Standard are permitted to use the IFRS for SMEs Standard.
Audit of accounts is mandatory for some forms of entities in the free zone like the free zone companies (FZCO) and free zone establishments (FZE), for a branch of local and foreign company audit report may not be necessary for most free zones. In order to finalize the audit, it is obvious that the accounting records and documents must be available and well maintained. In the UAE, the general requirement for businesses is to maintain their records for no less than five years. The Commercial Companies Law states that the audit of accounts is necessary for all companies in the mainland.
Generally, though the law stipulates the preparation of the audit report, the submission of the same is not enforced by the authorities and hence many organizations do not follow the same. Some free zones, particularly in the northern emirates do not require the submission of audited accounts for certain companies; one needs to bear in mind that this waiver is only for the submission of the audit report to the authorities however the preparation of audit report for the entity itself cannot be overlooked.
2.4International Financial Reporting Standards (IFRS) in the UAE
International Accounting Standards Board (IASB) has issued IFRS as the international accounting standard for accomplishing the tasks and activities of financial management. It deals with particular types of events and transactions for financial reporting. The IFRS explains a comprehensive way of working for the accountants to maintain their records. The set of principles are designed to ensure a common language that is well understood by the business people and accounting companies across the world.
The Securities and Commodities Authority (SCA) has made it mandatory for the businesses to comply with IFRS as stipulated by the Central bank of the UAE. So, all the companies listed in the NASDAQ Dubai (Formerly known as DIFX), Dubai Financial Market (DFM), or Abu Dhabi Securities Exchange (ADX) is required to manage their accounting records in accordance with International Financial Reporting Standards (IFRS). Therefore, all the companies listed legally on the Abu Dhabi Securities exchange from 2003 onwards are supposed to submit the IFRS financial statements.
2.5Financial and Banking System in the UAE
The banking system of the Arab Emirates consists of the Central Bank and other local and foreign banking institutions. The Central Bank of the UAE performs key functions in the economy of the country and is a well-established financial structure. It provides consultations and financial support to the Government of the United Arab Emirates, issues national currency (the United Arab Emirates dirham), keeps control over activities of the UAE banks, etc.
The UAE Central Bank imposes quite strict requirements for licensing of foreign and local banks, as well as for the scope of their services. That is why the financial market of the Emirates offers only reliable and reputable banks with a full range of services for companies and individuals.
Banks are generally open from Saturday to Wednesday, from 8:00 am to 3:00 pm. and from 8:00 am to noon on Thursday and like other businesses they are closed on Fridays. Hours vary significantly during the holy month of Ramadan to accommodate the breaking of the fast.
With the exception of the entities incorporated in some of the free-zones, all companies in the UAE are required to process their salary payments through the Wage Protection System (WPS). In accordance with the WPS requirements, all salaries must be paid UAE dirhams to the local bank accounts of employees. Non-compliance with the WPS requirement will trigger various sanctions, including suspension of services by the Ministry of Human Resources and Emiratisation.
For additional information regarding the WPS, please also see Mercans’ blog at: https://mercans.com/blog-human-resources-global-payroll/changes-to-uae-wps-announced/
To know more about how to do business in the UAE, please click here Our UAE global payroll and human resources management experts are available for you and will assist you promptly.
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