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A sole proprietorship is a simple business method whereby an individual trades on his own account pursuant to a trade license issued in his own name. This form of business entity is referred to as an ‘establishment’ rather than a company and the sole proprietor is personally liable to the full extent of his assets for the liabilities of the business.
Mainly UAE nationals and nationals of GCC countries are permitted to form sole proprietorships in Dubai. However the Establishment License being 100% in the name of the UAE national, a practice has arisen wherein the same license is leased to expatriates who then manages the business and retains all the profits.
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Foreigners may form sole proprietorships if they reside in the UAE. However, the law restricts the activities a foreigner may engage in as a sole proprietor to certain fields. These include the following:
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- The provision of medical services
- Engineering Consultancies
- Legal consultants
- Computer consultants
- Similar services and non-trading activities
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It is worth noting that in order to practice certain professions, it is necessary to fulfill various criteria and conditions. For instance, engineering consultants must be registered in the Register for Engineering Consultancy Practitioners at the Dubai Municipality before they can practice.
Nonetheless, a foreign sole proprietor is required to appoint a local services agent. The local service agency contract must be authenticated by the Notary Public and the foreigner’s residence should be under the new business sponsorship.
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The golden rule regarding companies being established is that they must have one or more national partners whose share in the company capital must not be less than 51% of the company capital.
The Dubai Economic Development has issued a standard classification of economic activities which fall under the following categories:
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- Agriculture
- Fishing
- Mining and Quarrying
- Manufacturing
- Electricity, Gas and Water
- Construction
- Trading and Repairing Services
- Hotels and Restaurants
- Transport, Storage and Communications
- Financial Intermediation
- Real Estate, Renting and Business Services
- Extra Territorial Organisations and Bodies
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Therefore, foreign investors wishing to establish business operations in Dubai engaged in any of the commercial business activities defined above must do so with a partner who is a UAE national.
Those intending to establish service companies and /or branch offices, as discussed below, where 100% foreign ownership is permitted, will be restricted to non-commercial activities.
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| There are seven different types of companies which may be established, namely: |
- General Partnerships
- Simple Limited Partnerships
- Joint Participation (ventures)
- Public Joint Stock Companies
- Private Joint Stock Company
- Limited Liability Companies
- Partnerships Limited with Shares
Each company is suitable for a particular purpose. However, before discussing these it should be noted that a company which does not adopt one of the above forms, is considered void and individuals who conclude contracts on behalf of the business are personally and jointly liable for the liabilities arising from such contracts.
General Partnership.
A General partnership is an arrangement between two or more partners whereby each of the partners are jointly and severally liable to the extent of all their assets for the company’s liabilities. Only UAE nationals are allowed to be partners in a general partnership. This form of business organization is therefore not appropriate for foreign investors wishing to set up in Dubai.
Nevertheless, the procedure for forming a general partnership is relatively straightforward and includes the preparation of a partnership memorandum, approval of the partnership name by the DED, inscription of the preparation into the commercial register at the DED, authentication of the partnership deed, publication of the firm’s data in the Companies Bulletin issued by the Ministry of Economy and Commerce, obtaining a trade license and registering the partnership with the Dubai Chamber of Commerce and Industry.
Simple Limited Partnership.
A Simple Limited Partnership is defined as a “company formed by one or more general partners liable for the company liabilities to the extent of all their assets, and one or more limited partners liable for the company liabilities to the extent of their respective shares in the capital only”
Thus, a simple limited partnership is essentially a modified general partnership. As in a general partnership, only UAE nationals may be general partners in a simple limited partnership, although foreigners may be sleeping partners, who essentially do not have a role in the management as opposed to the administration of the company regarding third parties. In addition, their liability is limited to the extent of their share capital in the partnership.
Sleeping partners should of course ensure that they do not lead third parties to believe that they are anything other than sleeping partners. Otherwise their limited liability will cease. The management of a simple limited partnership is vested in the general partners. As non-UAE nationals are excluded from assuming any form of management role, this form of business organization is probably inappropriate for foreign investors.
Joint Participation Venture.
Joint Participation ventures or consortium companies is defined as a “company concluded between two or more parties to share the profits or losses of one or more commercial businesses being performed by one of the partners in his personal name. The company shall be confined to the relationship between the partners and will not be effective towards third parties”
From the above it is clear that the existence of such a company is restricted to the arrangement between the partners therein and must not be made known to third parties. Between the partners
Themselves the arrangement is essentially a partnership. Each partner conducting business will generally do so in his own name and will not declare the interest of the other partners to others. The liability of the partners who are conducting business is unlimited regarding the liabilities of the company. If the liability of the other partners is disclosed, the venture will be treated for every purpose as a general partnership.
Public Joint Stock Company (PJSC).
Public Joint Stock Company are defined “any company whose capital is divided into equal value negotiable shares”
PJSC’s are very similar to the public limited company in the U.K. The shareholders of a PJSC are liable only to the value of their shares in the capital of the company. The nominal value of each share of a PJSC should not be less than Dhs 1 and not more than Dhs 100, and the minimum share capital requirements are Dhs 10 million for a general company, a banking entity Dhs 40 million and insurance and investment companies Dhs 25 million.
A PJSC must have at least ten founder members and its management should be vested in a board of directors consisting of a minimum of three and a maximum of twelve persons whose term of office may not exceed three years. Directors can be re-elected when their term of office has expired. A public joint stock company is required to have a chairman of the board of directors who must be a UAE national. In addition, the majority of the board of directors are required to be UAE nationals.
In addition, UAE nationals should hold at least 51% of the shares of the PJSC. The founder members must subscribe to a minimum of 20% and a maximum of 45% of the share capital of the company. If new shares are issued, the existing shareholders should be offered the opportunity to subscribe to such shares in accordance with their existing shareholdings.
Notwithstanding that, the PJSC has become increasingly popular in recent years vis-ŕ-vis the privatization sector and there are currently about 100 PJSC’s in the UAE. In addition, as it is the only business vehicle which allows shares to be offered to the public, it enables business to raise substantial amounts of capital, which is particularly the case when large-scale projects are concerned. This allows small foreign and local investors to participate in such projects.
It should also be noted that, where one is contemplating a business venture which involves insurance, banking or investment of funds on behalf of third parties, the establishment of a PJSC is a legal necessity and no other type of company may be established for such activities.
Private Joint Stock Company.
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A private joint stock is essentially the same as a public joint stock company, with the following differences: |
- The minimum capital requirement is Dhs 2 million.
- The shares of a private joint stock company cannot be offered to the public.
- Only three founder members are required.
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| Considering the lower capital requirement of Dhs 2 million, private joint stock companies are popular with foreign investors. |
Limited Liability Company (L.L.C).
A popular, and frequently the most appropriate, method of establishing a business in Dubai by foreign investors is to form a limited liability company which is similar to private limited liability companies in the UK. However, as mentioned earlier, where the intended business involves banking, insurance and /or investment activities conducted on behalf of third parties, a LLC is not legally permitted to practice such activities and a PJSC will have to be established instead. An LLC is defined as “ a company with limited liability where the number of partners may not exceed fifty and should not be less than two. Each of the partners shall only be liable to the extent of his share in the capital. The partners’ participation should not be represented by negotiable certificates”
In addition, a LLC has the following legal and commercial characteristics:
| Capital |
- The minimum share capital must be Dhs 300,000 divided into equal shares with a minimum face value of Dhs 1,000 per share.
- UAE nationals must hold at least 51% of the shares.
- Public subscription for raising capital is not permitted.
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| Management |
- Although a foreign partner is only legally permitted to own a maximum of 49% of the capital of the company, the day-to-day management of the company may be vested in a foreign manager.
- The manager or managers are appointed by the memorandum of association (Memorandum), by a separate management contract or the general assembly of the partners.
- Managers may be one or more of the partners or any other parties (including foreigners) provided that they do not exceed a total of five persons.
- In practice, national partners play no part in the operations of the company and may well give the foreign partner a power of attorney authorizing him to vote in the general assembly on his behalf.
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| Profits and Losses |
- It is possible to provide in the Memorandum that profit and losses will be shared in a ratio different to that of the share capital ratios.
Accounting Requirements
- It is necessary to appoint an auditor who must be accredited in the UAE.]
- The auditor should be appointed by the general assembly (which is essentially a meeting of all the shareholders of the company)
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| Procedure to Establish an LLC
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The following procedure should be satisfied for the establishment of a LLC:
1. Approve Company Name
The first step to be taken in establishing a LLC is to obtain the approval of the company name and activity by the DED. This is done by completing
the prescribed form which is issued by the DED for this purpose. The name of the LLC should, among other things, end with the words “limited
liability company” and either be derived from its objects or from the name of one or more of the partners. When the name and activities have been
approved, a Memorandum should be prepared.
2. Prepare, Authenticate and Approve Memorandum of Association.
The memorandum should be prepared and must be authenticated before the Notary Public at the Dubai Court or the Notary Public at the DED.
If one of the partners is a LLC (a juridical person), additional documents must be submitted with the Memorandum before it can be notarized.
Furthermore, where the foreign partner is a company, additional notarized, legalized and authenticated documents, officially translated and further
authenticated in Dubai, are required to be submitted. These are:
1. Certificate of incorporation or certificate of good standing of the company.
2. Memorandum and articles of association of the company.
3. Board resolution from the company calling for the taking up of the shares in the LLC and appointing an individual as its authorized attorney.
4. Power of Attorney from the company authorizing the appointed individual to act on its behalf for the establishment of the LLC and the taking up of shares of the LLC |
The documents listed above must be:
1. Notarized by a notary public in their country of origin.
2. Legalized by the foreign ministry of the country from which they originate.
3. Authenticated by the UAE Embassy in that country and
4. Authenticated by the UAE Ministry of Foreign Affairs upon their arrival in Dubai.
5. Translated into Arabic by a translator registered with the Ministry of Justice and thereafter the translation sealed by the Ministry of Justice. |
If the documents of the foreign company are in any language other than English, it is highly recommended that they be officially translated into English in their country of origin prior to being notarized, legalized and authenticated.
Once the Memorandum has been authenticated, the managing director(s) should submit the following original documents to the DED for approval:
1. The notarized Memorandum
2. A signed prescribed application form
3. A certificate from a bank operating in Dubai certifying that the capital of the company has been deposited with it, in cash. |
3. Register the company
Once the approval has been obtained, it is necessary to submit the following original documents to the Commercial Registry at the Trade License and Commercial Registration Department of the DED in order to register the company.
1. The prescribed application form signed by the manager(s) or their legal representative(s)
2. The Memorandum together with a copy
3. A certificate issued by the manager(s) and signed by the company’s auditor(s) stating that:
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all shares in kind or cash are fully paid up
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the value of the cash shares has been deposited in a bank account in the UAE
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the shares have been valued and the value representing such shares is credited to the assets of the company |
4. A certificate issued by the bank showing the total amount deposited by each partner and an undertaking from the bank to the effect that the deposited amount will only be released to the managers upon proof of registration of the company.
5. Letter of approval of the company’s name issued by the DED
6. The Original letter of approval of the company by the Committee of LLCs at the DED
7. Letter from the company’s auditors stating that they are willing to act as auditors for the company.
8. The appropriate fee.
4. Publish Company in Companies Bulletin
The documents delivered to the company representative should then be taken to the Ministry of Economy & Commerce in order to publish the company’s details in the Ministry’s Companies Bulletin. Publication will take place upon the payment of a fee.
After the publication, the Ministry of Economy & Commerce issues its approval letter.
5. Obtain Trade License
Before the newly formed company can begin its operations, it must apply to the DED for a trade license. Application for a trade license is made on the prescribed form which must be completed in Arabic and signed by the authorized signatory of the company. The following documents should be filed with the application along with the applicable fees:
1. A prescribed form setting out the proposed name of the company in Arabic and English
2. The original lease of the company’s office premises.
3. The prescribed form for obtaining the Dubai Municipality Building Department’s clearance on the suitability of office premises.
When the Building Department clearance has been obtained for the office premises, a name board must be prepared both in English and Arabic. The office premises will then be inspected by the fire and civil defense authorities, and by the Licensing Department of the DED. After the inspections have been carried out, the trade license fees will be assessed in accordance with a number of factors. The fees mainly consist of 5% of the business’s tenancy contract in addition to 5% of the manager’s residential tenancy contract as well as a fixed fee for each employee of the company which are Dubai Municipality Charges.
6. Register LLC with DCCI
After the companies trade license has been obtained from the DED, it is necessary to register the LLC with the Dubai Chamber of Commerce & Industry
| | Branch Office of a Foreign Company.
A very popular way for foreign companies to benefit from 100% foreign ownership is to open a branch office of the parent company.
A branch office is legally regarded as part of its parent company and does not have a separate legal identity from that of its parent company. Therefore the name of the branch office will be the same as that of the parent company.
Branch office are nevertheless required to have a local service agent. It is preferred that a local service agent be an individual, however, if the agent is a company, it must be wholly owned by UAE nationals. The national agent, however, will not acquire any rights or interests in the business of the branch office and will simply provide services on matters which concern federal and local government departments such as fulfilling immigration requirements on the business’s behalf. In return for their services, agents usually receive a fixed annual fee.
One of the conditions for establishing a branch office in the UAE is that it may only be engaged in activities similar to those of its parent company. It is important to note that a branch office is not permitted to carry on the business of importing the products of its parent company, since such activities are restricted to local trade agents.
The Procedure for establishing a branch office are relatively simple and normally involve three main tasks:
a) Obtaining approval from the Ministry of Economy & Commerce
b) Obtaining a license from the DED
c) Registering the branch at the Foreign Companies Register at the Ministry
The issuance of a branch license from the DED allows the company to conduct business in Dubai. The activities the branch will be allowed to practice, therefore, will depend on the type of license it obtains and, more importantly, the activities of its parent company.
There are some restrictions governing the activities a foreign company may practice. For instance, only UAE nationals may practice banking, insurance, money investment and operate commercial agencies.
Representative Offices of Foreign Companies.
A Representative office of a foreign company is legally distinct from a branch office of a foreign company in that it is only allowed to promote its parent company’s activities. Therefore, if a parent company deals in the sale and/or production of certain products and opens a representative office in Dubai, the office will only be able to promote and market the sale and/or production of such products and facilitate contracts in the UAE, as distinct from conducting their sale or the production itself.
It should be noted that in addition to the above limitations, representative offices have other restrictions in that they are not allowed to obtain credit facilities or put forward offers.
As in the case of a branch office, it is necessary when establishing a representative office to appoint a local service agent. However, in some exceptional cases a local service agent is not required.
Procedure to establish the representative office of a foreign business
The procedures and requirements for establishing the representative office of a foreign business in Dubai are the same as those needed for a branch office, except that
a) Representative offices do not have to be registered with the Ministry and thus do not have to pay the registration fees and
b) A certificate from the competent authority in the company’s home country stating that the company has been registered for not less than two years, and its official translation by a certified legal translator need to be submitted when applying for a trade license at the DED along with the documents listed previously for branch office license applications at the DED.
Civil Companies.
Apart from the commercial companies which may be established there are other three forms of civil or professional entities, namely:
a) Companies to perform work (work/service companies)
b) Speculative venture partnerships
c) Mudaraba companies
The main difference between Commercial companies and Civil Companies is that the activities which may be practiced in the former are of a commercial nature, whereas in the latter, the activities which may be practiced involve the use or investment of intellectual faculties, acquired information or the use of skills like carpentry.
The only legal entity a civil company may be established under is a partnership either between UAE nationals or between UAE nationals and foreigners for the practice of civil rather than commercial activities such as consultancy and carpentry. It follows therefore that legally speaking, civil activities may not be setup as limited liability companies or other forms of company and are thus not subject to requirements such as those of minimum share capital .
a) Companies to Perform Work (Service / Professional Companies)
Service or Professional Companies are defined as companies where two or more persons agree to be bound to carry out work and to be liable thereafter to third parties against payment of consideration, whether they share equally or unequally in the distribution of the work, and provided that work is of a single and inseparable nature.
Professional companies may be 100% foreign owned. However, it is necessary to appoint a local services agent from the Emirate in which the business is going to be registered. Where there is a local participant, it is normally acceptable for the local to own, a considerable share in that company, about 15% to 20% of the company with the foreign participant owning the remainder of the company in order to waive the requirement of having a local service agent. However there are no written rules to this effect and is simply a matter of practice. The local service agent merely acts in an assisting capacity in obtaining and renewing the company’s license and immigration requirements from the Ministry of Labour & Social Affairs and other concerned authorities. The day to day operations and management of the company and the liability for its debts remain with the foreign investors as agreed between them.
Regarding foreign investment, the most common form of civil entity used is the professional company. The activities which are most appropriate for such a company are essentially service areas, such as consultancy, civil engineering, medical and educational services.
Recently, Dubai has exempted engineering consulting companies that are fully owned by foreigners from the requirement of having a local service agent.
b) Speculative Venture Partnerships
This form of partnership is a contract between two or more persons to purchase property on credit, to sell it at a profit and subsequently to share the profits as agreed between them.
c) Mudaraba Companies
A Mudaraba is a contract where one of the parties to the contract contributes a certain amount of capital and in exchange the other party, the Mudarib, contributes his efforts/labour in order to make a profit. Here, the Mudarib is treated as a trustee of the capital as well as a partner to the profits.
There are other conditions various which must be satisfied for a Mudaraba to be valid. Among these is the provision that the contract must not stipulate that the Mudarib will be liable for any loss or waste of the capital, providing there is no wrongful act on the part of the Mudarib.
Thus, the Mudarib is given the power to make dispositions on behalf of the owners(s) of the capital. Nevertheless, the owner of the capital may stipulate the conditions of the contract provided they are not contrary to the Civil Code. However, he alone will bear any losses incurred and under the Civil Code any provisions made to the contrary are deemed void.
Procedure for establishing Service Companies
The procedures for establishing a service company are straightforward. Applicants must first obtain a preliminary approval for the name and activities of the service company from the DED.
To obtain preliminary approval, applicants must fill out an application form, submit copies of their passports and submit a copy of the passport of the local service agent if it is an individual, or copies of its trade license, passports of partners and family books of partners if it an entity.
Upon the issuance of the preliminary approval, the partners in the service company must submit the following documents in order to obtain a license:
. A copy of the service company’s memorandum, which is the constitutional document of the company, containing the objectives and provisions for the management, capital and distribution of profits of the company. However, if the company is being established by an individual, a memorandum is not required.
. The notarized local service agency agreement
. If the service agent is an individual, a copy of his passport must be submitted with the application. If the national agent is a company, its memorandum of association, a copy of the company’s trade license and copies of the passports and family books of all of the members will be required.
. Passport copies of all the partners.
The license a service company needs to obtain from the DED is a professional license. It should be noted that special approval may be required from the appropriate bodies before an application for a license can be made, depending on the activities the service company will be involved in.
A license will not generally be granted to enable a foreign company to establish a business presence in Dubai if the establishment of a branch office is more appropriate.
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