Types of Companies in the UAE On-shore/Mainland

Types of Companies in the UAE On-shore/Mainland There are various types of legal entities that operate commercial and professional activities in the United Arab Emirates (UAE). These legal entities are usually referred to as ‘companies’ in general practice. Therefore, for the purposes of easier reference we will use the term ‘companies’ while referring to legal entities, even though the term ‘companies’ may seem not compatible term for certain types of legal establishments.

Key Definitions

• On-shore – means the mainland territory of the UAE, which excludes the Free Zone areas.
• Free Zones– means designated areas where full ownership of companies are allowed for foreigners.
• Commercial Activities – those activities which are stipulated in the Article 5 – 6 of the UAE Federal Law No. 18 of 1993 on Commercial Transactions. Some of these activities are trading, import-export, real estate development, manufacturing, banking, insurance and etc.
• Professional Activities – those activities that are practiced as profession which involve the use or investment of intellectual abilities and skills. Some of the professional activities are medical services, engineering consultancy, management consultancy, legal consultancy, IT consultancy, HR consultancy and others;
• Local Service Agent –is a UAE national, who must be appointed as a local agent for companies that are fully owned by foreigners, subject to certain exceptions.

Introduction In general, the UAE offers two different operating environments for companies to do business in the country: On-shore and Free-Zones. Companies incorporated within the On-shore are largely established to conduct business activities within the UAE local market. One of the main characteristics of On-shore companies is that they can be formed only in association with a UAE national, who must be either a company shareholder or local service agent. Unlike On-shore companies, Free-Zone companies may be 100% owned by expatriates without associating with a UAE national partner or agent. Free-Zone companies can conduct business activities within the Free-Zones where the companies are registered. However, in this article we will mainly focus only on the types of companies that can be formed in the UAE On-shore: 1. Sole Proprietorship / Establishment 2. Commercial Companies

• General Partnership
• Simple Limited Partnership
• Joint (Participation) Venture
• Public Joint Stock Company
• Private Joint Stock Company
• Limited Liability Company
• Partnership Limited with Shares

3. Civil Companies 4. Branch and Representative Offices Further we will briefly review each of the above listed companies.

Sole Proprietorship / Establishment

A Sole Proprietorship is the establishment exclusively owned by one individual, who is personally liable without limit to the full extent of his assets for the liabilities of the entity. This type of entity can either conduct commercial activities or professional activitiesin the Emirate where it is registered. In accordance with the existing laws, only UAE nationals and nationals of GCC countries (subject to certain conditions) are permitted to form Sole Establishments for carrying out commercial activities. However, expatriates are also allowed to form Sole Proprietorships for conducting professional activities, such as medical services, engineering consultancies, management consultancies, legal consultancies, IT consultancies and similar services. A professional firm of foreign sole proprietor is required to appoint a local service agent. A Sole Establishment owned by a foreigner must appoint a UAE national as a local service agent, who will be engaged in the company’s dealings with government departments while applying for work permits, employment visas and other government approvals.

Commercial Companies

There are various types of commercial companies which are stipulated in the Federal Law No. 8 of 1984 on “Commercial Companies in the UAE” (Commercial Companies Law). They are basically formed to operate commercial activities in the UAE local market, subject to certain exceptions. Under the Commercial Companies Law, the companies are generally described as “a contract under which two or more persons are committed to participate in profit – making economic venture either by providing cash or work contributions and to divide between them profit or loss arising from such venture”.  Article 5 of the same Law enumerates the following categories of commercial companies in the UAE:

• General Partnership / Joint Liability Partnership
• Simple Limited Partnership / Sleeping Partnership
• Joint – Venture
• Public Joint – Stock Company
• Private Joint – Stock Company
• Limited Liability Company
• Partnership Limited by Shares

General Partnership / Joint Liability Company General Partnership is the agreement between two or more partners whereby each of them is equally liable for the company’s obligations to the full extent of all their assets, in accordance with the Article 23 of the Commercial Companies Law. Only UAE nationals are permitted to incorporate this type of partnership. This opportunity is not extended to non-nationals as probably the majority of their assets are usually located outside the UAE. Simple Limited Partnership / Sleeping Partnership Simple Limited Partnership is composed of one or more jointly – associated partners responsible for the company’s liabilities to the extent of all their assets together with one or more sleeping partner (s) liable for the company’s obligations only to the extent of their respective participation in the capital (Article 47 of Company Commercial Law). This type of partnership is also limited only for UAE nationals. Joint Venture Joint Venture is also a contractual agreement between two or more partners to share profits or losses of a commercial business. In Joint Ventures, the business is carried out in the name of one of the partners. The local equity participation in the joint venture must be at least 51%, but the profit and loss distribution can be mutually agreed. Joint Ventures are suitable for companies working together on short term basis or for a specific project. Joint Venture Agreement regulates the relationship b/n partners. In practice, there is no registration formality for this type of partnership in the government departments, as the partnership will operate using the license and name of one of the partners. Public Joint Stock Company Public 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 (Art. 64 of Company Commercial Law). The Law requires a minimum share capital of AED 10,000,000 of which a minimum of 25 percent must be settled on subscription. A minimum of 55 percent of the shares of a public shareholding company must be offered to the general public. Furthermore, it 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 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. Private Joint Stock Company Private Joint Stock Company has the same characteristics as the Public Joint Stock Company. However, it has three exceptions as follows:

• The minimum share capital is AED 2,000,000
• The shares cannot be offered to the public
• Only minimum of three founder members are required to incorporate such company.

It can be converted into a Public Joint Stock Company by fulfilling its requirements. Limited Liability Company Limited Liability Company is one of the widespread companies formed in the UAE. The main reason for its prevalence is that foreigners can participate as partners in the company and their liability is limited only to the extent of their share in the capital. According to Article 22 of the Commercial Companies Law, 51% of the shares should belong to the UAE national partner, and accordingly, 49% of the share can be owned by the expatriate partner. Distribution of profits and losses can be mutually agreed by the parties. L.L.C. can be formed by partners of not exceeding fifty but should not be less than two. The Law requires the minimum amount of AED 300,000 share capital divided into equal shares with a minimum face value of AED 1,000. Partnership Limited by Shares Articles 256 to 272 of the Commercial Companies Law allow another type of commercial company known as Partnership Limited by Shares. Partnership Limited by Shares is very similar to Simple Limited Partnership as it is defined by Article 256 of the Commercial Companies Law as “a company formed by general partners who are jointly liable to the extent of all their assets for the company’s liabilities and participating partners who are liable only to the extent of their shares in the capital.” The partners whose liability is not limited must be UAE nationals in accordance with Article 257 of the Commercial Companies Law. The minimum share capital requirement for this type of company is AED 500,000.

Civil Companies

Civil Company is an association wherein two or more persons agreed to be bound to carry out professional works and to be liable thereafter to third parties against payment of consideration. Professional activity means those that are being conveyed using intellectual abilities, acquired information or professional skills. Civil Companies are regulated by Federal Law No. 5 of 1985 on Civil Transactions Law (the Civil Code). Unlike Commercial Companies, Civil Companies can be owned 100% by foreigners, subject to certain conditions, and only Local Service Agent should be appointed. HR consultancies, Legal consultancies, Management consultancies are some of the professional and artisan activities that can be conducted. Civil Company is similar to the General Partnership in form and legal status wherein the partners are jointly liable for the company’s obligations to the full extent of all their assets.

Branch & Representative Office

Other type of legal entities is a branches or a representative office. Both foreign and local companies can establish their branch or representative office in the UAE. In terms of legal form and registration processes both a branch and a representative office are similar to each other; however, there are certain variations between them. For instance, a branch can do the same business activities as the parent company; however, the representative office can only be engaged in promoting or marketing its parent company’s poducts or services and thus are not permitted to engage in actual trading or service provision. Furthermore, a representative office cannot obtain credit facilities while a branch have such capacity.

Conclusion

Thus, the UAE laws allow several types of On-shore companies to operate business activities in the country. The type of the companies will mainly depend on the business activities that are going to be carried out. Moreover, one of the main characteristics of the On-Shore companies is that such companies can be established  only in association with a UAE national, who should be either a partner or a local agent. The business activities are generally classified as commercial and professional. Based on the type of the activity, the companies also can be either commercial or professional. Commercial companies are formed to carry out the commercial activitiesand professional companies are established to provide professional services. As far as commercial companies are concerned, expatriates can participate in Limited Liability Companies, Public and Private Joint Stock Companies, where their shares can be up to 49%, whereas the rest 51% shares should belong to the UAE national. However, there are certain types of commercial companies such as General Partnerships, Sleeping and Limited Partnerships that can be established only by UAE nationals. In terms of professional companies, expatriates are allowed to establish them with full ownership and in that case a UAE national acts as a local service agent. Furthermore, both UAE local and foreign companies can expand their business activities in the UAE by establishing their branches or representative offices.