UAE Citizen Partner
Setting a company in the UAE can be complex, as various business establishment options are available across the Emirates and free zones. Although establishing companies in free zones can afford 100% ownership to citizens not from the GCC, this is not always an ideal option as it limits trade within the UAE. The geographical limitation of the zone is the main obstacle for free zone companies. Whereas, it is not permitted to conduct business except within the free zone in which it was established or outside the United Arab Emirates. In contrast, internal companies can freely conduct business within the local market, in any free zone, or outside the United Arab Emirates. This article PRO GCC examines the problems related to establishing companies in the UAE and focuses in particular on the benefits resulting from the presence of a UAE citizen partner and the implications thereof, which is a mandatory condition for companies wishing to establish their businesses inside the country.
It also addresses the procedures that business owners can follow to eliminate potential problems that may arise and the recent amendment to the law on foreign ownership. It is worth noting that foreign investors often use the term "citizen / local partner" to refer to the 51% shareholder. However, this term can have misleading connotations because it hides the true nature of the ratio. That is, a citizen shareholder is a 51% partner, even if it is a shell partner. Some entrepreneurs make a mistake when they think that partners cannot legally intervene. However, Article 91 of the Federal Law on Commercial Companies grants sponsors "all the rights associated with describing a partner," and they may have the right to control a lot of the company. The recent foreign direct investment law issued in 2018 eases the conditions above to distribute UAE citizen partners' shares. However, a large part of the previous law remains in effect as the Dubai Department of Economic Development still has discretion regarding determining the size of foreign ownership permitted on the ground. Therefore, both aspects of the traditional local partnership and the new law's implications will be examined.
The considerations to be taken into account before establishing companies within the state
Currently, the Dubai Department of Economic Development provides a "prompt licensing" service for establishing companies. As the name indicates, you can extract a company license very quickly, usually within a day. This allows you to start a business without a Memorandum of Association and Tenancy Contract registered with Ejari, in the first year of obtaining the license. The company incorporation contract and the rental contract written with Ejari must be submitted to the Dubai Department of Economic Development upon renewing the immediate license.
- It can be challenging to start establishing a business on the mainland in the emirate of Dubai, as this involves many steps. After you have decided on the company and legal model that suits your needs, you should:
- Find a citizen partner.
- Document your office address in Dubai Municipality. The tenant's responsibility is to ensure that both the rental property and the rental contract are registered with Ejari before applying for a license.
- Obtaining initial approval for the name and commercial activity.
- Documentation of the memorandum of incorporation of the company .
- Obtaining any other additional approval (if required) from the relevant authorities. This depends on the type of activity being carried out and includes these powers; The municipality, the Roads and Transport Authority, the National Media Council ... and so on.
- Submit the final application to obtain a license.
What is meant by a UAE citizen partner?
According to Federal Law in commercial companies, a foreigner (citizens who do not belong to the Gulf Cooperation Council countries) may only own up to 49% of the shares of a limited liability company. As such, any foreigner wishing to establish a Limited Liability Company must have one or more Emirati partners who own at least 51% of the shares of that company. There are two types of local partnerships in the United Arab Emirates. Partnerships with foundation, sponsors and individual UAE citizen partnerships with foundations/sponsors. Collaboration with institutions occurs when an Emirati company (corporate company) owns 51% of the company's shares and responsibilities. Individual partnerships with sponsors occur when an Emirati (natural person) partner becomes a citizen in his capacity.
This is even though there is no actual investment in the company. Although limited liability companies on the mainland that are 100% owned by the citizens of Gulf Council countries do not need an Emirati sponsor, the citizens of the Gulf Cooperation Council countries are not exempt from the terms of the UAE partnership when there is a citizen who does not belong to the countries of the Cooperation Council. Al Khaliji is a shareholder in this company. Usually, Emirati sponsors are not involved in the day-to-day running of the company they sponsor. Their approach is that they only provide a service that enables you to set up your business. There is no incentive to step in because they are satisfied with being shadow partners. Thus, the foreign partner can enjoy all executive powers.
The extent of legality of side agreements
As a general principle, in UAE law, a written contract can only be contested with written evidence, except in cases where the opponent waives his right to obtain documentary evidence or when it is agreed to defraud the law. The validity of the annexed agreements is an important legal issue. On the one hand, Federal Law No. 17 of 2004 in the matter of combating commercial concealment aims to prohibit the use of side contracts or agency agreements concluded with citizens of the United Arab Emirates. Moreover, according to Article 10 (3) of Federal Law No. 2 of 2015, any assignment of ownership of any share to an Emirati partner in a limited liability company that can reduce the percentage to less than 51% is invalid. On the other hand, side agreements cannot be documented or recorded in the commercial registry because they are not formal agreements. In other words, side agreements contain a share-sharing clause that differs from official documents.
However, there is a conflict between the law and actual practice on the ground. While the UAE sponsor, by law, must own 51% of the shares, the courts are willing to view the side agreement as strong evidence regarding the real intentions of the parties. The new ruling issued by the Federal Court in the United Arab Emirates has proven that the side agreements are legal and confirmed that as the parties can continue to work on this basis. The Supreme Court also decided that a side agreement could be concluded, including many documents, not necessarily one. As such, side agreements are often discussed and / or supported by the courts. This is evidence of the Emirati judiciary's desire to determine the parties' real inherent intention and give importance to that. However, the aforementioned provision did not explicitly address the effect of Article 395 of the Civil Code, which states that "if the two contracting parties conceal a real contract with a visible contract, the contract in effect between the contracting parties and the public successor is the real contract."
The following kinds of businesses can be incorporated by way of immediate licensing:
- Limited liability companies
- Single person companies with limited liability
- Sole proprietorship companies
- Civil companies
In light of this, how can Article 395 of the Civil Code be reconciled with the more lenient approach adopted by the court?
A more viable approach in this regard might be the realization that there is a clear difference between the statutory contribution of mainland companies and the intended contribution. A case-by-case decision will likely be made regarding the true intention of the parties. This can be inferred from a side agreement or other factors such as the earlier dividend distribution method. Common concerns before starting to do business in the United Arab Emirates One of the common concerns before starting a business in the UAE is whether the Dubai citizen partner can expel you (as a foreign partner) from your company. According to Article 677 of the Civil "The majority of partners may request the judiciary to rule to dismiss any partner whenever they rely on this for serious reasons that justify the dismissal." Therefore, it is theoretically possible to separate one of the partners.