In common with much of the GCC, commercial law in the UAE states that a foreign investor cannot establish a mainland business entity without first appointing a local sponsor. The role of this local sponsor varies depending on the structure of the business, and as an inevitable challenge for foreign investors, it is vital to understand the functions of a local sponsor and the impact this has on establishing a business in mainland UAE.
Why have a local sponsor?
Companies who wish to operate in mainland UAE are required to have a local sponsor. The type of sponsorship available depends on the type of business to be conducted by the company and therefore the legal business structure selected
Types of sponsorship
There are three sponsorship options for a foreign investor wishing to set up a business in Dubai or Abu Dhabi: individual sponsorship, corporate sponsorship, and local service agents.
Individual sponsorship: As the name suggests, individual sponsorship is simply when an individual Emirati national sponsors your business, and by doing so, holds a 51% share of your company or acts as a National Service Agent if the business activity permits. He or she must be a UAE citizen over the age of 21, and whilst it is not required that they have any experience within your chosen industry, they will usually be business professionals or government employees. Whilst this might all sound a bit daunting, there are two important points to note at this stage. Firstly, profits do not have to be shared to reflect the percentage shareholding, and in most instances, the local sponsor is paid a set annual fee in exchange for full power of attorney and control over the business activities. Secondly, in holding 51% of the business, the local sponsor also assumes more than half of the liability for the company.
Corporate Sponsorship: The primary difference here compared with an individual sponsor is that the local partner is a 100% UAE-owned company. This allows for a far more robust governance structure to safeguard foreign investment, allowing issues such as shareholder succession to be dealt with under Company law and typically providing a dedicated team to assist with licence and visa renewals, and any other ad-hoc support required to operate the company. Again, the corporate sponsor will assume a 51% stake in the business, and in exchange for receiving an annual fee it is typical to contractually limit their involvement via a Shareholder Agreement.
Local Service Agent: This type of sponsorship is slightly different due to the fact that local service agents are appointed to act as a representative for businesses with 100% foreign ownership, such as in the case of setting up a Foreign Branch. The local service agent is required to handle all administrative government dealings and has no shareholding, financial or management stakein the business, and is instead paid an annual fee for their services.
Must I have a local sponsor to do business in the UAE?
One option for companies unwilling to explore sponsorship optionsis to establish a business within one of the UAE’s free zones. On the surface, free zones appear to be a cost-effective way for foreign investors to establish a business in the UAE whilst still retaining 100% ownership. The major drawback to this though is that businesses established in a free zone are not permitted to trade on-shore in the UAE. Our blog, “Free zones- Beware of the rules” gives a complete insight into the advantages and disadvantages of setting up a business in a free zone.
The Role of PRO Partner Group
As a leading company formation specialist, PRO Partner Group act as a corporate partner for foreign investors wishing to establish a business in the UAE and assume the role of the 51% Emirati shareholder, allowing foreign investors to retain effective control of their business. Through PRO Partner Group’s secure and trusted nominee structure, this model ensures that foreign investors’ interests are protected in accordance with the law.
In the case of a Foreign Branch, PRO Partner Group can be employed as a local service agent in order to quickly and efficiently handle all governmental administration requirements, whilst still enabling the foreign investor to retain 100% financial and management control.
Greg is the Business Development Manager at PRO Partner Group. For any information relating to company set up in the UAE contact Greg on email@example.com or call a member of the team on:
T: +971 (0)4 456 1761 (Dubai)
T: +971 (0)2 448 5120(Abu Dhabi)
— PRO Partner Group (@PROPartnerGroup) August 15, 2017