Q1: Key considerations on how a multinational business can set up as a group in the region
The United Arab Emirates (“UAE”) economy continues to flourish and be attractive to businesses from around the world. The potential options available to foreign multinational companies to undertake business or commercial activities in the UAE are set out hereunder. Essentially, foreign businesses are advised to consider the legal and procedural requirements and select the option that would best match their business objectives.
There are various options for multinational companies to setup their operations directly or indirectly in the UAE. The options would depend on the nature of the business conducted, the strength of the multinational company (foreign entity) and the commercial plans of such multinational company.
Some of the available options for setting up in the UAE are:
A. Mainland License
I.Operation through third party distributors or agents
II.Limited Liability Company LLC
III.Branch license / representative
I.Offshore Limited Company
II.Onshore Free Zone Company
A.I. Agent / Distributor
- This form of operation entails that the multinational company will sell / supply its services and products through one or more agents or distributors operating and licensed in the UAE
- Historically the difference between agents and distributors in the UAE have been the nature of the agreement entered between the multinational company and the agent/ distributor.
- An agency agreement usually results in the UAE agent registering such agreement on exclusive basis with the Ministry of Economy or the relative authorities. Distributors on the other hand would have an arm length commercial arrangement.
A.II. Limited Liability Company (LLC)
This is the most common form of legal business setup in the UAE. This structure permits multinational companies to conduct operations inside and outside the mainland UAE. The disadvantage of setting up an LLC is the requirement to have a UAE national (Or a UAE company 100% owned by UAE nationals) to own 51% of the multinational company operations or license in the UAE. The market in the UAE has developed means to comply with the Commercial Companies Law (Federal Law No. 2 of 2015) re the requirement of a UAE national partner. Documentation have been developed to secure the interest of the multinational business in the UAE operation and assets.
Aspects to consider when setting up an LLC:
- No minimum share capital requirement.
- Activities varies depending on the multinational business requirements.
- Subject to the nature of the business to be developed, the multinational company may fall under the new Foreign Direct Investment law (Federal Law No. 19 of 2018).
A branch license in the UAE, is simply a license permitting the multinational company to operate its business in the UAE as conducted in the headquarter of the multinational company.
Aspects to consider when setting up a branch license:
- The need of a UAE national sponsor. This is not the same as a UAE national partner, as explained above for an LLC. A sponsor will not own any shares in the company branch but will act as a service provider for local requirements.
- A branch license permits the headquarter of the multinational company to conduct trade and provide service activities.
- The branch license would not have an independent legal capacity. Any liability assumed by the branch license will need to be borne by the multinational company headquarter.
There are various designated free zones in the UAE, each one of the free zones regulates certain activities in the UAE. For example, the DIFC and the ADGM were setup regulate the financial sector; the Jebel Ali Free Zone and Dubai Airport Free Zone were setup for the trading sector; and TwoFour54 and Dubai Knowledge village were setup for the education sector.
The most common structure for setting up non-regulated entities in the UAE are:
I.Offshore Limited company
II.Onshore Limited Liability Company or Free Zone Establishment
B. I. Offshore Limited Company
The offshore is a special service vehicle usually setup for purposes of owning an asset, holding shares or related to a specific transaction. This structure is similar to that of limited companies incorporated in the BVI (British Virgin Island) and other jurisdictions.
Aspects to consider when setting up Free zone offshore:
- This entity cannot be conducting services or trade in the UAE. This entity however, can hold shares or assets in the UAE.
- This type of company does not have operational offices and premises and as such cannot employ / sponsor personnel.
B.II. Onshore Free Zone Limited Liability Company / Free Zone Company
These are entities setup as 100% owned by the multinational company without the need for a UAE partner or UAE sponsor. These entities are usually setup to develop the multinational company in the region and to assist their operations in the UAE.
Aspects to consider when setting up Free zone onshore:
- An onshore free zone company must operate from the free zone it is incorporated in.
- Any trading from within the free zone to the mainland must be conducted through a proper legal structure and will be subject to custom duties and VAT.
Q2: The effect of the recent bankruptcy legislation on those businesses facing difficulties because of cash flow issues
The Federal Law by decree No. (9) of 2016 on Bankruptcy (hereinafter referred to as the “Bankruptcy Law”) adopts new rules to protect businesses from bankruptcy and help them try to restructure rather than liquidate their assets.The Bankruptcy Law is based on economic principles aimed at reorganizing the financial obligations of the debtor and allowing businesses to return to growth by restructuring and regulating their debt.
A company facing financial distress due to lack of liquidity reasons or insolvency and are unable to pay debts when due, are advised to consider using one of the remedies provided for in the Bankruptcy Law. The prescribed remedies are “preventative composition” and “restructuring” mechanisms.
A company that is unable to pay its debts for a period not exceeding 30 consecutive business days, but is otherwise in good form and solvent, shall seek to apply for an order of “preventative composition” under the Bankruptcy Law from the competent court. Preventative composition may assist the business in rescheduling its debts.
In case the company ceased to pay its due debts for more than 30 consecutive business days, it is advised to initiate bankruptcy proceedings. Bankruptcy proceedings initially commences with the appointment of an expert to help in restructuring the business and avoid declaration of bankruptcy. If the court finds that the restructuring of the company is not feasible, then the company would be declared bankrupt and the court will have to liquidate its assets to repay their creditors.