Dubai is a city that is rapidly growing, innovating and modernizing. In fact, Entrepreneur reports that it is the top city in MENA regarding a “willingness to accept new ideas and innovations.”
As a global hub, businesses are afforded easy access to a worldwide market with billions of consumers.
Entrepreneur also ranks Dubai in the top 1 or 2 spots for:
– Ease in setting up new businesses
– Limited bureaucracy in procedures and paper
– Wide pool of local, employable talent
– Highest forecasted employment growth
With these qualities and many more, it’s no wonder you chose Dubai for the location of your new business venture.
Yet, you may have some concerns about the complexities of setting up your business in a foreign country. There may be questions you have regarding how a foreign entity goes about doing business in Dubai.
As you begin making decisions and planning how and where your business will operate, you will encounter rules, laws, and restrictions that, no doubt, may be unfamiliar or confusing to you.
For instance, most expatriates looking to open a business in Dubai often have questions regarding local sponsorship. This is a very important topic that entrepreneurs and businesses of foreign ownership must consider when formulating their business in Dubai.
Local sponsorship can seem complicated and confusing. However, with a little background and explanation, you’ll have a much clearer understanding of what local sponsorship is, why it is often necessary, and how it can impact your business.
WHEN DOING BUSINESS IN DUBAI REQUIRES LOCAL SPONSORSHIP
As a expatriate entrepreneur, investor, or business, you have a major decision regarding where your business will be located. This, in turn, will dictate how you set your business up, and whether you will need a local sponsor or not.
To register your business in Dubai, as a foreign investor or expatriate you have two options for formation:
1. Mainland Company
(Limited Liability Company) – Running commercial or industrial businesses or engaging in trading activities in Dubai’s mainland requires local sponsorship. Your local sponsor must be a UAE national, and will be a 51% shareholder in the business. However, in some cases, legal arrangements can be made where the sponsor will be paid an annual set fee (or percentage of sales or profits) and agrees to turn over power of attorney and day-to-day operations to you.
There are certain advantages, functions, risks and responsibilities on the part of your local sponsor which we will get into later, as well as an explanation of the 3 different types of sponsorships.
NOTE: If your mainland business will be a professional service where a professional license will be applicable (i.e., doctor, accountant, engineer, etc.), you will need a local service agent, not a sponsor. You will retain 100% ownership of your mainland business even as an expatriate. (More on that later).
2. Free-Zone Company
If you choose to operate your business in one of the UAE’s free zones, a local sponsor is not necessary. You will retain 100% ownership of your business and can repatriate 100% of your revenue and profits, however Free-zones may not be the best choice for your company depending on the activity, therefore it’s important to explore all options.
WHY BUSINESS SPONSORSHIP IS NECESSARY FOR COMMERCIAL OR INDUSTRIAL MAINLAND COMPANIES (LIMITED LIABILITY COMPANIES)
If you choose to operate your business in the mainland, the UAE government will require you to secure a local sponsor who will:
1. Represent you and your company in government departments
2. Be responsible for your business’ immigration and labour
3. Interpret documents and contracts for you
Dubai is a multi-cultural and modern emirate with many languages. English is the most commonly spoken language in Dubai. However, Arabic is its official language. Therefore, many documents, contracts and the majority of administrative dealings are done in Arabic.
The Dubai government wants to ensure that you—as a foreign entity—have a responsible, local authority who will be able to understand, interpret, and sign on your behalf in the relevant government offices, including immigration, labour and the economic department.
BENEFITS OF WORKING WITH A LOCAL SPONSOR
Here are some of the advantages of your partnership with a Local Sponsor:
– If you structure your business as an LLC, your business will only have to pay 5% VAT, no additional taxes are applicable
– You can open an unlimited number of branches throughout the UAE.
– You can repatriate profits
– Because of your partnership with a local sponsor, you can tender government and private projects, unlike free zone or professional services business that have no such opportunity.
– You will be granted investor status, which allows you to secure residence visas for yourself and any dependents for a reduced rate and increased validity.
WHAT ARE LOCAL SPONSORS RESPONSIBLE FOR IN DUBAI?
Your local sponsor will not only share in your company’s profits but is also responsible and accountable for your business actions.
Because they are responsible for your business dealings in Dubai, your local sponsor has certain risks. As a majority shareholder, they are liable for the following (should your company default):
– Cancelling your employees’ work visas
– Cancelling your employees labour status
– Closing bank accounts
– Cheques issued by your company (and the settling of any outstanding debt)
3 TYPES OF BUSINESS SPONSORSHIPS
There are the 3 types of sponsors for setting up your mainland business in Dubai:
- Individual Sponsorship: In this situation, an individual will act as your local sponsor. This person must be an Emirati national over the age of 21 and not working in a government office. While they need not have experience operating a business in your field, it would be advisable.
- Corporate Sponsorship: This type of sponsorship is similar to Individual Sponsorship, except that you are being sponsored by a company—not an individual. The company must be a wholly owned UAE national company. Corporate sponsorship is the more expensive option but allows you to bypass Sharia Law in the unfortunate event of your sponsor passing away. This is the best option to safeguard your company’s interests.
- Local Service Agent: Setting up a professional services business in mainland UAE requires that you hire a local service agent. This agent acts as your representative in labour, immigration and government offices, but unlike an individual or corporate sponsorship, they do not own any shares in your company. Instead, you will pay an agreed-upon, annual fixed fee. This fee will vary, depending upon the stature of the agent and their specific contribution.
Local service agents can be used for professional licenses, branch of foreign companies, or representative offices (i.e. 100% foreign owned entities). Branches of foreign companies and representative offices don’t have separate legal identities from their parent company and are considered extensions of them.
For more information on sponsorship, or to speak to a member of ACT’s team to find the best tailored solution for your individual requirements, contact us today.