One of the most common of the challenges here in the UAE is the issue of foreign ownership. Any mainland business that has activities which fall under commercial or industrial licenses can only be 49% owned by a foreign entrepreneur– with a local sponsor owning the other 51% stake. Naturally, the thought of handing over half your business is daunting, but this is by no means the full story. And in some cases you may not need a local sponsor at all.
That’s why it’s important that any entrepreneur looking to set up in the Emirates knows exactly where they stand when it comes to owning their business: do you need a local sponsor – and if so, what exactly does that entail?
What is a local sponsor and do I need one?
First things first, let’s determine exactly what local sponsorship is. Essentially, it is a compulsory requirement for any foreign person who wishes to set up a business in the UAE mainland. Local sponsors must be UAE nationals and own at least 51% of your business. However, profits do not need to be split along these lines. In fact, in the majority of instances, the local sponsor is paid a set fee or minimal profit share, agreed upon when the business is set up. There are a couple of exceptions to this rule, but more on that later. For now, let’s take a look at the types of local sponsor available. There are three main ways to open a business in the UAE mainland: through individual sponsorship, corporate sponsorship, or the use of a local service agent. The type you require will depend of the business activities you wish to undertake.
Individual sponsorship: As the name suggests, this is when an individual Emirati national sponsors your business and holds a 51% stake (and therefore 51% liability) of your company. Individual sponsors must be UAE citizens over the age of 21 and can be male or female. Individual sponsors do not have to have experience running a business in your chosen field, however they should be either professionals, business owners or government employees. Now for the important part: in exchange for a set annual fee, the local partner can hand over full power of attorney, and therefore full control, of the business and its day-to-day activities to the foreign investor. It is also important to note that all earnings are held in the name of the business with nothing in the name of the local partner.
Corporate sponsorship: This is similar to individual sponsorship except here the sponsor is a UAE national company. Again, the local sponsor would take on a 51% stake in the business. In both cases, the foreign investor will run the company with the local sponsor receiving a set fee or profit share agreement.
Local service agents: These are required when a professional – such as a doctor, engineer or accountant – sets up a business trading in their area of expertise. In this case, foreign entrepreneurs can apply for a professional services licence and maintain 100% ownership of their business. They must, however, appoint a local service agent who will act as their representative in all administrative dealings with government departments. The local service agent does not hold a stake in the business and is instead paid an annual fee for their service.
Do you need a local sponsor?
Now onto the all important question, do you need one? Well, if you wish to conduct commercial, industrial or trading activities in the UAE mainland then the answer is usually yes. However, there are a few exceptions. As we’ve established, professional services businesses do not require local sponsorship– and neither do branch or representative offices. Branch and representative offices of existing foreign businesses can be 100% foreign owned and are set up through a local services agent. It is important to note, however, that neither of these business types are standalone. They do not have a separate legal identity and are treated as extensions of their foreign parent company. While branch and representative offices are similar in many respects, there is one clear distinction: branch offices may engage in commercial activity in the UAE mainland and earn profits, though they must only trade in activities similar to that of its parent company. A representative office on the other hand is not permitted to earn profits in the UAE and must limit its activities to marketing and promoting its foreign parent’s products and services. Another way of retaining 100% ownership of your business is to set up in one of the UAE’s free zones. While free zones offer many financial and other benefits they do not easily allow you to trade in the local UAE market and are therefore not suitable for entrepreneurs wishing to set up in the mainland.
Considerations before starting your sponsor search
If you’ve read the above and come to the conclusion that a local sponsor is required then there are a few things you need to consider before starting your search.
1. Will the sponsor help the business? In most cases, the answer here is no. Local sponsors on the whole are providing a service – allowing foreign entrepreneurs to run businesses in the UAE mainland. For this they are remunerated, either through a fixed fee or pre-agreed profit share, and that is usually the end of the deal. The foreign investor is left to get on with running the business while the local sponsor receives their cut for acting as a local representative.
2. Should I seek out a high profile sponsor? There are plenty of high-profile and even celebrity individuals in the UAE who offer a local sponsorship service. These individuals will usually try to stand out from the crowd by offering networking opportunities or due to their status. While these claims may well be true, they are hard to substantiate and you could end up paying a premium for the same service you would get anywhere else.
3. What can go wrong? While rare, it has to be said there have been cases where things have gone badly wrong between foreign investors and local sponsors. For example, should an individual sponsor pass away, their share of the business would be transferred to their heirs. Should those heirs have no interest in being a local sponsor to your business, things could get messy and you may find yourself unable to trade.
Fortunately, there are several ways to protect against this. The first is by working with a corporate sponsor rather than an individual, as any changes at board level – due to death, retirement and the like – are unlikely to have any impact on your agreement. Secondly, if you do decide to go with an individual sponsor, make sure you get certain assurances upfront in the event of death. Establishing who the 51% stake would fall to and that they agree to the same terms as your local sponsor will save you much time, money and stress should the worst happen.
What are the key benefits of working with a local sponsor?
Aside from the main benefit of being able to trade locally within the UAE market, there are a number of other advantages to working with a local partner. LLCs formed with a local partner are 100% tax free and the foreign investor is able to repatriate 100% of their profits should they wish to. Companies set up with a local partner also have an additional advantage in that they are able to open limitless branches throughout the UAE and pitch for a host of private and government projects that are not available to free zone or professional services companies without a local partner. Finally, when forming a business with a local partner, foreign entrepreneurs are given investor status in the UAE allowing them to obtain residence visas for themselves and their dependants.
Setting up with a local sponsor
Naturally the thought of handing over a stake in your business can set off alarm bells. However, in reality that is not what you are doing when working with a local sponsor in the UAE. Depending on the type of agreement you put in place, it is still possible to retain your profits. In fact, from a financial standpoint, it is not much different from operating in a free zone – you will get the same tax and repatriation benefits for example. Of course there is a lot to think about when entering into any business arrangement and hopefully this article has given you a clear idea of what’s involved. It’s the first of a series designed to build a picture of the ins and outs of working with local sponsors in the UAE.
If you wish to have a local sponsor, please contact us.