fbpx

UAE Companies: An Introduction to UAE Company Law

UAE Companies

In this article, we will look at the main features of local (mainland) companies in the United Arab Emirates. Unlike free zone companies, mainland companies are regulated by uniform federal legislation. The legal forms of companies in the Emirates are similar to those in world practice and understandable to representatives of different legal systems.

The main features of the UAE companies

The status of companies in the UAE and other corporate law issues are addressed in the Federal Decree-Law no. (32) of 2021 On Commercial Companies that entered into force on 2 January 2022 (further referred to as the “Law 2021” of the “Law”).

This Law, significant for those considering company formation in the UAE, applies to all local UAE companies that do not fall under the exceptions listed in the Law. The Law does not apply to:

  • companies exempt under a Cabinet decision or special federal laws;
  • companies wholly owned by the Government (where a special provision is stipulated to this effect in the Memorandum of Association);
  • companies in which the Government owns at least 25% of their capital operating in the field of oil exploration, extraction, refining, manufacturing, marketing, and transportation, or in the energy sector of all kinds (where a special provision to this effect is stipulated in the Memorandum of Association);
  • Special Purpose Acquisition Company (SPAC) and Special Purpose Vehicles (SPV) under the decision of the Securities & Commodities Authority.

The Law also does not apply to companies incorporated in free zones of the UAE where a special provision to this effect is stipulated in the laws or regulations of the relevant free zone. However, these companies shall be governed by the Law if such laws or regulations permit them to conduct their activities in the UAE mainland (outside the free zone).

The Minister of Economy (or the Securities & Commodities Authority for public joint-stock companies) may issue the rules of corporate governance mandatory for the companies. Violating such rules may entail significant penalties.

Companies in the UAE are registered at the Emirate level. The company acquires a legal personality as of its entry in the commercial register at the local corporate affairs authority in the relevant Emirate.

UAE companies’ duties

Before commencing its activities in the Emirates, the company must obtain all the licenses and permits required for such activities.  

The company name must be followed by the company’s legal form and must not violate the public order of the UAE.

Each company must have a registered address in the UAE to receive official notices and correspondence.

The Memorandum of Association of a Company must be made in Arabic, authenticated by the competent authority of the relevant Emirate and entered into the commercial register.

Companies must notify the registering authority of any changes in information about the company (particularly, name, address, share capital, number of employees, and legal form).

Each company must keep accounting records which allow establishing at any time its financial position. A company must keep its accounting registers in its head office for at least 5 years from the end of the financial year.

The UAE companies prepare annual financial statements applying international accounting standards and practices. The Federal Tax Authority can request the financial statements to confirm the profit declared by the company in the tax return. An audit of financial statements is required for limited liability companies and joint-stock companies.

A company’s financial year is determined in its articles. The first financial year cannot exceed 18 months from the date of the company’s incorporation. The subsequent financial year is 12 months after the expiry of the preceding financial year.

The Law 2021 provides the following legal forms, a key aspect of local company formation in Dubai:

  • General Partnership; 
  • Limited Partnership;
  • Limited Liability Company;
  • Private Joint Stock Company);
  • Public Joint Stock Company.

General Partnership

A General Partnership (also translated as “Joint Liability Company”) in the UAE consists of two or more individual partners who are jointly and severally liable in all their personal assets for the company’s obligations. The partnership is managed by all or certain partners or by a manager who is not a partner. A partner’s interest can be assigned only with the consent of all partners and subject to the restrictions set out in the memorandum (partnership agreement).

Limited Partnership 

A Limited Partnership in the UAE is formed of one or more partners who act on behalf of the partnership and are jointly and severally liable for the partnership’s obligations, and one or more silent partners who are liable for the partnership’s obligations within the limits of their contribution to the partnership’s capital. Silent partners do not manage the partnership’s affairs. Management of the partnership is carried out only by joint partners.

Limited Liability Company 

A Limited Liability Company in the UAE consists of members (not less than 2 and not more than 50) who are liable only to the extent of their shares in the company’s capital. A company can also be incorporated and owned by one person (a legal entity or an individual).

A company name must reflect its objectives or name(s) of its members as well as indicate its legal form – “Limited Liability Company” or “LLC”. If a sole member owns a company, its name must be followed by the expression “Sole Proprietorship” or “Single Owner”.

A company must maintain a register of its members, including the full name, nationality, date of birth and place of residence of every member (for legal entities – head office address) and the transactions effected on membership interests and dates. The particulars entered in the register of members and any changes made during the last financial year must be delivered to the competent authority and the Registrar every year.

A company must have sufficient capital to achieve its objectives. The capital must consist of shares equal in value. The Council of Ministers may determine the minimum limit of the capital of the limited liability company. In cases where this is mandatory, a company makes the capital contribution to its bank account opened in a bank in the Emirates. 

If a member alienates his share in the company, other members have pre-emptive rights to buy such a share.

A company is managed by one or more managers (directors) appointed by members from among themselves or third parties and accountable to the general meeting of members. 

Private Joint Stock Company 

A Private Joint Stock Company in the UAE has two or more shareholders with the capital divided into shares of equal nominal value. Shares must be paid up in full and may not be offered for public subscription. A company may have a single shareholder, provided it is a legal entity. A shareholder is liable only to the extent of his share in the company’s capital.

The minimum issued capital of a private joint stock company is AED 5,000,000 (around USD 1,361,000). This limit may be modified by a Cabinet decision.

Public Joint Stock Company 

A Public Joint Stock Company in the UAE is a company the capital of which is divided into equal and negotiable shares. Founders subscribe to part of such shares, and the remaining shares are offered for public subscription. A public joint stock company may be founded by at least five persons (except for cases of conversion of a company of other legal forms into a public company).  

A company is managed by a Board of Directors consisting of not less than three and not more than eleven members. The general meeting of shareholders is convened at least once a year within four months following the end of the company’s financial year.

The minimum issued capital of a public joint stock company is AED 30,000,000 (around USD 8,167,000). This limit may be modified by a Cabinet decision.

Laws of some Emirates or free zones regulations may provide different types of companies.

Holding companies in the UAE

The objects of a holding company are limited to the following:

  1. holding shares or membership interests in joint stock companies and limited liability companies;
  2. providing loans, guarantees, and financing to its subsidiaries;
  3. owning movable and immovable property required for its activity;
  4. managing its subsidiaries; and
  5. owning industrial property rights (patents, trademarks, industrial drawings and models) and transfer rights for their use to its subsidiaries or third-party companies.

In the realm of company formation in Dubai, holding companies are restricted to conducting activities through their subsidiaries.

Economic substance requirements

In 2019 the UAE introduced “economic substance” requirements for local and FTZ companies carrying out certain activities (“relevant activities”). The current economic substance requirements may be found in the UAE Cabinet of Ministers Resolution of 10 August 2020 No. 57.

Activities that require economic substance in the UAE

Relevant activities that involve duties related to the economic substance for companies include:

  1. banking business;
  2. insurance business;
  3. investment fund management business;
  4. lease-finance business;
  5. headquarters business;
  6. shipping business;
  7. holding company business;
  8. intellectual property business;
  9. distribution and service centre business.

Each of these fields covers several core income-generating activities listed in Resolution No. 57 and specified in the Ministerial Decision No. 100 of 2020.

What is “economic substance”?

If a company carries out any of the abovementioned activities, it must satisfy the following criteria (the economic substance test) in relation to these activities:

  1. core income-generating activity is conducted in the UAE;
  2. the relevant activity is directed and managed in the UAE;
  3. with regard to the level of the relevant activity:
    • the company has an adequate number of qualified full-time employees;
    • the company incurs adequate operating expenditure in the UAE;
    • the company has adequate physical assets in the UAE.

The following companies are exempt from the economic substance requirements:

  • companies operating as investment funds;
  • companies that are tax residents in a jurisdiction other than the UAE;
  • companies wholly owned by one or more residents of the UAE that do not form a part of a multinational group and carry out their business only in the UAE;
  • branches of foreign companies, the income of which from the relevant activity is subject to tax in a foreign jurisdiction;
  • other companies determined by the decision of the Minister of Finance.

Economic substance reporting in the UAE

The UAE companies must annually notify the competent authority:

  • of the relevant activities carried out during the relevant financial year;
  • of relevant income generated during the financial year;
  • of commencement and end dates of the company’s financial year;
  • of any other information and documents that the regulatory authority may request.

The notification for the previous year is submitted annually by 30 June of the following year.

IMPORTANT: notifications on economic substance must be submitted both by companies obliged to have the economic substance in the UAE and by companies exempt from such obligation. Exempt companies must also provide the information and documents justifying their right to exemption. 

Companies obliged to have economic substance in the UAE must submit an annual Economic Substance Report, which includes:

  • type of relevant activity conducted by the company;
  • amount of income from the relevant activity;
  • amount of operating expenses and assets relating to the relevant activity;
  • information of the place of business in the UAE and, where applicable, of property, plant and equipment used for the relevant activity;
  • number of full-time qualified employees and number of personnel responsible for carrying out the relevant activity;
  • core income-generating activities;
  • the company’s financial statements;
  • declaration as to whether or not the company satisfies the economic substance test;
  • if the relevant activity in the intellectual property business, the declaration as to whether or not it is a high risk.

A company must submit the economic substance report no later than 12 months from the end of the company’s financial year.

The economic substance rules in the UAE involve many complex issues. Whether or not a company has “relevant” activities and whether it is required to have economic substance in the Emirates can only be determined by taking into account the scope and details of activities of each particular company.

Summary

  • The UAE mainland companies are incorporated under the Law on Commercial Companies, 2021. Free zone companies are set up in accordance with the relevant free zone regulations.   
  • A limited liability company (LLC) is the simplest and most popular form of a local company in the UAE, including among foreign investors. Such a company may consist of one or more members.  
  • Companies must have a valid license for their activities and a physical office in the UAE. They also must prepare financial statements and submit tax returns. 
  • Companies with certain activities must maintain an adequate level of “economic substance” within the UAE, i.e., be managed in the UAE, have staff and assets and incur adequate expenses. 
Company Formation in the UAE
Click to rate this page!
[Total: 6 Average: 5]

Share this

Facebook
VK
Telegram
Twitter
Print

Still have questions? Contact us today

Scroll to Top

Book a Free Consultation

The purpose of the initial consultation is to introduce you to our services, as well as to discuss your individual needs related to company registration (maintenance) and opening a bank account.