Setting up a business in UAE is one of the most profitable ventures these days. UAE provides plenty of new business opportunities. According to a research, nearly 42% of business start-ups from Middle East and North Africa region commence from UAE. Emirates NBD forecasts that 200,000 new businesses will be formed in Dubai alone by 2020 and 95% of them will be SMEs. This can be credited to effect of Expo 2020 as new business formations are essential part of it.
As lucrative it may seem setting up new business in UAE brings along some of challenges too. One of the key challenges in mainland business is the element of local sponsor.
Business Sponsor in UAE
According to UAE Companies Law, any person who wishes to establish Mainland Company in UAE must appoint a local sponsor who should be UAE national and own 51% of business.
Naturally, the thought of handing over ownership more than half of your business is off-putting. You would want to be your own boss of your business. But let’s not stop here; influence of local sponsor is not as much as you might think. Generally local sponsors in UAE do not get involved in controlling your business or be involved in decision making.
Types of local sponsor and their influence over foreign business
There are three sponsorship options available to a foreign investor wishing to setup a UAE mainland business. These are,
- Corporate sponsorship
- Individual sponsorship
- Local service agent
In corporate sponsorship, business is sponsored by UAE national company (owned by Emiratis) instead of an individual. UAE Company will hold 51% of shares as well as obligations of foreign business.
- Corporate sponsorship is less risky than individual sponsorship.
- No interference with foreign business
- Foreign partner is able to retain 100% of financial benefits
- Better legal protection
- On the down side, corporate sponsorship is costly. Foreign partner will have to pay more to access this straightforward route.
2. Individual sponsorship
In this type of sponsorship, an individual sponsors foreign business. This individual will be a UAE national, over age of 21 and is usually a business professional or government employee, however it is not required that he should have experience in your chosen industry.
- In most cases, the approach of individual local sponsor is to provide service for business setup in UAE. It is not compulsory to share profits. Usually they are paid a set annual fee in exchange for complete power of attorney and control over business operations.
- Although Article 91 of Commercial Companies Law UAE has given sponsors complete rights as that of partners. But it is worth mentioning that sponsors though own 51% of company also carry 51% share of company’s liability. Most local sponsors choose not to meddle in company’s day to day matters nor seek to introduce new business change against your will.
3. Local Service Agent
This form of sponsorship is different than the above two in a way that local service agents act as representative of business and have no ownership in it. LSA is a UAE national and is paid a fixed annual fee for his service. Local service agents are usually appointed for certain kind of licenses such as professional license, civil companies conducting no engineering activity or branch of foreign companies.
- Local service agents have no ownership in company
- LSAs neither receive commission nor profits
- They are only involved in administrative government dealings of business and have no stake in financial or managerial dealings of business.
Can local sponsor fire you from your own business?
Perhaps your biggest concern would be the chance of your dismissal by local sponsor as he is majority shareholder of your company. We think this is highly improbable as local sponsors prefer being sleeping partners and are content by being paid for their services.
While unlikely, this is not entirely impossible. A case concerning Limited Liability Company arose back in 2012 in which the company was divided among three partners i.e. US company, Omani shareholder and UAE shareholder (owning 51%). The sponsor wanted to remove Omani shareholder due to his harmful decisions for company. Omani shareholder responded via their set agreement that stated UAE holder owns only 37.5%.
After many trials, court made a decision in favor of Omani shareholder based on the existence of side agreement amongst partners. Another important point to mention here is that theoretically, a partner can be removed from a company as UAE law allows majority shareholders to file for judicial order to remove any partner if the reasons are well justified.
The above case highlights the importance of business contract. Everything should be in writing. Do not settle on verbal agreement. Rather devise a comprehensive agreement with your sponsor so that if disagreement arises in future, you have legal support.
Read more on why business need a local sponsor to start a business in Dubai? in our blog.
If you need local sponsor for your business, contact our business representatives for guidance and support.