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There is often a lot of confusion around the different types of companies that can be set up by foreign entrepreneurs in the UAE. To the outsider looking in, you could be forgiven for thinking that it can be a complex process– particularly when it comes to the need to work with a local partner.
So that’s the question– do you actually need one?
To answer this, entrepreneurs must first establish the type of business they are looking to set up, and whether or not it will be based in one of the UAE’s many free zones– these two factors will determine whether or not a local partner is needed. Should you wish to set up a professional services company, for example, these can be 100% foreign-owned, without the need for a local partner. The same is true of businesses operating within free zones.
However, these options are not suitable for everyone and therefore many UAE-based entrepreneurs must set up shop with the help of a local person. Essentially any business that falls under either commercial or industrial licenses, unless set up in a free zone, must register what’s called a Limited Liability Company or LLC– this requires a local partner to hold a majority stake in the business. But don’t worry, you won’t end up signing away half your business and its profits– but more on that later.
Local partners can actually bring huge benefits for businesses wishing to trade within the UAE– and as the 16,000+ new commercial and industrial licenses that were issued in 2015 (according to the Dubai Statistics Center) go to testify, it’s certainly not something that holds entrepreneurs back.
Partnership requirements: Understanding business types
There are three common ways for foreign entrepreneurs to set up a business within the UAE: obtaining a professional services license, setting up in a free zone, or forming an LLC.
1. Professional services license This is the only way for foreign entrepreneurs to own 100% of their business and set up outside of a free zone. As the name suggests, professional services licenses are issued to service providers and professional services businesses– there were 5,637 new licenses of this type issued in 2015. While they do not require any form of local ownership, they must be set up through a national service agent who receives a fee– however, the local agent has no liability or authority over the business. Professional services licenses are usually favored by businesses which require a local presence in the UAE– for example, restaurant owners who wish to open in a popular area.
2. Free zones This is another way for foreign entrepreneurs to retain 100% ownership of their business. Free zones are essentially designated areas throughout the UAE that offer various benefits to those wishing to set up a business– which, besides 100% ownership, also includes 100% personal and corporate tax exemption. Entrepreneurs who set up within free zones also have the option to repatriate 100% of their business profits. However, free zone businesses cannot trade directly with the local market in the UAE without the help of a local agent or distributor, who, again, will take a fee.
3. LLCs Businesses that wish to trade locally within the UAE and fall under either commercial or industrial licenses –which includes retail and trade businesses as well as manufacturers– must form an LLC. Last year alone, there were 15,945 commercial and 201 industrial licenses issued in the UAE– making LLCs the most common business type in the UAE. There are very few limitations to the types of business activities that can be undertaken by LLCs –with the exception of banking, insurance and investment– and the only key requirement is that they must be at least 51% owned by a UAE national. What is extremely important to note, however, is that profits are not shared along these percentage lines. In fact, in most cases, the local partner is paid an annual fee– meaning entrepreneurs retain 100% of their profits and are not even required to divulge their accounts. Alternatively, though less common, the local partner receives a pre-determined percentage of either sales or profits.
The benefits of having a local partner
Perhaps understandably, the 49/51 split in favor of a local partner immediately rings alarm bells in the heads of expat entrepreneurs looking to set up in the UAE. However, as we have already established, depending on the agreement with the local partner, entrepreneurs are still able to reap 100% of their profits. And even when a profit share is agreed, it is usually for a minimal amount.
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. In fact, full control of the business lies with the foreign entrepreneur– leaving them to run and manage all day-to-day business activities without any interference or even interaction with their local partner. However, many entrepreneurs choose to leverage the local market knowledge of a local partner to open doors and form connections and relationships within the UAE that would not be possible otherwise.
Working with a local partner as an LLC also allows foreign entrepreneurs to trade directly with the local market, open a limitless number of 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.
As well as affording foreign entrepreneurs almost unrestricted access to the wider UAE economy, LLCs are also completely tax-free and –just like free zone companies– allow entrepreneurs to repatriate 100% of their profits should they wish to. And that’s not all. When forming an LLC with a local partner, foreign entrepreneurs are given investor status within the UAE, making it easy to obtain residence visas for both the investor and their families.
Do you need a local partner?
So, do you need a local partner to set up business in the UAE? The short answer is no– not necessarily. However, if you don’t meet the requirements for a professional services license, and wish to trade directly with the local UAE market, it could well be your best option.
The idea of “handing over” half of your business is naturally off-putting, but in reality, you are not doing that at all. As we have already established, depending on the agreement put in place with the local partner, entrepreneurs can retain 100% of their profits. When you look at it this way, it is not all that different financially from operating in a free zone– the same tax and repatriation benefits are afforded, and free zone companies are still required to pay a local agent to trade directly with the UAE market. Plus, what the other options don’t give you is local market knowledge and insight as well as near unrestricted access to any markets with the UAE. Far from being an inconvenience, setting up in the UAE with a local partner brings with it plenty of unique benefits.