THE IMPACT OF UAE’S LEGAL AND REGULATORY FRAMEWORK ON COMPANY STRUCTURING

This article has been researched and written by Scott Cairns and the team at Creation Business Consultants and has not used AI in generating this article.

OVERVIEW

The United Arab Emirates (UAE) legal and regulatory system has a major effect on how companies are structured. The creation, management, and liquidation of legal entities are governed by a clear legal framework in the country.

Some of the key features that affect business structure are as follows:

JURISDICTION

The country has three major jurisdictions, including onshore, free zone, and offshore to choose from. Each jurisdiction has its own set of regulations with respect to ownership, capital and legal requirements. Companies can leverage unique benefits of these jurisdictions and choose the optimum structure.

LIMITATIONS ON FOREIGN OWNERSHIP

Prior to the enforcement of Federal Law No. 26 of 2020, foreign investors were required to have a local UAE partner to incorporate an onshore firm. The current situation, however, allows foreigners to own 100% of the shares in an onshore firm for most of the business sectors. Whereas free zones and offshore jurisdictions typically allow 100% foreign ownership.

GLOBAL BEST PRACTICES

The UAE aims to implement global best practices for conducting business while fostering corporate governance, transparency, and regulatory compliance amongst businesses within its corporate eco-system.  Companies must adhere to accounting standards, financial reporting and compliance regulations (e.g., Anti-Money Laundering (AML)), and corporate governance principles, according to the UAE regulators. These rules seek to increase accountability, safeguard the interests of all stakeholders, and guarantee effective corporate governance.

LAWS GOVERNING EMPLOYMENT

The UAE Labour Law which came into force in February 2022, also known as Federal Decree Law No. 33 of 2021 regarding the Regulation of Employment Relationships and its Amendments, covers the labor rights of employees in the private sector. Employment contracts, working hours, employee perks, and termination processes are all governed by the law. Companies must follow these regulations while dealing with employment-related issues.

TAXATION

In recent years, the UAE has adopted tax changes, including the implementation of Value-Added Tax (VAT) and Corporate Income Tax legislation. Furthermore, the UAE has signed double taxation treaties with several countries to give tax relief and prevent double taxation.

CONSIDERATIONS WHERE THE TARGET COMPANY IS INCORPORATED IN THE UAE

The following are the important factors to consider while intending to incorporate the target firm in the UAE:

REGULATIONS DETERMINED BY EACH JURISDICTION

Consider any advantages or disadvantages connected with the chosen jurisdiction as each UAE jurisdiction may have its own set of rules and regulations.

TAX IMPACT

Analyse the impact of UAE tax laws, including VAT and corporate tax regulations on the target company’s financial performance.

REGULATORY COMPLIANCE AND REPORTING – (No Longer in Effect)

Carefully assess the target company’s business activities for ESR. The regulation requires UAE onshore and free zone companies and certain other business forms that carry out any of the defined “Relevant Activities” to maintain and demonstrate an adequate economic presence in the UAE relative to the activities they undertake (Economic Substance Test).

CONSIDERATIONS WHERE A SUBSIDIARY OR BRANCH WITHIN THE TARGET GROUP IS INCORPORATED IN THE UAE

There are several important factors involved when considering a subsidiary or branch within the target group that is incorporated in the UAE, such as:

• Operational regulations – establishing an appropriate structure for the company’s commercial operations is crucial for any company entering a new foreign jurisdiction. It is critical to weigh the benefits and drawbacks of establishing a branch office or subsidiary in terms of operational constraints.
• Tax impact – assess the impact of UAE tax laws, including VAT and the Corporate Tax regulations on the branch and subsidiary’s financial position, and whether either of these structures can benefit from UAE double taxation treaties.
• Corporate structure – understanding of the legalities of governance, liabilities, reporting obligations, employment matters for both branch and subsidiary is crucial when target group is incorporated in the UAE.

LEGAL IMPLICATIONS FOR COMPANY STRUCTURING

Before planning for company incorporation, the following aspects need careful consideration:

• Ease of incorporation.
• Administrative burdens and regulatory requirements.
• Choosing the right legal type and potential risks and liabilities for the partners and shareholders.
• Prospects for scalability in the future.
• Taxation impact.

BUSINESS REGULATIONS RELATED TO MAINLAND COMPANIES AND FREE ZONE COMPANIES

Onshore (Mainland) companies are governed by the UAE Federal Law No. 2 of 2021, commonly known as the UAE Commercial Companies Law (CCL). This law specifies rules for company incorporation, shareholder arrangements, management standards, corporate governance, and other operational issues.

Article of 11 of Federal Decree Law No. 32 of 2021 stipulates that the UAE company shall obtain all the approvals and licenses required (from the Department of Economic Development) for the activity to be conducted by the company in the respective Emirate’s before commencing to practice its activity.

The UAE CCL 2021 also defines the legal forms:

1. General partnership.
2. Limited partnership.
3. Limited liability company.
4. Public joint stock company.
5. Private joint stock company.

The local government in each Emirate regulates its free zone entities. As a result, each free zone has its own set of rules and regulations. In general, a company registered in a free zone may not conduct business outside of the free zone, i.e., on the mainland. If the company wants to expand its operations to the mainland, it must approach the appropriate Emirates Department of Economic Development (DED) to meet the license criteria.

WHAT TO DO NEXT?

Creation Business Consultants will keep you informed about the latest regulations which could impact your business. Our team of experts will leverage our experience to help understand the latest changes while simultaneously providing you with all the details needed to run your company in Dubai and the UAE. Speak to one of our Corporate Structuring or tax consultants today for your free 30-minute consultation, email [email protected], or call +971 4 878 6240 Saudi Arabia +971 50 536 1923

Scott Cairns,
Managing Director