Legal Obligations and Responsibilities of Local Sponsors in the UAE

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

The UAE’s business landscape has witnessed remarkable growth in recent years, attracting a significant number of foreign investors. Foreign companies seeking to establish a business in the UAE must understand the role of local sponsors. A local sponsor acts as a liaison between foreign companies and the local authorities, providing essential support and guidance.

DATE: JANUARY 2, 2022 – IMPORTANT UPDATE: KEY AMENDMENTS REGARDING LOCAL SPONSORS AND CORPORATE NOMINEES FOR DOING BUSINESS IN MAINLAND DUBAI AND THE UAE

The UAE has undergone significant legal reforms in recent years, particularly with the introduction of the UAE Commercial Companies Law (CCL) in 2021. These changes have profoundly impacted the role of local sponsors and corporate nominees in mainland Dubai and the UAE.

Key Changes:

• Relaxation of Ownership Restrictions:
  • The CCL now allows 100% foreign ownership in most business activities on the UAE mainland, meaning that foreign investors can establish mainland companies without the need for a local sponsor in many cases.
  • However, certain sectors—such as banking, insurance, and oil and gas—may still require a local sponsor.
• The Role of Corporate Nominees:
  • Even if 100% foreign ownership is permitted, a corporate nominee may still be required to fulfill certain legal formalities.
  • Our corporate nominees are UAE-based entities that act as local partners, holding a nominal shareholding in the company.
  • They do not have an active role in the management or operations of the business.

Overview of Historical Law (No Longer in Effect):

CHANGES IN LOCAL SPONSORSHIP REQUIREMENTS (No Longer in Effect)

Previously, foreign companies were required to have a local sponsor with at least 51% ownership to set up a company in UAE. However, recent regulatory changes have relaxed these requirements for many industries and business activities. Now, foreign companies can often establish businesses in the UAE without a local sponsor, offering greater flexibility and control.

This blog post will delve into the legal obligations and responsibilities of local sponsors in the UAE, providing valuable insights for foreign investors navigating the local business environment.

WHAT IS A LOCAL SPONSOR?

A local sponsor in the UAE is a UAE national or a UAE-based company that partners with a foreign company to facilitate its operations in the country. 

Types of Sponsorship Arrangements:

• Individual Sponsorship: A UAE national can act as a local sponsor for a foreign company.
• Corporate Sponsorship: A UAE-based company can sponsor a foreign company, often through a joint venture or partnership arrangement.

Legal Requirements for Local Sponsors:

The specific legal requirements for local sponsors may vary depending on the emirate where the foreign company intends to operate. However, in general, local sponsors are expected to:

• Provide local knowledge and expertise: Assist the foreign company in understanding local laws, regulations, and customs.
• Facilitate communication: Act as a liaison between the foreign company and local authorities.
• Provide administrative support: Assist with obtaining necessary licenses, permits, and visas.
• Comply with legal obligations: Ensure that the foreign company adheres to all relevant laws and regulations.

It is important for foreign companies to carefully evaluate their options and choose a local sponsor who is reliable, knowledgeable, and committed to their success.

LEGAL OBLIGATIONS OF LOCAL SPONSORS IN UAE 

Local sponsors in the UAE are subject to various legal obligations that they must fulfil to ensure the smooth operation of the foreign company. These obligations include:

Contractual Obligations:

Local sponsors are typically responsible for signing legal documents and contracts on behalf of the foreign company, acting as its authorized representative. They must also ensure that the foreign company adheres to all applicable UAE laws and regulations, including those related to labor, taxation, and corporate governance.

Liability and Responsibility:

Local sponsors should be mindful of the potential legal risks associated with their involvement in the foreign company. They may also be required to provide financial guarantees or assume certain financial risks associated with the foreign company’s operations.

Government Relations:

Local sponsors play a crucial role in facilitating government approvals and renewals, such as visas, trade licenses, and work permits. They also serve as a liaison between the foreign investor and local authorities, helping to navigate the administrative processes and address any issues that may arise.

RIGHTS AND RESPONSIBILITIES OF LOCAL SPONSORS IN THE UAE

Local sponsors in the UAE have certain rights and responsibilities associated with their role.

Rights:

• Entitlement to a percentage of the business profits: In some cases, local sponsors may be entitled to a share of the business profits, as agreed upon in the sponsorship agreement.
• Rights related to decision-making within the company: The extent of a local sponsor’s involvement in decision-making may vary depending on the specific agreement. However, they may have certain rights to participate in strategic decisions or provide input on company policies.

Responsibilities:

• Supporting the business in navigating local legal frameworks: Local sponsors are responsible for assisting the foreign company in understanding and complying with UAE laws and regulations.
• Ensuring the business adheres to cultural and regulatory expectations: They should help the foreign company adapt to local cultural norms and practices and ensure that the business operates in compliance with all relevant regulations.

COMMON CHALLENGES FACED BY LOCAL SPONSORS

Local sponsors in the UAE may encounter various challenges in their role. Some common challenges include:

• Navigating changes in UAE laws and regulations: The UAE legal and regulatory landscape is constantly evolving. Local sponsors must stay updated on changes and ensure that their actions remain compliant.
• Balancing the interests of foreign investors with local legal requirements: Local sponsors often need to balance the interests of foreign investors with the requirements of local laws and regulations, which can sometimes be conflicting.
• Addressing conflicts of interest or disputes: Disputes or conflicts of interest may arise between local sponsors and foreign investors. Local sponsors should have strategies in place to address such issues and maintain positive relationships.

LEGAL SAFEGUARDS FOR FOREIGN INVESTORS

To protect their interests, foreign investors should prioritize a well-drafted sponsorship agreement. This agreement should clearly outline the rights, responsibilities, and obligations of both the foreign investor and the local sponsor.

Additionally, foreign investors can explore legal mechanisms to minimize their reliance on local sponsors. These may include:

• Free zones: Establishing a business in a free zone can provide certain advantages, such as 100% foreign ownership and reduced regulatory burdens.
• Alternative structures: In some cases, foreign investors may be able to establish a business without a local sponsor, such as through a branch office or a representative office.

By understanding these legal safeguards and exploring alternative structures, foreign investors can mitigate risks and protect their interests in the UAE.

CONCLUSION

Local sponsors play a vital role in facilitating the entry and operations of foreign companies in the UAE. They provide essential support, guidance, and compliance assistance, ensuring that foreign investors can navigate the local business landscape effectively.

While local sponsorship remains a valuable option for foreign investors, understanding the evolving legal landscape and exploring alternative structures is crucial. Foreign investors are strongly encouraged to seek legal advice from qualified professionals to ensure that their arrangements with local sponsors are compliant, transparent, and mutually beneficial.

As the UAE continues to evolve as a global business hub, the role of local sponsors may evolve as well. Foreign investors should stay informed about any changes in regulations or policies that may impact their operations and relationships with local sponsors.

For personalized advice and guidance on local sponsorship arrangements in the UAE, please contact our team of legal experts. We can assist you in understanding your options, negotiating favorable terms, and ensuring compliance with all relevant laws and regulations.

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Ka-Ying Leung,
Business Development Consultants