Top 5 Ways to Set Up Business in the UAE

Entrepreneurs often ask how to open a company in the UAE, and then, once it’s been registered, what requirements and laws to consider, what limitations to expect, and how to keep overheads reasonably low. In this article, we will explain the top 5 ways to set up your business in the UAE.

Basic information to know about the UAE if you decide to open a company in the UAE 

• The UAE is an elective monarchy formed from a federation of seven emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain. 
• The country is one of the youngest jurisdictions in the Middle East. In December 2021, it marked the 50^th anniversary. Its population (as of January 2022) is a little bit over 10 mln, of which 8.92 million are expats. They are employed in a variety of industries. Being an oil-rich state, the UAE has also diversified its economy and became a regional and global hub for business, trade and finance.
• Arabic is the primary national language, with English widely spoken and used in business as the second language.

Basic facts to know about the UAE legal system if you decide to set up business in the UAE 

To open a company and do business in the UAE, you need to understand that the legal system in the UAE is based on both the civil and the Sharia laws that form part of the Islamic tradition. Each member emirate has sovereignty over its own territories and territorial waters. Since 2021, the system included the common law practiced in Dubai International Financial Centre Courts (DIFC). 

The UAE Constitution guarantees all individuals equality and personal freedom. Citizens must not be discriminated against on the basis of origin, nationality, faith or social status.

The UAE is a civil law country. Sources of law for civil matters include:

• Sharia law or Islamic Law. It is not quite relevant to commercial transactions. It governs religious, morality and personal law matters, particularly for Muslims.
• the UAE Civil Code (the UAE Civil Transactions Code of 1985 inspired by Egyptian and French law) + the Commentary (Explanatory Note on the UAE Civil Code of 1987)
• the Constitution
• other special purpose federal laws and regulations
• laws and regulations of each emirate.

International law is incorporated into national law in the UAE after it is ratified.

The Federation and the Emirates:

• The UAE constitution provides for the distribution of powers between the federal government and the government of each emirate.
• The constitution serves as the legal basis for the federation and is the basis for all legislation enacted at the federal and emirate levels. Under the constitution, the federal government has exclusive jurisdiction over a variety of independent matters, including foreign policy, defense, and security. The federal laws take precedence over the local law of each emirate.
• The local authority of each Emirate is authorized to regulate all local matters which are not covered by federal law. Also, the government of each Emirate retains substantial powers to regulate commercial activities, issue trade licenses, and maintain company registrations to the extent that such activities are not otherwise regulated under federal law.

Sharia Law:

Although the constitution says that Sharia is the primary source of law, it is still not the only one, and its application is usually limited to the following areas:

• at the courts, when there is no specific legislation governing a particular issue
• religious, moral, and personal law matters, especially relevant to Muslims (e.g., inheritance, divorce, etc.);
• transactions that are deliberately phrased to be Sharia-compliant, e.g. Islamic banking transactions.

Except where such provisions would conflict with UAE law (including Sharia law and public policy), the UAE recognizes and accepts the concept of freedom of contract. This allows the contracting parties to regulate their relations as they wish.

5 options on how to set up business in the UAE

There are essentially five ways to achieve this objective:

• the fly-in-fly-out method or inbound trade from abroad 
• registration via an agent/distributor
• a local company formation
• a Joint Venture
• merger and acquisition.

Let’s look at each of these potential options of how to open a company in the UAE in more detail.

Option 1:  use the fly-in-fly-out method or inbound trade from abroad to set up business in the UAE

This form of business allows a foreign company to trade in the UAE from their home country, thus saving on the need to physically establish a presence in the Emirates. However, this option usually is applicable only to specific services and goods. Overseas companies without a physical presence in the UAE may find it difficult to establish proper relations that are essential for growing and expanding their business in this jurisdiction. Besides, local clients usually request or require a foreign company to have a registered physical presence within the UAE. There should also be a detailed consideration of how to resolve from abroad any problems that may arise.

The UAE Company Law requires foreign investors to register and be licensed by the competent authorities in the UAE before they can do any business locally. This is a significant limitation for conducting activities on a fly-in fly-out basis in the Emirates.

Option 2: contract an agent/distributor to open a company in the UAE

This option is suitable for foreign companies that do not need to maintain their substance/physical presence in the Emirates. It allows foreign companies to rely on their commercial agency agreements and distribution agreements with members of networks developed by third parties in the UAE market. This is a way to reduce expenses and mitigate risks. However, any such agreement with a local party needs to be based on prudence, compliance, and due diligence.

The UAE Commercial Agencies Law (Federal Law No. 18 of 1981, with amendments) regulates the appointment of registered distributors, commercial agents, and sales representatives. A Commercial Agency is defined as any arrangement whereby an international company appoints an agent to distribute, offer, negotiate the sale or purchase of goods on its behalf within the UAE market. Commercial agents do so for commission or profit.

The Commercial Procedure Code (Federal Law No. 18 of 1993) relies on the Commercial Agencies Act and establishes a framework that regulates different types of commercial representations. A contracted agency is the most common agency type. It contracts some local agent to represent a foreign principal in the distribution and sale of goods or services, and perform on a permanent basis and in a specific area of activity, for a fee, ‘the instigation and negotiation of the conclusion of deals, to the advantage of the principal and in return for payment’. 

According to UAE law – commercial agency and distributor agreements are basically treated as one and the same body. There is a wide range of options and types of agents/distributors. The differences are mainly between registered and unregistered agreements. 

A registered arrangement (agency or distribution) is valid only when the agent or distributor is a UAE national or a UAE private company owned by the UAE nationals.(The UAE abolished the old rule requiring that 51% of the share capital of an entity set outside free economic zones be owned by Emirati nationals). If the agreement is not concluded, the Commercial Code applies. Agents benefit from dealing with exclusive goods, i.e., the imported goods that usually are exclusive in the market.

Termination of a registered commercial agency/distribution agreement is difficult and costly because of the strict rules and limitations that apply.

Option 3: register a local entity to set up business in the UAE

Altogether, there are three main opportunities available to foreign investors:

• to open a local company in the UAE
• to open a company in the UAE in one of its free economic zones and thus establish a commercial presence
• to set up an offshore business (International Business Company).

How to open a resident company in the UAE?

Federal Law No. 2 of 2015 is the new Commercial Companies Law (CCL), which came into force on July 1, 2015, and replaced the previous Commercial Companies Law (UAE Federal Law No. 8 of 1984, as amended). Foreign businesses wishing to operate within the UAE usually do so either through a Limited Liability Company (LLC) or through a branch/representative office, even though the new CCL does allow other forms of companies to be registered in the UAE.

How to open a Limited Liability Company in the UAE? 

Currently, the new CCL does not impose a minimum capital requirement on LLCs, even though:

• in practice, many businesses continue to apply the old minimum capital requirement (e.g., AED 300,000 in Dubai or AED 150,000 in Abu Dhabi); the capital in an LLC must be divided into shares of equal value
• new LLCs’ activities in many sectors are still subject to certain minimum capital requirements as part of the binding agreements.

Other important points to be aware of:

• Operational management of the company may be conducted by a manager, who in practice is often appointed by the foreign owner.
• It is possible to provide in the Memorandum of Association that profits and losses will be divided in a manner that differs from the ratio of shares in the Authorized capital.
• It is necessary to appoint an auditor, who must be accredited in the UAE.
• Although there are no property restrictions for branches, a Local/National Service Agent must be appointed and must be either a UAE national or a wholly UAE national-owned company. The Service Agent acts only as a representative and has no civil responsibility, profit, or monetary compensation. It only provides a limited scope of services authorized by the government or administration and stipulated by the National Agent’s Service Agreement. Such services generally include the filing of license applications, license renewals, and visa applications for opening a branch.

How to open a foreign company branch in the UAE?

The new Commercial Companies Law (CCL) allows a foreign company to open a local branch in the UAE which is not a separate legal entity but part of its parent company. Consequently, there is no legal protection for the parent limited liability company. Local branches can develop business only in the parent company’s fields of activities. 

It usually takes about 4 to 6 weeks to register a branch because the registration process involves many steps and the preparation of the application documents plus their notarization. The reforms conducted according to the new CCL will help to make this period shorter.

How to open a company in the UAE free economic zone

As an alternative to opening a local company, it is also possible to open an LLC or a branch office in one of the many free zones in Dubai and the UAE.

Free zones are specific areas within the UAE and were introduced to attract foreign investment. Each free zone is governed by its own authorities, issuing its own rules and regulations. The licensing authority in each free zone is responsible for free zone licenses and company registration. Typically, free zones focus on a specific industry and are tailored to specific business sectors, so they only license certain types of activities.

Although there are many free zones in the UAE, most of them are located in Dubai. Some of the most popular free zones are:

• DIFC – Dubai International Financial Center.
• JAFZ – Jebel Ali Free Zone.
• DMCC – Dubai Multi Commodities Centre.
• DAFZ – Dubai Airport Free Zone.
• DCC – Dubai Creative Clusters, otherwise known as TECOM, which includes Dubai Internet City, Dubai Media City, etc.
• KIZAD – Khalifa – Abu Dhabi Industrial Zone.
• Masdar City.

Most free zones feature primarily the following two types of free zone companies registered as Limited Liability Companies:

• Free Zone Establishment
• Free Zone Company.

The main difference between the two types is the number of shareholders and the share capital requirements.

Although free zones allow 100% foreign ownership, companies registered in free zones are not allowed to operate within the UAE. Each free zone has its own (non-criminal) laws that apply to companies located there, along with UAE Federal Laws and local laws of the relevant emirate. The DIFC is the only exception to this rule, as it has its own set of laws (other than criminal laws) which are not governed by UAE laws. Normally, each free zone allows the registration of a local company, branch, or representative office.

How to register a branch in free zones 

The concept of a branch is the same as that of a branch within the UAE, a branch is an extension of the foreign parent company and therefore is not a separate legal entity and does not involve limited liability. A branch is also not required to have its own share capital. The main difference between a local UAE branch and a free zone branch is that a free zone branch is not required to appoint a National Service agent. However, the branch is limited in what it can do and develops only such activities that are relevant to the scope of its foreign parent company.

The main restriction on free zone enterprises (a Limited Liability Company or a branch company) is that they are forbidden to ‘do business’ outside this particular free zone area. However, free zone businesses are allowed to trade freely in their respective free zone and outside the UAE. In order to attract customers within the UAE (i.e. outside the free zone area), a free zone enterprise may interact with a local distributor/agent (who is properly licensed) or may open their own local LLC or branch within the UAE.

How to open an offshore company in the UAE / International business company?

Companies not going to participate in any business in the UAE (the UAE or one of its free zones) can act as holding companies not conducting commercial activities. According to the offshore regulatory provisions of certain free zones, these companies are very handy ‘suitcases’ for freehold property within the UAE.

Jebel Ali Free Zone and Ras Al Khaimah Investment Authority are the largest free zones that offer registration of offshore companies in the UAE.

How to open an offshore company in the UAE? The main costs of setting up business in the UAE 

The process of company or branch registration is usually longer than in other jurisdictions around the world. The documents required for filing the application will also have to be notarized and legalized in the issuing country.

The total costs tend to be higher than elsewhere, and depend mostly on the following expenses:

• visas.
• shareholder agreements.
• the cost of rent/lodging.
• fees for the regulatory functions.

Option 4: open a joint-stock company to set up business in the UAE 

Foreign companies wishing to enter the UAE market or establish their operations without commercial agency or distribution agreements often opt for a joint venture. A joint venture allows the foreign investor to get a stake and a role in the operation and management of their venture in the UAE while benefiting from the participation of a local partner. The local partner can contribute financially or provide technical facilitation, skills, or local connections and reputation.

Although the CCL allows a certain type of venture, a joint venture, to be used as the ‘suitcase’, in practice, most joint ventures register as Limited Liability Companies in the UAE or free zones. In the case of a local company, the previously mentioned requirement applies – the 51% share in the Authorized capital to be held by a UAE national or a company fully owned by UAE nationals.

There is no need to license a joint venture or publish a joint venture agreement. As in all jurisdictions, choosing the right partner(s) is key to ensuring that they will be able to support the joint venture’s mission.

Option 5: use a merger and acquisition to set up business in the UAE 

The 5th strategy of foreign companies opting to enter the UAE market is to acquire or invest funds in an existing UAE company or business. In the UAE, both the purchase of a share and acquisition of assets are eligible. Please note the following limitations:

• Very limited information is publicly available; the 360-degree due diligence is a must
• There are certain restrictions on foreign ownership, with the old requirement for local companies to be 51% owned by UAE nationals or a company owned by UAE nationals.
• There are no regulatory provisions that would be similar to the European stipulations (Transfer of Undertakings legislation) for transfer of responsibilities/liabilities in the case of transfers of employees in the UAE, and hence – the transfer of employment contracts from the seller to the buyer on a business acquisition is considered as part of business assets’ acquisition.
• Stipulations regarding severance payments and service gratuity in the UAE in the case of asset transfers need to be taken into account.

Things to know about Due Diligence when intending to open a company in the UAE 

Each of the above-stated 5 possibilities, especially the assignment of agents and distributors, joint venture, and acquisition, reinforces the need for complete due diligence. This is the only way to guarantee commercial compatibility and avoid any legal complications in the future.

Other important considerations refer to the following requirements:

• avoid the conflicts of interest 
• ensure that the foreign company will maintain compliance with its anti-bribery and anti-corruption commitments.

The key point to consider when deciding to open a company in the UAE 

The decision to go local versus offshore (i.e. in one of the free zones) depends significantly on the location of customers and consumers, as well as on the nature of the business (for example, a free zone may make more sense if the customer base is located in the Middle East rather than directly inside the UAE).

It is important that the business license should clearly mention the intended and actual business operations. This is different from the approaches in other jurisdictions, where ‘shelf companies’ and companies that engage in more general fields of activities are quite common.

The cost of starting a company may be higher than in other jurisdictions because, for example, optional costs – such as the need to translate, notarize, apostille documents, and real estate requirements – are a key part of the incorporation process.

Business establishment in the UAE can take significantly more time than in other countries and jurisdictions.

Answers to some typical questions asked by clients intending to open a company in the UAE

If I decide to open a company in the UAE (in Ajman), can I use the Jebel Ali port to import and export tools? Or am I limited to the Ajman port?

You can obtain the IE codes of the ports in the UAE, and you can import your products through any of the ports.

We are going to open a company in the UAE or a free zone. However, we have heard that the minimum office space required to open a company in the UAE is 50 square meters, is this true? And does this also apply to the UAE free zone companies? Or, are there different requirements?

The minimum office space eligible for opening a company in the UAE is 20 square meters. In free zones, the minimum office requirement varies from zone to zone, the smallest office area required is a Flexi-Desk (shared office option).

I am planning to open a company in the UAE as a sole trader in the lease expensive free zone in the UAE. I heard that Umm Al-Queen is the cheapest one.

Yes, money-wise, Umm Al-Queen is the most reasonable opportunity to open a company in the UAE.

How much does it cost to set up business in the UAE (in the Ajman Free Zone)? What is the process for obtaining visas for employees? What is the approximate cost of a warehouse there? The type of business is Trade in Clothing. What is the visa process? If we want to rent a warehouse, what is the approximate cost to rent 100 square meters? What is the minimum required area for 6 visas? Would a Flexi-Desk be ok?

You can set up a business in the UAE in Ajman and get a trade license for one type of business activity. It will cost about 20,000 Durhams to rent an office with a legal address/mailbox. A warehouse lease costs around AED 350 / sq.m. You will be entitled to 1 visa for every 7 sq.m. of office space. The standard sizes available now are 100-420 sq.m. A Flexi-Desk will entitle you to 2 visas.

I am planning to open a company in the UAE (in the JLT Free Zone). Should there be an office? I have an online business and would like to open a company in the UAE and have minimal space, i.e. a Flexi-Desk.

You can get an office of 3 sq.m., which can be used 16 hours a month.

I am going to set up business in the UAE (in Dubai). What would be the best choice if I am the sole proprietor? I provide consulting services, so my overheads can be very minimal (a Flexi or virtual office is sufficient), no visas are needed.

RAKIA, DMCC, and DWC Free Zones might be suitable.

If you have any experience and ideas on how best to open a company in the UAE, please share them in the comments!

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