When it comes to setting up in the UAE as a foreign businessperson, there are basically two options: you can start a business in a free zone or launch a mainland company.
While there are opportunities in both, there is a wealth of lesser-known advantages in favour of setting up a mainland company, says Hayden Mollard, general manager of Virtuzone.
One of the most compelling reasons for opting for a mainland company set up is that you would be able to trade directly with other mainland entities. You would also have greater scope when it comes to business activities – as a mainland company you could take on governmental work, benefit from no business or personal taxes and offer more visas to employees.
But there is one step in this process that requires careful consideration - finding the right local UAE sponsor for you.
Main pointers for local sponsorship
Non-GCC nationals must be sponsored to launch a mainland business in the UAE. According to UAE law, the sponsor must be a registered national and be made a partner with at least 51% of company shares, in the case of an LLC (Limited Liability Company). There are cases where foreign nationals can own 100% of the shares in their company, dependent on the business category, but will still need a local service agent to act as their sponsor.
With this in mind, credibility will be key when choosing your local sponsor. Hayden Mollard, General Manager of Virtuzone looks at how to keep this process as simple as possible.
Getting to know your local sponsor before a deal
Ideally, a local sponsor should be someone with an established track-record. When launching a company in mainland UAE, some entrepreneurs may not have an already-vetted connection. When time is of the essence, this can lead them to go into business with a perfect stranger.
On most UAE business or expat forums, there are hundreds of local people offering their services as sponsors. Opting to make a deal with one of these people may seem appealing at first glance, especially if you believe that there are no better options. But given how much is at stake, it makes sense to take the time to acquire a deeper understanding of your future partner’s background and expertise before signing on the dotted line.
Hidden costs in the sponsorship fee
When drawing up a deal, sponsors and foreign entrepreneurs agree upon a system of fees. In an ideal world, this fee structure would be transparent and easy to read. Unfortunately, the reality is that these contracts can be far from straightforward and you may find yourself in seriously hot water should you not take the time to understand the fine print. The solution can be as simple as asking for a complete breakdown of the fees before agreeing to the terms of any given contract.
The initial fee that local sponsors quote may only encompass one element of the service; for example, it may only be the government license cost. If that fee excludes other costs (such as for the investor visa or the investor deposit), and so is not representative of what you would ultimately be expected to pay, you could be in for a shock.
Verbal, not written contract
In the UAE, contracts may take the form of a verbal agreement, in addition to written or electronic documents. While you may believe that a verbal (and hence, legal) agreement has been made, it may not stand up in a court of law. For a verbal agreement to be considered a valid contract in the UAE, sufficient evidence is required to support its existence and authenticity, whether electronic records or paper.
When you are confident in a local sponsor, get a comprehensive contract drawn up as soon as possible. That way, in the event of a disagreement between you and your sponsor, you can rest assured prior agreements will be legally binding.
The unexpected death or retirement of a local sponsor
When it comes to choosing a sponsor, we want to consider every possible contingency. The unexpected death or early retirement of a local sponsor can cause an array of issues. For one, company shares may become the legal property of the sponsor’s heirs. If the heirs in question do not wish to be sponsors themselves (and, thus, carry out the standing agreement), it may require that the company ceases trading until another viable solution is found.
To save yourself money and stress, obtain assurances up front about who the 51% of shares would fall to should the worst occur, and ensure that they agree to the same terms as your local sponsor.
Finding the right local UAE mainland sponsor
Many of the issues above arise because of a lack of time, know-how or resources to invest in the necessary research, vetting and relationship building. Finding a credible sponsor with whom you have a strong connection, direct channel of communication, or mutual business interests can help to mitigate the challenges listed here.
If you do not already know a reputable sponsor, there is another option available to foreign entrepreneurs looking to set up a company in mainland UAE.
The corporate sponsorship solution
While newcomers may be under the impression that a local UAE sponsor is the only way to set up a mainland company, another solution exists.
There are three core advantages of this approach:
1. No interference from the sponsor - With corporate sponsorship, entrepreneurs maintain complete control over their business, despite the sponsor holding a narrow majority of shares. As a rule, corporate sponsors do not get involved in the day-to-day running of the company, allowing business owners to continue to have full management of their staff, clients and service offering.
2. 100% of the financial benefits - Much like an individual sponsor, a corporate UAE mainland sponsor becomes a 51% shareholder in the company. However, one of the major benefits of this option is that you, as the business owner, retain 100% of the financial benefits.
3. In-depth protective contracts - Side agreements are often a difficult part of the process. Luckily, this is another area in which corporate sponsorship may be advantageous. Many corporate sponsors offer detailed contracts drafted by first-tier legal counsel, so that the rights of business owners and their shareholders are fully protected.
Choosing the right sponsor
Selecting an appropriate sponsor for your business is key to launching a mainland enterprise. Explore the options out there. Be familiar with the risks and advantages. After all, the individual or corporation on that dotted line will be a partner in your business.
Last but not least, when considering which option is best for you, don’t be afraid to ask what kind of setup support and security your sponsor can bring to the table.For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.