Business Structuring in the UAE

The economic aspirations of a country depend on how well it prepares the ground for its long-term value creation, and the UAE has dominated this story in the last couple of decades. Between 2000 and 2022, the GDP of the UAE has grown by almost 500%. This is an extraordinary achievement that highlights the UAE’s forward-looking economic policies.

However, the UAE’s growth story is not simply a matter of historical data. Its true potential will be unleashed in the coming years and decades. In this context, the Swiss-based International Institute for Management Development’s (IMD’s) World Competitiveness Centre (WCC) report becomes significant. The WCC report, which analyses countries based on over 336 competitiveness criteria focusing on economic performance, government efficiency, business efficiency, and infrastructure, has placed the UAE among the top 10 countries in the world. These are indicators that talk about a country’s preparedness for the future.

One of the most important factors that sculpt a country’s growth story is how government and businesses interact with each other. That’s exactly where business structuring comes in. A business, depending on its goals and scale, needs to choose a legal structure based on which it will be registered and function. Business structuring refers to organising a company’s framework and defining its legal form, governance, and operational processes.

In this blog, we will specifically look at how business structuring works in the UAE, focusing primarily on the legal forms, management framework, and geographical location so that a company can optimise its operational efficiency and move along the growth trajectory that the UAE represents as a country.

One of the first considerations for business structuring is the location of a business. The UAE has a complex regulatory framework with multiple jurisdictions, each having its own laws and guidelines that a company operating in that particular jurisdiction needs to follow.

In this context, two fundamental questions should be the starting point for determining the legal structure of a company:

1. Is the UAE our target market?
2. Which particular location will be best suited for the activity our company shall engage in?

Depending on the answers to these questions, a business can choose to operate either in the mainland or in one of the 40+ free zones spread across the UAE. In addition to the mainland and free zones, a business may also choose to set up an offshore company in certain parts of the UAE for the favourable tax exemptions and other facilities available to them. For our blog, though, we will focus primarily on the legal structures for businesses in the mainland and free zones.

Follow AKW Consultants on WhatsApp Channels for the latest updates.

If the target market for a business is the UAE itself, then one may set up a business in the UAE’s mainland. The licence is more flexible, and a business can trade anywhere within and outside the UAE. A company can have one of the six licences depending on the activities they are involved in:

1. Professional
2. Commercial
3. Industrial
4. Tourism
5. Agricultural
6. Occupational

Inside the UAE’s mainland, a business can choose from more than 2,000 activities. In one of the most significant pieces of legislation, the UAE government allowed foreign investors to have complete ownership of a business in the mainland. Previously limited to 49 percent, foreign companies can now have 100% ownership in thousands of activities. A business can even be licenced for more than one business activity.

The legal form of the business determines which particular regulations it will need to follow, and accordingly, business structuring needs to be done. Some of the legal forms available for an investor include Limited Partnership, Limited Liability Company (LLC), Public Joint Stock Company (PJSC), Private Joint Stock Company (PrJSC), Sole Establishment, etc.

For getting a business licence, the unique name of the company must be followed by its legal form. Some of the legal forms, such as civil company, limited liability company, public shareholding company, or private shareholding company, require a Memorandum of Association. Sole proprietorship firms that are completely owned by non-GCC residents will need a Local Service Agent from the UAE. Once other requirements are fulfilled, the business receives a trade licence. In addition to other relevant laws, Federal Decree-Law No. 32 of 2021 on Commercial Companies regulates the commercial companies established in the UAE’s mainland. It is important to note that Article 5 of said Decree-Law states that companies operating in the free zones do not fall under it.

One of the biggest advantages for businesses operating in the UAE is its tax-friendly atmosphere. For mainland companies, the UAE has a 0% corporate tax on taxable income up to AED 375,000 and a 9% corporate tax rate above this threshold. It has a standard rate of 5% VAT on the consumption or use of goods and services. The UAE also does not levy any income tax on personal income. All these make the UAE among the most tax-friendly economies in the world. Let’s look at how the UAE’s 9% corporate tax rate in the mainland compares to the corporate tax rate of the other economies around the world:

Source: National News

The free zones across all seven Emirates in the UAE have significantly contributed to establishing the UAE as a hub for global trade. Free zones are known for the extraordinary ease of business, especially geared towards foreign investors. Business structuring in the UAE’s free zones can be done quickly and with minimal paperwork. The free zones allow foreign investors to have 100% ownership of their company. As different free zones have distinct activities, their infrastructural facilities are also directed towards a better workflow. Most importantly, access to the global market is unparalleled in these free zones, primarily because of the infrastructural and logistical support available to the businesses.

The UAE’s free zones are extremely popular throughout the world. DMCC  (Dubai Multi Commodities Centre), home to more than 24,000 companies, has been ranked number one in the Financial Times’ fDi’s Global Free Zone of the Year for 9 consecutive years, and contributes to 11% of Dubai’s annual FDI. JAFZA (Jebel Ali Free Zone) is the largest free zone in Dubai and helps sustain 130,000 jobs. In 2023, businesses registered in JAFZA generated more than USD 168.6 billion in trade value. In 2020, of the USD 111 billion in total re-exports from the UAE, USD 62 billion came from the free zones, and only USD 49 billion from the mainland. The increasing share of re-exports from free zones in comparison to the mainland between 2017 and 2020 is given below:

Source: Embassy of the UAE

There are two legal structures that a free zone business can take depending on the number of shareholders:

1. Free Zone Limited Liability Company (FZ LLC) or Free Zone Company (FZ Co.)
2. Free Zone Establishment (FZE) 

However, it is important to note that all free zones might not register both types and that should be cross-checked with individual free zones while business structuring.

While each of the free zones has different rules, they offer the benefits of 100% foreign ownership, allowing foreign investors 100% repatriation of capital and profits. Another important aspect of the free zones is that the companies are exempt from customs duty. Customs duty is paid if the goods are imported into the UAE mainland. The UAE’s free zones have 0% corporate tax for the qualifying income of “Qualifying Free Zone Persons”, making these free zones extremely attractive to foreign investors. Like UAE’s mainland, free zones also do not levy income tax.

Recently, the Federal Tax Authority, as reported in the Gulf Business, has published a guide on how Corporate Tax Law will be applied to Free Zones and Free Zone Persons. The guide details the conditions to be met for a Free Zone Person to become a Qualifying Free Zone Person and benefit from 0% corporate tax. The QFZP must maintain audited financial statements, demonstrate substantial business in free zones, and derive income from qualifying activities. It has also detailed how total revenue and non-qualifying revenue are determined. Also, if non-qualifying revenue for a business exceeds the lower of AED 5 million or 5 percent of their total revenue, called de minimis requirement, then the company’s entire income “may be disqualified from the 0 percent tax rate”. Understanding these provisions in detail is extremely important during business structuring.

The governance framework for companies depends on where a particular business is located and the legal form of the business type. For mainland companies, corporate governance is determined by Federal Decree-Law No. 32 of 2021 on Commercial Companies. However, it is also important to note that as business structuring involves multiple moving parts, other laws and regulations also come into play. Here, we will detail one of the most popular legal forms used for business structuring, especially by foreign investors, called the Limited Liability Company (LLC).

Under the Commercial Companies Law, each of the different legal forms of the company has separate prescriptions regarding corporate governance. Articles 71 through 104 deal with Limited Liability Companies, which are companies that have between two to 50 partners. A register for the partners needs to be maintained and kept by the managers of the company. Together, all the partners need to have a General Assembly, which shall meet at least once a year during the four months after the end of the fiscal year. Like other legal structures, an LLC will also need to obtain all required licences before commencing their business. They should have a registered address as well as maintain their accounting records and keep the records in their headquarters for a period of five years.

For a Limited Liability Company (LLC), the liabilities for each of the partners go up to the share they actually hold in the company. The Memorandum of Association (MoA) is used for settling disputes between the partners. The partners shall also determine in the MoA who shall be responsible for the management of the company and accordingly can elect one “Manager” or a “Board of Managers” from partners or third parties. Their powers and functions shall be written in the MoA. The “Manager” or “Board of Managers” is responsible, among other things, for preparing the annual balance sheet, profit and loss account, and recommendations on the distribution of profits.

 If “Managers” are not appointed in the MoA, then the General Assembly of the partners can appoint one. If the total number of members goes above 15, they will also need to appoint a Supervisory Board with at least three partners. They also need to have one or more auditors elected by the General Assembly every year. Business structuring requires companies to be conversant with all the requirements, regardless of their legal form.

The most important part of getting business structuring right is understanding the regulatory complexity involved in the UAE. Even though the government actively facilitates ease of doing business, the fact that different regions are guided by different laws and regulations and that business structuring lies at the intersection of multiple laws, makes the processes complicated. Also, a business needs to choose the right business licences depending on activities, target market, and other factors discussed earlier in the blog. This is extremely important in optimising a company’s efficiency.

Find out how AKW Consultants can help you navigate the process of business structuring by choosing the appropriate location for your business, ensuring a hassle-free process, and keeping you compliant with all relevant laws to unleash your growth potential.