Company Formation Evolves

Higher foreign ownership in firms could change the way companies are created in the UAE, writes John Martin, founding partner and CEO of Links Group.

The UAE is about to experience the biggest overhaul of its Companies Law in almost 30 years. The new legislation is expected to allow higher foreign ownership ratios in companies, which, if enacted, will certainly boost the creation of new businesses in the country.

It’s a moot point that was first tabled 10 years ago. Every few years the topic has bubbled to the surface, but with no firm resolution. This time seems different. With the draft bill having been approved by the Cabinet, this is the closest we’ve come to it being legislated. We now wait in anticipation for is its publication in The Official Gazette.

If passed, the bill will allow the Cabinet to specify the types of businesses and sectors where a foreign partner may hold more than 49 percent of a company’s capital. Potentially, we will see more foreign business retain 100 percent equity in their onshore UAE business.

As a business that specialises in nominee sponsor or partner services, we anticipate a major shift in company formation service providers towards nominee service agencies.

A service agent, as opposed to a local sponsor or partner, has no equity shareholding in the foreign company that it supports. Essentially, the service agent provides an important link between the foreign company and its compliance with any business administration procedures mandated by the UAE Government.

The responsibilities of a service agent include the provision of labour and immigration services to enable the employment of personnel and management of their free travel in and out of the country required by the business. A service agent can also assist with the import and export of essential goods for the operation of the business. It can often be tricky to navigate the documentation requirements of UAE Customs.

Anyone who has operated a business in the UAE understands the importance of expediting such business administration procedures. An issue with one employee’s visa runs the risk of freezing any additional recruitment by the firm until that particular issue is resolved.

It is essential that the nominee service agent has sound relationships with the necessary government entities and can advise foreign companies about their obligations, for example, does the size of their office adequately accommodate their number of staff? A service agent must also be readily available, at all times, to respond to the requests of both clients and the government. An absent agent can be detrimental to the operation of the business in question.

The question most people ask is why can’t a foreign company manage such documentation directly? The UAE Government – as with other countries in the region – keeps an understandably close grip on matters relating to labour and immigration of the transient and expatriate work force. This is for reasons of security as well as commercial excellence. It is not expected that control of these essential state matters will be relinquished to any foreign party.

However, the government does recognise the importance of streamlining such processes and this is where independent and credible service agents can play an important role.

The Wage Protection System – designed to protect the rights and remuneration of foreign expatriate workers – is one demonstration of this. A straightforward payroll payment system has been a natural progression for the UAE as the population growth and international exposure increased. This is good for the worker and, when implemented accurately, good for the employer too. It is in the interests of the local partner or service agent to ensure all the companies for which it is responsible comply with such legislation.

Foreign investor interest in the UAE will no doubt be greatly enhanced by the prospect of majority foreign company ownership. Their ability to integrate swiftly into the local economy will be enhanced with the support of appropriately positioned and authorised nominee service agents.