Practical guide for Russian Entrepreneurs to set up business in Dubai

29 Jul, 2022
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Veronika Chastukhina

In-house lawyer, Whitewill Dubai

Due to political and military events started on 24 of February 2022, Russian Federation got flooded with US and EU sanctions including banking, export, aviation, fossil fuels, and other commodities, as well as “freeze and seize” policy.

This situation has left its indelible mark on all Russian citizens, and right now it is very important for Russian people to get a full understanding of further possible steps to be taken for comfortable living, traveling, international banking options, business growth, and exploring in full their options in politically friendly countries. We are very happy to call the United Araba Emirates, one of such countries.

There are multiple options for business startups in UAE. One of the most diverse, economically stable to the international market, and attractive places for international business investors became the emirate of Dubai.

To launch a successful business, the government of Dubai allows further options for incorporation:

  1. Limited Liability Company on the mainland of Dubai (local company)
  2. Free Zone firm (onshore / resident)
  3. Offshore company (in a free zone) or
  4. Branch of a foreign Parent Company.

Limited Liability Company

This legal structure will give you the freedom to locate your business anywhere in the city, which is a great benefit, as you must set up your business in an area that is most profitable. However, you must know that LLC is a locally registered business, in some cases and for specific business activities, a UAE national must be a 51% shareholder (a local “sponsor”) of your company or to be appointed as a local service agent. In both cases, this person is called a local sponsor as they kind of sponsor the existence of the company as their involvement is mandatory for the registration purpose. A negotiable fee will be paid yearly to the local sponsor for his initial support (such as for example visa application by a local sponsor for you as the investor of your business startup), this must be fixed in a written legal agreement and attested in the local court. Do not proceed with any actions based solely on verbal understanding and it is highly recommended to always consult a lawyer before executing any legal contract.

If you wish to own your business 100%, you can proceed with a Free Zone Company (onshore). There are more than 20 Free Trade Zones in Dubai where you, as a Russian investor, can choose the business activity and start a company. It is important to know that your office space will be directly connected to the location of a Free Zone, that is why you must check in advance what are the rental prices in a chosen Free Zone district, as the actual availability of office space keeps changing.

In free zones, you can set up different types of companies based on your requirements. Free Zone Establishment allows you to have a Single shareholder structure, while a Free Zone Company – has two or more shareholders.

The main advantages of a business startup in Free Zones are 100% foreign ownership, an easy company formation process, a UAE Residence Visa for the investors, directors, and employees, and duty-free customs boundary.

With respect to the license of the company, in both above cases be very precise on the license category, it must match your business model and allow all activities that might be required for your business. It also should not be too narrow.

Offshore company or a Holding Company is a wholly owned legal entity registered in one of the free zones, which can conduct its activities only on the outer markets (except for the purchase of real estate and holding shares of other firms in the UAE). In Dubai, such a company can be registered only with Jebel Ali Free Zone Authority. An offshore company can have a bank account (but not in each and every bank, due to the heavy regulations to combat money laundering activities it became complicated, and banks are being extra careful on accepting to open bank accounts for offshore companies). Offshore companies also cannot have a physical office space in UAE, but their registered address is always the address of the Corporate Service Provider who assist in the establishment of such company, also it doesn’t provide the eligibility to its shareholders or directors to be granted a residency visa, can’t hire expatriate staff, and again, is not allowed to conduct business inside the UAE.

The advantages of the Offshore company in Dubai include no taxation on any business activities performed outside the UAE, no audited financials required to be submitted after the business setup, and the highest level of confidentiality (including all the information about a director and shareholders are not required to be registered in the public record).

Usually, Offshore companies are used for international consulting services, international trading, holding, or shipping company, owning real estate, and registering copyright and patents.

A branch of a foreign Parent Company will allow you to retain up to 100% ownership over your business and benefit from the UAE’s double tax treaties. This establishment can be set up in mainland Dubai or Free Zone. The main difference is that the Branch incorporated in one of the Free Zones will be subject to the registration and licensing requirements in which it will operate and specific share capital.

In addition to the branch, foreign companies can also opt to establish their presence in the UAE through a fully owned subsidiary, or just a representative office. The most preferable structures are branch offices and subsidiaries, as they allow to undertake commercial activities in Dubai. Independence is the main difference between these two structures, the branch office is tied to the Parent Company, and the subsidiary is allowed to conduct its own operations.

To open a branch office, a subsidiary, or a representative office in mainland Dubai, the foreign company must appoint a local service agent to liaise the administrative works with the Government Authorities. Such agent must be either a UAE national or a company owned 100% by a UAE national. The local service agent is appointed for one year for a yearly fee. The contract is renewable every year with a provision to change the agent in case of any disagreement. For Free Zones, there is no such requirement, and the Manager/Director will be the authorized person for conducting the business activities.

It is important to know that the Branch Office will hold the same/similar license activities and bear the same name as its Parent Company. The branch office will be not considered a separate legal entity and the Parent Company will be liable for any obligations and debts, thus, the Parent Company must appoint a representative in Dubai to take on the branch’s affairs. There are also certain restricted activities that can’t be held by the branch office incorporated on the mainland, such as commercial and industrial, also, it can’t engage in manufacturing, import or export of products to/from the UAE.

The main benefit of a branch office is 100% ownership by the Parent Company (both in mainland and Free Zone), the possibility to trade freely in the UAE, sign local contracts, hire local staff, and conduct business with UAE clients.

On the other hand, the Subsidiary is considered as a legal independent structure/company which undertakes its own operations, where the Parent Company will act as a shareholder and have decisional power, however, will no longer be liable for the actions of the subsidiary. In mainland, a subsidiary can be established as an LLC (where 51% of shares will be held by a UAE national business partner unless the business activity of the subsidiary is allowed to have 100% foreign ownership), each Emirate in the UAE has issued a list of specific commercial activities where it is allowed to be locally owned by foreign investors and in Free Zone – as a free zone company (where no local sponsor or partner is required at all times).

Representative Office is an extension of the already existing business, which acts as a marketing and communication office, solely for the promotion of the Parent Company in the UAE market. It cannot conduct a business in the UAE to turn a profit, does not engage in any type of sales, services, or commercial activities, and cannot export, import, or sell in the UAE, it must outsource all business to its parent company. It can, however, hold a bank account for its operating expenses. So the cash balance at the end of the financial year will always be negative.

In general, summarizing the above information and prior incorporation process, you should set your goals and flag for yourself: what kind of company and business would you like to set up;  what kind of license do you need; do you need a mainland or free zone company; do you want to make a profit within UAE our outside; do you need visas for you and your employees to live in UAE and run your business (number of visas varies and based on the size of your office and nature of business); how much money are you ready to spend on bank account opening (it can be higher than you expect); what kind of office space do you require and for how many people.

For your own comfort and time/cost saving, hire a certified, well-known registration agent/business advisory firm, which will “take you by the hand” and lead you through the incorporation and registration process, explain to you all possible options for specific business types, guide you through free zones and mainland activities, will help you with the opening of bank account, arrange for an auditor and be able to offer you nominee services.

My name is Veronika Chastukhina, I have extensive knowledge and experience in the UAE Corporate Structures. I can advise and assist you and your organization to do business in and with the United Arab Emirates. Please feel free to contact me through veronikachastukhina@gmail.com

 

Veronika Chastukhina

Corporate Legal Consultant

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