UAE Onshore Company Structuring


Factsheet
29 March 2021 By CHRISTOPHER GUNSON ,DR. JOCHEN MURACH ,BABAK NAMAZI , JONATHAN P. NOBLE

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Effective 27 March 2021, Article 10 of UAE Federal Law No. 2 of 2015 regarding Commercial Companies (the “Companies Law”) will be

amended to create a framework for the government to grant sector-wide exemptions to 49% shareholding cap on foreign direct investment.

However, the 49% cap will remain the general rule, and foreign investors should be familiar with the basic mechanics of structuring joint ventures. This factsheet sets out the main rules for structuring foreign investment as a limited liability company in the UAE. These rules are expected to  remain in effect for most companies. 

 

Maximum 49% Foreign Investor Shareholding

Under Article 10 of the Companies Law, a UAE national must

hold a minimum of 51% of the share capital in a company.

Technically, Federal Law No. 17 of 2004 regarding Commercial

Concealment (the “Concealment Law”) prohibits any

arrangement that limits the UAE shareholder from exercising

the rights inherent in the 51% shareholding. The Concealment

Law makes so-called “side agreements” regarding the 51%

shareholding unenforceable.

In practice, both informal and formalized nominee

arrangements, by which a UAE shareholder holds the


 

Prohibition on Class Shares / Preferred Shares

Article 206(1) of the Companies Law generally prohibits classshares. This restriction originates from the principle of theequality of economic rights set out in Shariah (Islamic law).Article 206(2) of the Companies Law authorizes the UAECabinet to pass regulations for class shares, but the Cabinet hasnever acted to create such regulations, and we understand thatthis matter is not a current legislative priority.


 

Foreign Shareholder Total Management Control

The Companies Law provides that an LLC may have one or more“managers.” For the purpose of complying with the CompaniesLaw’s limit on managers, it is common for other titles, such aspresident, chairman, or managing director, to be given tosenior members of management who may or may not bemanagers.Foreign shareholders can appoint all managers as well as allmembers of management and can enforce these rights ofappointment through a sole shareholder resolution, so long asthis right is contained in the company’s memorandum ofassociation.


 

Profit Dividend Distributions

The memorandum of association can provide for thedistribution of profits among the shareholders in a proportionthat is different than the percentage of share capitalownership. The 49% foreign shareholder can receive a higherprofit share, which can be as high as what will be accepted bythe company registrar in each Emirate (typically called theDepartment of Economic Development).The limit on the permitted profit share for the 49% shareholderis set by custom at the public notary and not written law. Thislimit differs by Emirate:

  • In Dubai, the maximum permitted profit share is generally 80%.

  • in Abu Dhabi, the maximum permitted profit share is generally 90%.

  • in the northern Emirates, there are multiple instances of higher

  • ratios, such as 95%, 97% and 99% being approved.


 

Unanimous Approvals at the Public Notary

In practice, regardless of what is agreed in the shareholderagreements or articles of the company, all shareholders mustattend the public notary in person or through an authorizedrepresentative holding a power of attorney to signamendments to the articles of association and variousresolutions. In practice, any shareholder who refuses to attendthe public notary can effectively veto some major companydecisions that require the notarization of documents by allshareholders.


 

Shariah Inheritance Risk

Inheritance for Muslims in the UAE provides that most assets,including shares in a company, are divided in the aggregatebetween their inheritors, based on the principles of Shariah, as determined by a Shariah court.In the event that a UAE national shareh older passes away, it can take months, or even years, to determine the inheritor of all the estate’s assets. During this time, unless the beneficiaries are in agreement, a company may be unable to carry out business because of the absence of a decision maker to vote on behalf of the deceased shareholder’s shares.

The issues createdby death include:Shareholding of the deceased UAE shareholder may be split among any number of heirs.The heirs are typic ally not bound by the terms of any agreements signed by the deceased UAE shareholder.Powers of attorney issued by the deceased UAE shareholder become void upon death.

The most common mitigation strategy for death risk in a joint venture company is to only have companies, not individuals, act as shareholders in the joint venture company.

For example, if a UAE national shareholder holds shares by way of a whollyowned LLC as a holding company, then the death of the UAEnational shareholder will not directly impact the joint ventureLLC.

Notably:While the shareholding of the holding company will be split among the deceased individual shareholder’s heirs, theholding company will remain as the shareholder of the joint venture company.Agreements signed by the holding company will remain valid, as it survives the death of its shareholder.Powers of attorney issued by the holding company remain valid upon the death of its shareholder.


If you would like more information about this topic then please contact us.
Christopher Gunson
Partner
Dubai
gunson@amereller.com
Jochen Murach
Partner
Dubai
murach@amereller.com
Babak Namazi
Partner
Dubai
namazi@amereller.com
Jonathan P. Noble
Local Partner
Dubai
noble@amereller.com

 


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2021


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