How to Contract with a Free Zone Company or vice versa
Many businesses have opened up in the various free zones dotted around the UAE. Whilst the advantages of a free zone company are pretty well-known, 100% foreign ownership/full repatriation of profits etc., one of the anomalies is that free-zone companies are, often, prohibited from carrying on a business with persons (including companies) resident in the Mainland. This is often contained in the rules and regulations of a free zone. The term ‘Mainland’ is often used to describe those parts of the UAE which are not free zones.
The rules regulating such business activity are set out in Law No. (13) of 2011 Regulating the Conduct of Economic Activities in the Emirate of Dubai (the “2011 Law”). The Law requires the Department of Economic Development (“DED”) to authorise any free zone company wishing to trade on the Mainland.
Briefly, the 2011 Law allows free zone companies to set up branches in Dubai subject to certain conditions being met.
The 2011 Law is very clear in that it specifically states that only the DED can grant regulatory approval to economic activity in Dubai- so the DED must approve a free zone company opening a branch or trading in Dubai.
Further, the 2011 Law states that only the following type of businesses may conduct business in Dubai:
• a sole proprietorship or a sole trader;
• a civil works company;
• a commercial company; or
• a branch of a national, or free-zone, company.
Taking each in turn:
A sole trader is pretty self-explanatory and relatively straightforward.
A civil works company can be owned by non-UAE individuals, a free zone company or a foreign company, if the owner’s activities are the same as the company to be established on the Mainland. A requirement would be that a local UAE agent is appointed.
A commercial company refers to a limited liability company, or LLC as they are typically known- the main disadvantage of this structure is that a UAE national must legally hold 51% of the company’s shares.
A branch can be established in the UAE and be owned by a free zone company; and it will have to have the same name as its parent company. A local UAE service agent has to be appointed but there is an exemption if the parent free zone company is owned by a UAE national(s) who has at least 51% of the ownership).
The local agent has no responsibility to the branch or the civil works company- his role is to ensure that the branch, or civil company, does business in Dubai; and, it is clear that he has no interest in the management, operation, assets or finances of the company. So the risk to the business is minimal
The Ministry of Economy regulates the permitted activities for branches; and it would be necessary to obtain the Ministry’s prior approval, regarding the proposed activity, before commencing any trading activity. This would be in addition to the approval of DED.
The Ministry of Economy has set out the following steps to establish the branch:
• obtain approval of the trade name and approval certificate from the DED;
• passport copy of both the general manager and the local service agent. If the local service agent is a corporate body, then a copy of the license is needed;
• copy of the corporate documents of the free zone entity including duly notarized resolution calling for opening the branch and power of attorney in favour of the branch’s general manager;
• local service agent agreement duly notarized at the notary public;
• bank guarantee of AED 50,000 in favour of the Ministry of Economy;
• payment of AED 15,000 as the Ministry of Economy fees.
As you can see, setting up a branch is not a simple process and therefore you should always consult a qualified lawyer.
Hasnain Khalid is a qualified English solicitor with many years’ experience in corporate / commercial, real estate and banking matters. He specialises in advising small to medium size businesses.