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Retaining 100% foreign ownership by setting up a Branch Company in the UAE

28-04-2020

Foreign ownership in UAE is a subject that has been on the radar of trending discussions, in particular after FDI Law. However, what companies remain unaware about is retention of 100% foreign ownership in the UAE through alternative modes, in particular- through setting a branch of a Foreign Company whereby the ownership of the branch company lies a 100% with the Foreign Company. 

Article 327 of the UAE Federal Law No (2) of 2015 on Commercial Companies (“UAE Commercial Companies Law’’) grants Foreign Companies the right to operate in the UAE subject only to the provision of the law. Article 328 clarifies that any Foreign Company establishing its principal office or branch in mainland UAE should obtain a relevant license from the representative Emirate’s/ State’s governing authority. Foreign companies may not carry out an activity or establish their own principal office or a branch in the State without obtaining a license from the Competent Authority upon the consent of the Ministry. The license shall determine the activity to be practiced by the company. 

As stated by Article 330, sub-article (2) of the above Law, the office or branch of a foreign company in the State to be deemed the principal office of its activity inside the State, and such activity shall be subject to the provision of the law in force in the State. According to the law, a legal person shall not practice any economic activity or set up a branch to any activity before obtaining a license to practice such activity provided through the relevant authority in the Emirates. The Department of Economic Development (“DED”) ascertains the relevant license pursuant to which any individual or legal person can conduct Economic Activities in the UAE. 

It is important to mention that the license which a company will obtain and the business form of such company are two different aspects both governed independently by the DED, which is responsible to issue the appropriate license in accordance with the relevant trading activity. 

Commonly, the purpose of the branch office is to promote and market the products or services of the Parent Company, undertake the same business as that of the Parent Company, enter into transactions and conclude agreements in the name of the Parent Company, and offer services to its customers within the United Arab Emirates. It is crucial to underline that a branch company is not allowed to partake in any activities different than its Parent Company, thereby, no new activity/or different activity than that of the Parent Company can be the activity of the branch company. However, if the Parent Company has ten activities, the branch company can either do all or any or a few of those.

Including the license from the Economic Department, in order to practice permanent or temporary activities, the branch company would be required to obtain the Chamber of Commerce registration. 

Article 1 of the Ministerial Decision No. 377 of the year 2010 states that: ‘’ The Manual of license procedures for branches and offices of firms incorporated abroad and free zones in the UAE attached to the Decision shall be adopted’’, therefore, prior to obtaining the initial approval for incorporating a branch of a foreign company in the UAE, the DED requires the approval of the Ministry of Economy as a prerequisite. 

Article 329 of the UAE Commercial Company Law grants foreign companies the right to establish their own branches or offices within the UAE provided that the agent of the foreign company shall be a UAE national. If the agent is a company, it shall be a UAE company and all its partners shall be UAE nationals. The obligations of the agent to the company and third parties shall be limited to providing such services to the company, without any responsibility or financial obligations in connection with the business or activity of the branch or office of the foreign company inside the State or abroad. Therefore, a Local Service Agent (LSA) is required for the purpose of filling the formal requirements of the Law of the presence of an Emirati national who will not be a shareholder or partner or manager in the license but would only be retained as a LSA on the license. 

In conclusion, opening a foreign branch in the UAE guarantees 100% foreign ownership. However, the branch company can only conduct similar activities of the Parent Company which remains liable for the branch’s debts and obligations and which is required to designate a representative to manage the branch’s affairs.  


Article by:
Beenish Haider


 
Head of Corporate & Commercial Department 
The Legal Group