In United Arab Emirates (UAE), it is common practice for foreign individuals and firms to set up companies or branches. However, UAE law requires foreign entities to have a local sponsor or a local service agent, depending on the type and location of the company
. Here is an overview of local sponsorship arrangements in UAE:
1. Local sponsorship types:
Local Sponsor for Mainland Companies: If you intend to set up a company in the UAE mainland (outside the free zone), you will need a local sponsor, also known as a local partner or service agent. The local sponsor owns a minority stake (51%) in the company, but may not have control over the company’s operations. The terms of the partnership are usually defined in a Memorandum of Understanding (MOU).
Local Service Agent for Branches: If you are setting up a branch of a foreign company in UAE or elsewhere in the UAE, you usually need a local service agent. Unlike a local sponsor, a local service agent has no equity or ownership in the branch. Their role is mainly administrative and they help with matters related to the authorities and provide the branch with a local address.
2. Roles and Responsibilities:
Local Sponsor: The local sponsor’s role primarily involves meeting legal requirements, such as obtaining licenses and permits, and liaising with government authorities. However, they do not have operational control over the business, and their involvement in the day-to-day operations is typically limited.
Local Service Agent: A local service agent for a branch of a foreign company performs similar administrative functions but does not have any ownership interest or control in the branch’s operations. They act as a local representative and help facilitate interactions with government entities.
3. Memorandum of Understanding (MOU):
When entering into a local sponsorship agreement, it is important to have a well-drafted memorandum of understanding or sponsorship agreement that clearly defines the roles, responsibilities, and payment arrangements between the local sponsor or service. agent and a foreign entity.
4. Choosing a local sponsor or service agent:
Choosing a local sponsor or service agent is critical to the success of your business in UAE. It is recommended to do due diligence and choose a reputable and reliable local partner. Many companies work with professional service firms or legal counsel to find suitable sponsors or representatives.
5. Free Zones:
If you want to maintain full ownership and control of your business, you may want to consider setting up your business in one of UAE’s many free zones. Free zones offer various incentives, including 100% foreign ownership and tax breaks, making them attractive to many businesses.
6. Legal Advice:
Legal advice is strongly recommended when setting up a business in the UAE, especially when entering into local sponsorship agreements. Legal advisors help ensure that contracts comply with UAE laws and regulations and provide guidance on navigating the complexities of the local business environment.
Local sponsorship arrangements are common practice in UAE and the UAE, providing access to the local market for foreign companies. However, it is important to clearly understand the terms of the agreement and work with reliable partners to ensure a smooth and successful business in the UAE.
