Most entrepreneurs choose their careers to be their own boss and have firm control over the businesses they run. However, while starting a business in Dubai, foreign entrepreneurs may not be able to fully satisfy this desire as a local sponsor (UAE National) is required by law to own at least 51% shares of the company. The foreign entrepreneur can have only 49% ownership over mainland business activities under commercial or industrial licenses. However, having a local sponsor is not really a challenge but a unique feature of the mainland business setup in Dubai. Yet, the foreign investor should know who a local sponsor is and why the requirement is important for mainland company formation in the UAE. Hiring the best business setup consultants in Dubai, UAE will equip the foreign entrepreneurs with the right knowledge and expertise regarding the various aspects of local sponsorship.
Who Is a Local Sponsor?
Local sponsorship is a mandatory requirement for any foreign investor opening a company in Dubai mainland. The local sponsors should be UAE nationals who will hold 51% of shares in the capital and if the agreement (MOA) is silent same 51% share in the profit of the business. That is on the paper, in actual the investors need not split the profits with the sponsor and instead pay fixed fees, called sponsorship fees, as mutually agreed with the local sponsor. In the case of LLC, the foreign partner will get all the powers to run the business through notarised MOA.
There are three main types of local sponsorship available in the UAE, they are:
i) Individual Sponsorship
In this type of sponsorship, an individual UAE national holds a 51% stake (also 51% liability) of the company. It is mandatory that the individual local sponsor should be UAE nationals above the age of 21 and can be male or female. There are no set rules on whether the sponsor should have knowledge or experience in the sector in which the foreign investor is planning to conduct business. However, the local sponsor should be qualified to sponsor few activities such as audit and architect licenses which are regulated by the Ministry of Economy and Dubai Municipality respectively.
ii) Corporate Sponsorship
Corporate sponsorship is similar to an individual sponsorship but the difference is that instead of an individual, a company owned by UAE national will be sponsoring the business. The corporate company will take a 51% stake in the company in this case instead of an individual. The sponsor will avail a set fee and the foreign investor will have full control over the company.
iii) Local Service Agent
Business activities under the professional license issued by the Dubai Department of Economic Development (DED) require a UAE national who will be a Local Service Agent (LSA) called Wakil-e- Khidmaat. Professionals like IT consultancy, restaurants, management consultancy need to appoint an LSA. Unlike the commercial and industrial licenses, the professional license allows foreign entrepreneurs to have 100% ownership. The LSA’s role is mainly dealing with administrative and government departments on behalf of the foreign investor. The LSA only gets paid an annual fee for the services and doesn’t hold any share in the business. The agreement, called the Local Service Agreement between foreign nationals and LSA will be notarized at the notary office which can be terminated by the foreign partner at any time. The type of sponsorship is dependent upon the requirements of the business activities the investors are planning to conduct in the Dubai mainland. Hiring reputed business setup consultants will provide the entrepreneurs with in-depth knowledge about what type of sponsorship best fits their business requirements.
Do All Businesses Require a Local sponsor?
As mentioned above, the foreign entrepreneurs who conduct business activities under commercial and industrial licenses in Dubai mainland must appoint a local sponsor. And the activities under the professional license require an LSA. There are other exceptions also: the branch and representative offices of foreign companies. The branch and representative offices of foreign companies could be set up in Dubai mainland by appointing an LSA and can have 100% ownership. However, such forms of legal structures are regarded only as of the extension of the parent company.
Foreign investors can do away with the requirement of local sponsorship by setting up a company in any one of the 40 free zones in the UAE. The free zone companies are regulated by the respective free zone authorities that allow 100% ownership for the foreign entrepreneur. However, the free zone companies are not allowed to directly trade in the local UAE market despite many financial benefits.
Also, the UAE has recently cleared a new Foreign Direct Investment (FDI) law by which 122 activities spanning 13 key sectors are allowed to have 100% ownership. The activities cover the following key sectors:
- Agriculture
- Manufacturing
- Transport and Storage
- Hospitality and Food Services
- Information and Communications
- Science and Technology
- Healthcare
- Education
- Art & entertainment
- Construction
How Business Setup Consultants in Dubai Can Help in Finding Local Sponsors?
The UAE has been welcoming foreign entrepreneurs with open hands ever since it decided to diversify its economy. The foreign investors may find the process of setting up a business in Dubai not only complex but rather strategic decision to the different sets of regulations that govern the mainland and the free zones. While the Dubai mainland business setup offers the benefit of trading with the vast UAE market, it requires a local sponsor who holds at least a 51% stake in the business. The free zones, on the other hand, offer 100% ownership but won’t allow trading with the UAE market and there are restrictions on business activities. A complex task it may seem, but a reputed business setup consultant in Dubai. UAE will make the process quicker and easier.
Jitendra Business Consultants (JBC) is a pioneer in helping thousands of foreign entrepreneurs fulfil their dream of starting a business in Dubai. JBC’s well-qualified business setup consultants are well-versed in local laws and regulations and will assist the entrepreneurs in selecting the right business jurisdiction for setting up a business. The process of finding local sponsorship is not a daunting task as JBC’s dedicated team of company formation specialists will be supporting the businessmen all along. The JBC can also act as a local service agent in the case of business activities under the professional license. JBC will assist the entrepreneurs in all stages of business formation right from registration to incorporation. With JBC’s knowledge and expertise, the process of company formation in Dubai is no longer a complicated process.