Mahendra Asher & Co. - Chartered Accountants

1.0

BACKGROUND

UAE Commercial Companies Law No.8 of 1984, as amended (“the Companies Law”), is now implemented in all the Emirates. Most important aspect of the above implementation is that Non- UAE Nationals cannot be general partners with unlimited liability - i.e. only UAE Nationals can be general partners with unlimited liability.

1.2

The Local Authority in each Emirate (i.e. the concerned Municipality or The Department of Economic Development), is the relevant Competent Authority to register and licence the companies.

2.0

LIMITED LIABILITY COMPANY

2.1

Although various forms of companies are available, "Limited Liability Company" (“LLC”), is the preferred vehicle for foreign investors to do business within non Free Zone areas in UAE.

2.2

Important features of LLC are as follows:

a

LLC shall not engage in the business of insurance, banking, investment of money on behalf of other parties;

b

Minimum of two Partners; maximum 50;

c

Minimum capital required in Dubai , AED 300,000 - each share of AED 1,000; for other Emirates, minimum capital is AED 150,000;

d

51% shares to be held by UAE Nationals, at all times;

e

Each Partner's liability is limited to nominal value of capital;

f

Capital must be fully paid up on establishment. Capital must be deposited in a bank account and the amount can only be withdrawn after the LLC has been entered in the Commercial Register. Capital can be subscribed to in kind;

g

Profit/loss to be distributed equally among the partners unless the Memorandum of Association specifies otherwise. Any provision for excluding a partner from profit or exempting him from loss shall be void;

h

LLC shall not offer its shares for public subscription;

i

Transfer of shares shall be restricted and existing partners shall have the first right of refusal;

j

Management may be entrusted to one or more Managers (equivalent to Directors), selected from amongst partners or outside party (number not to exceed five);

k

If the number of partners exceeds seven, a Supervisory Board is to be formed;

l

Directors shall be responsible for preparing annual accounts and get them audited within three months from the end of the financial year and hold the Annual General Meeting within four months from the end of the financial year;

m

Notice of Annual General Meeting to be sent by registered post (21 days before Annual General Meeting);

n

Partners may attend the Annual General Meeting personally or through a proxy (Director cannot be a proxy);

o

Register of Partners, Minutes of Directors and Partners have to be maintained;

p

A resolution shall be null and void if it violates the Companies Law, or the Memorandum of Association of the company, or is passed for the benefit of some of the partners, or to the detriment of other partners without regard to the interests of the company. A claim for nullification shall not be heard after one year has elapsed from the date of resolution and submission of the claims shall not result in the suspension of the implementation of the resolution unless the Court orders otherwise;

q

10% of the net profit shall be transferred to a legal reserve (until such reserve is equal to 50% of the paid up capital) which is not available for distribution.

3.0

OTHER MATTERS PERTAINING TO LLC

3.1

Where UAE National is not an active financial partner, foreign partner usually brings in full capital and LLC is usually formed with minimum capital wherein 51% shares are held in UAE National’s name. Additional capital is brought in by the foreign partner by way of loan capital. As regards 51% shares held by UAE National, a written understanding is signed with him whereby the rights and benefits relating to 51% shares are assigned to the foreign partner.

3.2

With a small capital, banks do not give credit facilities unless the foreign partner gives personal guarantee and/or provides other collateral such as fixed deposits/mortgage of assets. In case of loan capital, banks usually impose a condition of subordination of loan amount in favour of bank and/or non-withdrawal of loan capital.

3.3

Under the Companies Law, profit/loss distribution ratio can be different from the capital contribution ratio.

4.0

FORMATION OF LIMITED LIABILITY COMPANY

Following procedures to be followed in Dubai for LLC formation :

4.1

Signing prescribed application form by partners and obtaining approval of trade name, activities and partners from The Department of Economic Development, Government of Dubai.

4.2

Signing of’ the Memorandum of Association for forming a LLC, before Notary Public.

4.3

Following documents should be delivered to the Office of The Department of Economic Development :

a

Prescribed application approving trade name, activities and partners approved from The Department of Economic Development;

b

Notarised Memorandum of Association in original and copy;

c

A certificate from the Bank for the total amount deposited by each partner, with the undertaking from the bank not to make payment of the amount except to the Company's Director/s after producing a proof of entry in the Commercial Register;

d

Certificate from Director/s that the shares have been fully paid up and allotted to the partners;

e

Certificate from Auditors regarding Capital Contribution by partners and a Certificate confirming appointment as Auditors;

f

Passport copies of all partners;

g

Tenancy contract for the premises;

4.4

If the partner is a foreign body corporate, following documents duly notarised at the place of incorporation and legalised by UAE Embassy, attested by UAE Foreign Ministry, and Arabic translation authenticated before Ministry of Justice have to be submitted :

a

Resolution of the Board of Directors, specifying the Representative and his powers;

b

Power of Attorney in favour of the Representative;

c

Memorandum & Articles of Association of the foreign body corporate; &

d

Certificate of Incorporation.

4.5

The Department of Economic Development shall check the application and above documents and enter in the Commercial Register and furnish the Ministry of Economy and Commerce, with a copy of the Memorandum of Association and other enclosures, along with a copy of entry application indicating that the entry has been effected, giving the date thereof and a copy of the certificate of entry in the Commercial Register.

4.6

The Ministry shall arrange for publishing the details of LLC in the Companies Bulletin after payment of fees and shall notify The Department of Economic Development accordingly.

4.7

LLC cannot commence its activities except after its name is entered in the Commercial Register and after having obtained the trade licence from The Department of Economic Development.

4.8

On issue of licence, bank can release the capital deposited to the Director/s.

4.9

LLC cannot set up branches in other Emirates except after complying with the trade licence rules of the concerned Emirate.

4.10

LLC has to renew its commercial registration and trade licence every year.

4.11

Law provides that conversion of existing partnership business into LLC shall not result in release of general partners from pre-conversion liability without the consent of the creditors. It presumes such consent if a creditor makes no objection to the conversion within 3 months of the date of official notice of conversion. Appropriate notice through The Department of Economic Development has to be given prior to registration in the Commercial Register.

5.0

EXCEPTIONS TO COMPANIES LAW

5.1

Companies Law do not apply to :

a

Professional enterprises or sole proprietorship concern. Most Emirates have special regulations for professionals/artisans which provide for appointment of a Service Agent who is not responsible for any financial liabilities of such enterprises;

b

Business set up in the Free Zones of UAE, if such business is set up under Free Zone Decrees of the concerned Emirate;

c

Companies operating in the field of oil exploration, extraction, manufacturing and transportation; companies engaged in electricity and gas production as well as water desalination and related activities;

d

Companies excluded from the application of Commercial Companies Law by a resolution of the Council of Ministers.