Local sponsor in Dubai – Everything you need to know

December 5, 2018

Dubai has long been a welcoming and attractive business environment for entrepreneurs from every corner of the globe. It’s a major reason why almost 90% of the UAE’s inhabitants are foreign nationals. 

However, while the draw of the emirate is clearly enough to attract so many to do business here, that’s not to say that getting started isn’t without its quirks and complexities. Or indeed that there is nothing that can be done to make the Emirates even more attractive to overseas entrepreneurs.

One such quirk that is often cited as a barrier to foreign entrepreneurs starting businesses in the UAE is the country’s law regarding foreign ownership.

Traditionally, a non-Emirati entrepreneur wishing to establish a company here could either set up in a free zone and retain 100% ownership or set up on the mainland and hand over a 51% stake in their business to a local sponsor. There are exceptions to this rule – for example, a business operating under a professional services license could be 100% foreign owned.

While free zones offer many benefits – such as 100% exemption from customs tax, the freedom to repatriate all invested capital and profits, and no foreign exchange controls or currency restrictions – they differ slightly to mainland companies.

Free zone businesses are not permitted to trade directly with the local UAE market without working with an agent who commands a fee. Nor can they take on government work. Therefore, any entrepreneur wishing to trade freely locally within the UAE or bid for lucrative government contracts would have to work with a local sponsor who, on paper at least, holds a controlling stake in the business.

The reality is local sponsors very rarely get involved with decision making, have no claim to profits and are usually simply paid an annual fee for their service. However, it is often claimed that, even so, many overseas entrepreneurs are put off from starting businesses in Dubai and the UAE because of foreign ownership rules.

This is no longer the case, however. Thanks to a change in legislation, foreign nationals are no longer always required to work with a local sponsor in Dubai in order to establish a business here. In fact, 100% foreign ownership of mainland businesses is now permitted in many sectors across the UAE.

Foreign ownership – what’s changed?

The changes to foreign ownership in the UAE were confirmed to have come into effect in the last quarter of 2018, having been in the works for some time now.

The move is part of a series of initiatives – which also includes the introduction of a 10-year residence visa – aimed at making the country less reliant on oil income. Relaxing regulation on foreign ownership is expected to increase foreign investment in the UAE, primarily into non-oil sectors, thus strengthening and diversifying the country’s economy.

Chavan Bhogaita, the head of market insights and strategy at First Abu Dhabi Bank said of the new legislation:

‘Many people held back from investing here as they felt there was no long-term tenure and they were dependent on a short-term visa. Now, with a 10-year visa and 100% foreign ownership, investors and people looking to set up and grow businesses here will have more confidence.’

It should be stressed, however, that 100% foreign ownership is not permitted across all industries. What’s more, companies wishing to retain 100% foreign ownership must apply for permission to do so – permission that can be denied.

Those wishing to start a business within an industry on the so-called “negative list” would still need to work with a local sponsor in order to do so. These industries include:

Do I need a local sponsor in Dubai?

If you wish to start a business in a sector that does not allow for foreign ownership then yes, you will still be required to work with a local sponsor. The good news is, finding a local sponsor in Dubai is not particularly difficult. What’s more, there are in fact many benefits to working with a local sponsor – such as access to local knowledge and expertise.

However, working with a local sponsor is not without its challenges, particularly to those new to the country. That’s why it’s vital that you seek expert advice before committing to working with a sponsor.

You should also take the time to get to know your sponsor well before making any sort of deal. This means getting to know them personally as much as possible as well as sourcing references and assurances from others within the UAE that have worked closely with them.

There are several other things that you should take care of before committing to a deal too. Ensure that both parties know exactly what they are getting from the arrangement. Make sure all fees are clear and transparent to avoid any confusion later down the line once revenues start to come in.

It also pays to make clear who has a say in decision making. Make sure you set this out from the offset and get it in the form of a contract. A local sponsor may tell you now that they have no interest in what the company does, but who’s to say this won’t change over time.

The same is true of ownership. While it is incredibly uncommon, there have been cases of local sponsors trying to assert control and claim ownership of a business. To help avoid this, make sure you have a set of legally binding documents that clearly outline where the agreed boundaries are.

Finally, any agreement you put in place should also include an exit plan for both you and your sponsor. What happens if you decide to sell the business or shut it down and return to your home country? Equally, what happens if your sponsor no longer wishes to carry out the role, decides to retire, or passes away? With no previous agreement in place, your deceased sponsor’s shares in your business could be passed down to their heirs – who you have no relationship with.

Fortunately, pitfalls such as these can be avoided simply by setting out clear rules before you enter an agreement with a sponsor – and ensuring all boundaries are safeguarded with legally binding contracts.

Navigating local sponsor legislation

Whether or not you are required to work with a local sponsor in Dubai will depend largely on the nature of your business. A company formation specialist such as CREATIVE ZONE can work with you to understand your business activities and advise on whether you are eligible to retain 100% ownership. We can even help you find a sponsor if one is required.

CREATIVE ZONE can also manage the entire company formation process for you. This includes applying for your license, helping your find premises, applying for visas, and opening a corporate bank account. Our office is a one-stop shop service, all we need is a little information and few documents from you, and we’ll do the rest.