Discusses the legal requirements/options for joint venture/licensing in this market.
Last Published: 8/7/2019
A Joint Venture (JV) is a favorite choice for foreign companies wanting to enter the UAE market or develop their existing operation beyond an agency or distribution arrangement.  The JV agreement or contract of establishment regulates the obligations and respective entitlement of each of the JV partners.  JVs are very common where it is impossible for a single contracting entity to execute the project alone, e.g., a local contractor and a much larger international contractor partnering on “mega” project.  A JV is commonly formed either contractually or through the formation of a limited liability company under Federal Law No. 2 of 2015 (the Commercial Companies Law). 

Under the Commercial Companies Law foreigners cannot own more than 49 percent of a limited liability in the UAE outside any of the various free zones.  A JV does not need a license.  However, if a limited liability company is used to effect the JV, it may very well require licensing.  Similarly, there is no need to publish the underlying JV agreement.  The foreign partner deals with third parties under the name of the local partner who, unless the agreement is publicized, bears all liability.  In practice, JVs are a suitable structure for companies working together on specific projects. 

Choosing the right JV partner (s) is key to the venture’s ultimate success.  The structures available to establish a JV in the UAE in which foreign equity participation is permitted are:  public and private joint stock companies (JSC), a limited liability company (LLC), a limited partnership company (LPC), a share partnership company (SPC), and a joint venture company (JVC – also known as a contractual venture or consortium company). 

The main considerations when choosing the structure of a JV entity, apart from tax considerations, are the designation of liability, management and governance structure, requirements for formation, and the distribution of profits and losses.  The structure of the JV entity may restrict the positions foreign nationals can hold.  In a JSC, the chairman, the vice chairman, and most of the board of directors must be UAE nationals. In the case of an SPC or an LPC, all general partners must be UAE nationals. 

The chosen structure also impacts the required time to set up the JV entity.  For an LLC, the registration/incorporation process will determine the time required for formation.  In particular, the LLC must obtain approval issued by other UAE government authorities depending on the activity of the LLC, and if one of the partners is a foreign entity, certain documents must be attested, legalized, and translated into Arabic.  The registration/incorporation process is twofold for an LLC: a submission of documents to receive initial approval, followed by a subsequent submission of documents to receive final approval. 

When contracting with a partner to form a JV, it is important to understand that unless the existence of the JV is disclosed, the only legal recourse that a foreign enterprise may have is against the partner with whom they have had dealings.  The partner who actively conducts the business enters its name into the Commercial Register to obtain a trade license and is liable to the third party.  If the existence of the JV is disclosed to the third party, the non-active partners also become liable, in which case the partnership is deemed a general partnership. 

Licensing of manufacturing processes is also a growing market, especially considering the UAE's desire to increase the quality and diversity of local manufacturing.  The total market for industrial licenses remains relatively small due to the limited manufacturing done in the UAE where industrial zones such as Jebel Ali and Khalifa Industrial Zone Abu Dhabi (KIZAD) hope to attract manufacturers by offering a range of incentives from free-zone status to the ability to use foreign nationals for 100 percent of their workforce, as well as some of the region’s cheapest utility costs.
 

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United Arab Emirates Business Management Legislation