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Foreign Company Branch in UAE

Analysis on Mode of Business Setup

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Yash Paliwal
Yash Paliwal

Published on: Dec 6, 2024

Anjali Singh
Anjali Singh

Updated on: Dec 6, 2024

★★★★★(18 Ratings)
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Introduction:

When considering establishing a business presence in the UAE, entrepreneurs often face a crucial decision: whether to set up a foreign branch or an incorporated company. Foreign Branch Office in the United Arab Emirates (UAE) is an unincorporated extension of the parent company and from a Federal Decree Law No 32 of 2021 on Commercial Companies (Company Law) perspective, a branch of a foreign company is considered to be the same entity as its parent. It does not have separate legal personality, it directly engages in business under the parent company’s umbrella without a separate legal identity. Setting up a foreign branch in UAE offers up numerous advantages for foreign businesses looking to expand into the Middle East. The procedure for opening a foreign branch office in the UAE is explained below.

Advantages of Setting up a Foreign Branch in UAE

  1. 100% Foreign Ownership: Foreign companies can retain 100% foreign ownership in the UAE, unlike a local limited liability company (LLC), which requires a local partner, a branch office allows 100 percent foreign ownership, this gives the parent company full control over its operations, profits, and decision-making. This setup is particularly attractive for businesses looking to maintain full ownership without the need for an Emirati partner.
  2. Simplified Licensing and Regulatory Process: Setting up a foreign branch in the UAE typically involves a straightforward and efficient licensing process, which can often be completed within a few weeks, especially in free zones. The regulatory framework for branches is relatively simple, as branches are not considered separate legal entities. Instead, they are an extension of the parent company, which reduces the complexity of legal filings and reporting.
  3. Streamlined Market Entry: A branch office provides a legal presence in the UAE’s Market, helping you to capitalize on possibilities in the Middle Eastern market.
  4. Operational Flexibility: Branch offices can conduct business activities in accordance with their license, allowing you to tailor your operations to best suit your market entry strategy.
  5. Tax Advantages: Most foreign branches in the UAE benefit from a zero percent corporate tax rate on their income, with the exception of branches of foreign banks, which are taxed at 20 percent.
  6. No Paid-Up Capital Requirement: There’s no need for a significant initial investment, making it easier to establish a presence.
  7. Ease of Repatriation: A Foreign Branch can freely repatriate profits, capital, and earnings to its parent company. There are no restrictions on moving funds in and out of the UAE, allowing parent companies to retain their earnings without the complexities of currency controls or tax implications.

Licensing a Branch of Foreign Company

This Licensing process allows company to get an initial approval for the establishment, which is valid for 4 (Four) months, enabling it to complete the procedures with the concerned authority:

  1. Access the eSystem of foreign establishment branches and offices.
  2. Enter the information, attach the required documents* and validate accuracy.

*Required Documents

  • True copy of the trade name reservation certificate/initial approval certificate of the competent authority indicating the activity of the branch.
  • Official certificate from the concerned entity of the country in which the company is established, indicating the date of incorporation, name, legal form, name of proprietors, activity practiced and capital.
  • Decision by the establishment’s administrative board to open the branch or office and engage in the activity; and the authorisation issued to the establishment’s representative submitting the request.
  • True copy of the agency contract concluded between the establishment and the national agent.
  • True copy of the agent’s ID – if he is a natural person or the owner of an individual institution. If the agent is a legal person, the following must be attached: copy of the establishment’s commercial license, name and nationality of partners as issued by the concerned authority at the emirate in which the establishment is registered.
  1. The request is accepted upon ensuring payment of the required fees of AED 3500 or rejected while sending a message to the establishment via the eSystem clarifying the reasons for this.
  2. Initial approval is issued to be submitted to the concerned authority, as per the MoE’s prescribed form, provided that it is valid for four months (the establishment may not engage in any business during that time). If expired and the establishment does not obtain the license from the concerned authority, a new license fee of must be collected.

Procedure for Registration of a Branch of Foreign Company

  1. Access the eSystem:
    Begin by visiting the eSystem for foreign establishment branches and offices at this link. This platform aims to simplify the registration procedure.
    This service enables the registration of a foreign entity; the entity must file a request with the Ministry of Economy within one month from the license issuance date by the relevant authority, through the MoE’s website.
  2. Enter Information and Attach Documents:
    Fill in the required information accurately. Ensure all necessary documents* are attached. These documents typically include proof of the parent company’s registration, a resolution from the parent company authorizing the branch, and details about the branch’s operations.

*Necessary Documents:

  • True copy of the competent authority license.
  • True copy of duly attested authorization granted to the director together with true copy of his passport.
  • Bank Guarantee (AED 50,000) according to the approved form issued by any bank operating in the UAE. The bank guarantee shall be made for the order of the Minister of Economy and shall be automatically renewable.
  • Letter from certificate auditor except Representative office.
  1. Validate and Submit:
    Double-check all entered information and attached documents for accuracy. Once verified, submit the application. The system will handle your request and inform you of any necessary charges.
  2. Payment and Notification:
    If the application is complete and the fees of AED 7500 are paid, the request will be accepted. If there are issues, the system will send a message detailing the reasons for rejection, allowing you to correct.

Comparison of Key Features:

The difference between a Branch of a Foreign Company and a Company Incorporated in the UAE is significant in terms of ownership, legal structure, and regulatory requirements. Below is a detailed comparison, backed by applicable laws and regulations in the UAE:

S. No. Basis Branch of a Foreign Company Company Incorporated in the UAE
1 Ownership Structure
  1. A branch serves as an extension of a foreign company and lacks its own separate legal identity in the UAE. It is known as a representation of the foreign parent company in the UAE.
  2. The Foreign parent firm has full responsibility for the branch’s responsibilities and commitments. There are no UAE nationals necessary for ownership, although a local agency may be required.
Regulatory Framework: Governed primarily by the Commercial Companies Law (Federal Decree-Law No. 32 of 2021), as well as relevant regulations from the respective Free Zones if operating within one.
  1. A business established in the UAE is considered an independent legal entity with its own legal identity, separate from that of its owners (shareholders). The ownership and structure depend on the type of company, such as:
    • Limited Liability Company (LLC): Requires at least 51% UAE national ownership.
    • Free Zone Company: Can be 100% foreign-owned.
  2. Regulatory Framework: Governed by the Commercial Companies Law (Federal Decree-Law No. 32 of 2021) and specific regulations for each free zone (e.g., Dubai International Financial Centre (DIFC) regulations).
2 Liabilities
  1. The liabilities of a branch are directly linked to the foreign parent company. The branch itself does not bear independent liability. If the branch incurs debts or liabilities, the parent company is ultimately responsible.
  2. The branch must comply with the same financial regulations applicable to UAE companies, including annual auditing, reporting, and tax obligations if applicable.
  1. A company formed in the UAE has independent legal responsibility. The owners’ liability is typically confined to the amount of capital they contribute to the company (as in the case of an LLC). In other types of companies (such as a Public Joint Stock Company), the structure allows for public investment and trading.
  2. A newly formed company must also adhere to local regulations on taxes, reporting, and auditing.
3 Taxation
  1. A branch is subject to UAE tax laws, and its income may be taxed in the UAE depending on its business activities. This may include VAT (introduced in 2019), as well as specific business tax laws.
  2. For foreign entities, there is no income tax for branches unless they engage in activities such as banking, insurance, or other sectors where specific taxation applies. However, foreign companies are subject to Economic Substance Regulations if they engage in certain business activities in the UAE.
  1. Firms established in the UAE are subject to the UAE’s taxation system. Value Added Tax (VAT), applicable at a rate of 5%, is imposed on the majority of goods and services.
  2. In 2023, the UAE implemented a Corporate Tax on business profits that go beyond AED 375,000. This tax affects companies based in the UAE, such as LLCs, joint-stock firms, and Free Zone entities (if they do not qualify for a tax exemption).
  3. Free Zones may offer tax exemptions for a period (typically 15-50 years), and companies can benefit from these exemptions if they meet certain criteria.
4 Licensing & Registration
  1. A branch must apply for a license with the relevant authority in the UAE (e.g., the Department of Economic Development in each Emirate, or the relevant Free Zone Authority).
  2. It must register with the Ministry of Economy and comply with licensing requirements. It also needs to appoint a local service agent (if not in a free zone), who does not have ownership but helps facilitate the legal process.
  3. The branch cannot engage in activities outside the scope defined by the parent company’s operations.
  1. A locally incorporated company requires the formation of a legal entity with proper incorporation documents (e.g., Memorandum of Association, Articles of Association, etc.). The company must comply with registration requirements specific to its legal form (e.g., LLC, Joint Stock, etc.).
  2. The registration process typically includes obtaining a trade license from the local authorities or the relevant Free Zone Authority.
  3. Companies in the UAE must also register with the Ministry of Economy or relevant Free Zone Authority and obtain additional permits depending on the nature of their business.
5 Operations and Limitations
  1. Branch is confined to the activities outlined by the parent company’s operations. It cannot carry out operations that are not covered by its licence.
  2. The branch can directly conduct business in the UAE and may benefit from the reputation and infrastructure of the foreign company but has limitations in terms of scope and flexibility.
  1. A locally incorporated company enjoys the full autonomy of operations within the framework of UAE laws and regulations. Depending on the structure, the company may have the ability to enter new markets, grow within the UAE, and establish subsidiaries.
  2. An LLC, for example, can have its own business operations, whereas a Free Zone company may have geographical limitations.
6 Regulatory Authorities & Legal Compliance
  1. Branches must comply with the Ministry of Economy, Economic Department of the Emirate (for non-Free Zone branches), and local laws.
  2. They need to submit annual financial statements, which should be audited by an independent auditor. The parent company’s compliance with international laws and regulations is also relevant.
  1. Companies must comply with both Federal Decree-Law No. 32 of 2021 (UAE Commercial Companies Law) and any specific local laws of the Emirate they are registered in.
  2. For certain types of companies, specific regulatory authorities, like the Securities and Commodities Authority (SCA) for joint stock companies, may oversee their operations.

Conclusion

In conclusion, the decision between setting up a foreign branch or an incorporated company in the UAE ultimately depends on the specific business needs, goals, and preferences of the entrepreneur or parent company. A foreign branch offers the advantage of 100% foreign ownership and operational flexibility with relatively simple regulatory requirements, making it an appealing option for businesses seeking to establish a straightforward market presence with limited complexity. One should carefully evaluate their business objectives, regulatory requirements, and financial capabilities to make an informed choice that best supports their venture’s success in the UAE market.

Disclaimer

The information provided in this article is intended for general informational purposes only and should not be construed as legal advice. The content of this article is not intended to create and receipt of it does not constitute any relationship. Readers should not act upon this information without seeking professional legal counsel.

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