image displaying Comparison between Foreign Branch and LLC in UAE for company structure options.

Choosing UAE Company Structures: Branch vs LLC

Table of Contents

When looking to set up in the UAE, two commonly evaluated business structure options are foreign branch and limited liability company (LLC). But what do these entities mean and what are the key differences? This comprehensive guide examines all aspects in detail.

What is a Foreign Branch?

A foreign branch, also called a representative office, refers to an extension of an existing overseas company that wishes to operate in the UAE to explore and target the local market. Some key characteristics:

Not An Independent Legal Entity

A branch office is not a separate legal entity. It remains an integral part of the parent company and conducts business in its name.

The cost to establish company remains almost same as the LLC Company

Easier to Establish

Setting up a branch in the UAE takes same process as like LLC Company with same or sometimes more time with almost same compliances is relatively faster and involves lower compliance requirements in terms of capital and documentation compared to establishing a local subsidiary.

Parent Company Assumes All Liability

The foreign parent entity holds full legal and financial liability for the transactions and obligations of its local branch.

Limitations on Business Activities

Branches cannot undertake all types of commercial activities in the country. There are restrictions on dealing directly with customers and carrying out sales transactions. Core focus remains marketing, showcasing products/services, understanding the market and providing post-sales assistance.

Common Uses

The branch structure offers foreign companies an easy option to test the UAE market before deciding on full expansion through a permanent local entity. It is also used to provide after-sales facilities for products sold to local distributors or firms.

Requirements for Establishing a Foreign Branch in UAE

To open a branch office in the UAE, the parent company must fulfill certain prerequisites:

  • Parent Company Operational for 2+ Years: The overseas parent company must have been actively operating for at least two years with sound finances.
  • Appoint a Local Service Agent: Foreign companies must appoint a UAE national or company as the local service agent to facilitate operations.
  • Submit Parent Company Details: Relevant details in terms of ownership, financial statements, activities etc. pertaining to the parent company must be submitted while applying.

Meeting these main pre-conditions make a foreign company eligible to set up its branch office in the UAE.

Understanding Key Aspects of a Limited Liability Company

A limited liability company (LLC) is a legally independent entity incorporated in the UAE, with its own local Memorandum of Association. Some salient features:

  • Separate Legal Entity: An LLC is registered as a distinct legal entity and can enter into contracts and agreements under its own name.
  • Limited Owner Liability: The financial liability of the owners is limited to their percentage shareholding in the company. Personal assets remain protected.
  • Minimum Capital Requirement: Every LLC in UAE requires minimum share capital of AED 300,000 of which at least 30% must be paid upfront before registration.
  • Board Resolution Needed for Actions: Any major company decisions require a board resolution signed by shareholders. Day-to-day functioning can be looked after by a appointed manager.
  • More Compliance Requirements: LLCs have recurring compliance requirements like yearly audit, submitting activity reports, updating ownership details if any changes etc.
  • Wider Business Activities Permitted: LLCs can conduct a wide range of trading, sales, marketing and other commercial activities in the country as long as they are approved in the license.

Rules for Establishing an LLC in the UAE

To set up an LLC in the UAE, founders must adhere to rules such as:

  • Have 1 to 50 Shareholders: An LLC must have a minimum of one and maximum of fifty shareholders as per local company law.
  • 51% Local Equity: UAE nationals or fully Emirati-owned entities must hold at least 51% of the business shares.
  • Select Approved Activities: The activities that a LLC conducts must be covered by the license issued by the relevant regulatory authority.

Meeting these parameters makes a business eligible to be registered as a limited liability entity.

Comparison of Key Features: Foreign Branch vs LLC in UAE

Let’s compare some fundamental parameters between LLC and foreign branch setup in the country:

Legal Status

  • LLC has clear independent legal standing
  • Branch office does not have separate legal identity

Shareholders & Local Partners

  • LLC requires 1 to 50 shareholders with 51% local ownership
  • No concept of owners or local partners for branches

Capital Requirement

  • Minimum AED 300,000 capital needed for LLC
  • No minimum capital stipulation for registering branch

Control & Governance

  • LLC shareholders and appointed manager control operations
  • Branch governed entirely by foreign parent firm

Operational Scope

  • Wider range of activities allowed for LLC
  • Restrictions on dealings for branch office

Compliance

  • Higher compliance load for LLCs
  • Relatively lower reporting needs for branches

Liability

Careful evaluation of these key aspects facilitates choosing the right setup.

Conclusion: Choosing an Optimal Company Structure

In closing, foreign branch and LLC offer two distinct models for overseas entities to operate in the UAE – branches provide an initial foothold while LLCs allow full-fledged business ownership and control. Depending on long-term objectives, it is vital to weigh key factors before deciding on the ideal company structure.

FAQs

What legal status does a branch office have?

A foreign branch does not constitute a legally independent entity, it remains part of the parent company.

Can a branch office undertake sales activities?

No, there are restrictions on direct sales transactions for foreign branches in the UAE.

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Pranav Modi

Mr. Pranav Modi, CA is supported by 12+ years of Consulting, Auditing and Accounting practice across diverse sectors.

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