Why businesses need a local sponsor to start a business in Dubai?KWS Admin
Let’s admit it, setting up your own business is a quite a challenging task. Even more difficult is to setup your business on a foreign territory; about which you have no idea such as their government regulations, economy, business structure, policies, local culture etc. These added complications make your task a bit of a minefield. Surprisingly, these hazards do not put a foreign entrepreneur off when it comes to setup their business in Dubai. Why? Because Dubai has made its business environment so favorable for foreigners that they are always willing to invest there.
Dubai, now-a-days is known as incubation hub for business innovation. It provides a strategic location, state of the art infrastructure, investor friendly government regulations that encourage Foreign Direct Investment (FDI), new business set ups and trade.
If you are looking to setup your business in Dubai, basically there are two options available to you i.e. create a business setup in Dubai Free Zone or launch a Mainland Company. The detailed explanation of both of the forms is explained here. Broadly speaking, mainland companies can conduct their business in UAE local market or outside of UAE. Free Zone companies can conduct their business operation only in their respective free zones where they have been formed. They can go to UAE local market only with the help of local service agent. It depends upon your type of business that will help you go for either Mainland or Free Zone as both offer their own benefits.
One of the most common challenges while setting up Dubai Mainland is the issue of foreign ownership. Any commercial or industrial Mainland business must have a local sponsor. That is why foreign entrepreneurs wishing to start their business must have knowledge and clearance of whether they need a local sponsor and what will be the repercussions.
So let us first understand the concept of local sponsorship. Local sponsors are compulsory requirement for foreign entrepreneurs who intend to establish Dubai Mainland business. Local sponsors must be UAE National and will hold 51% of business shares. However, profit sharing is not this much. A fixed percent share on profit or fixed annual fee is decided beforehand. There are three types of local sponsor in UAE,
- Corporate Sponsorship: In this type instead of an individual, a UAE Company holds 51% of shares and obligations of an organization that belongs to foreign entrepreneurs. This is the most common form.
- Individual Sponsorship: An individual (UAE National) in his/her capacity becomes a local sponsor and holds 51% of shares and 51% liability of company.
- Local service Agent: This type of sponsorship is for professionals like doctors or artists who appoint a local service agent who is paid fixed annual fees and doesn’t hold 51% of shares in company.
Do Businesses Need a Local Sponsor?
Now let’s come down to the main question that do businesses in Dubai actually need a local sponsor? The answer is quite simple. If you are going to be involved in commercial, industrial or trading activities in Dubai mainland, then you do require a local sponsor. There are few exceptions in this case e.g. professional services as well as branch and representative offices do not require local sponsor. They are 100% foreign owned and formed with the help local service agent. However branch offices can only engage in activities that are related to its parent company and are allowed to earn profits. Representative offices cannot earn profits. They can merely promote their parent company products and services.
In order to obtain complete ownership of your business, you can go to Dubai Free Zones for your company formation which allows 100% foreign ownership and control as well as many other benefits. Keep this in mind that free zone companies are not easily allowed to trade in Mainland.
Factors to Keep in Mind before Starting Your Local Sponsor Search
- Local Sponsors mostly do not help the business in their operations or any other sort. They simply are providing their service as local representative and allowing foreign entrepreneur establish their business in Mainland. And for this they are paid a fixed annual fee or certain profit share.
- There are plenty high profile or even celebrity sponsors in UAE who claim to be different than other by providing network opportunities or providing door for certain industries because of their status. This can be true but you have to be aware that you do not pay extra amount for what you can easily get through other channel in quite less cost.
- Things can go wrong in certain cases. e.g. in case of death of sponsor, his shares will be passed to his heir and if they are not interested in being your local sponsor; you can be in big trouble and won’t be able to trade. You can avoid this by going for corporate sponsorship.
Major Advantages of Local Sponsor
Apart from gaining access in local market, local sponsor provide other major benefits too. Limited Liability Companies formed with local sponsor are completely tax free and foreign investor can repatriate 100% of his profits. You can open multiple (no limits) branches of your company throughout UAE and can get hold of various government projects which you cannot attain if you are free zone company. Lastly, collaborating with local sponsor gives you status of an investor in UAE which will allow you to obtain residence visa for you and your family.
If you are interested to know more about local sponsors in UAE or in search of finding a local sponsor for your business setup in UAE, feel free to contact us at KWSME. We provide all the services for new business setup and will assist you in forming your company by saving your money and time.