The challenges of finding a local UAE sponsor

14 August 2017 Category:
Local sponsor

The UAE is a region brimming with potentially lucrative business opportunities that never fail to attract savvy entrepreneurs.

When it comes to setting up in the UAE as a foreign businessperson, there are basically two options: you can start a business in a free zone or launch a mainland company. While there are opportunities in both, there’s a wealth of lesser-known advantages in favour of setting up a mainland company.

One of the most compelling reasons is that your company would be able to trade directly with other mainland entities. You would also have greater scope when it comes to business activities – as a mainland company you could take on governmental work, benefit from no business or personal taxes, and offer more visas to employees.

It’s no wonder many entrepreneurs opt for the benefits that lie here. But there is one step in this process which can cause issues, and that is finding a local UAE sponsor.

7 major challenges of local sponsorship

Non-Gulf Cooperation Council (GCC) nationals have to be sponsored to launch a mainland business in the UAE. According to UAE law, the sponsor must be a registered national and be made a partner with at least 51% of company shares, in the case of an LLC (Limited Liability Company). There are cases where foreign nations can own 100% of the shares in their company dependant on the business category, but will still need a local service agent to ask as their sponsor. 

With all this in mind, credibility will be key when choosing a local sponsor. So let’s look at how to keep this process as easy and simple as possible. 

1. Getting to know your local sponsor before a deal: An established local sponsor ought to be someone who can be trusted. Ideally, with an established track-record.

When launching a company in mainland UAE, some entrepreneurs will not have an already-vetted connection. When time is of the essence, this can lead them to go into business with a perfect stranger.

When launching a company in mainland UAE, some entrepreneurs will not have an already-vetted connection. When time is of the essence, this can lead them to go into business with a stranger.

On most UAE business or expat forums, there are hundreds of local people offering their services as sponsors. Opting to make a deal with one of these people may seem appealing at first glance, especially if you believe that there are no better options.

But given how much is at stake, it makes sense to take the time to acquire a deeper understanding of your future partner’s background and expertise before signing on the dotted line. 

2. Hidden costs in the sponsorship fee: When drawing up a deal, sponsors and foreign entrepreneurs agree upon a system of fees. In an ideal world, this fee structure would be transparent and easy to read. Unfortunately, in our world these contracts can be far from straightforward and you may find yourself in seriously hot water should you not take the time to understand the fine print.

The good news is that the solution can be as simple as asking for a complete breakdown of the fees before agreeing to the terms of any given contract.

The initial fee that local sponsors quote may only encompass one element of the service; for example, it may only be the government license cost. If that fee excludes other actual costs (such as for the investor visa or the investor deposit), and so is not representative of what you would ultimately be expected to pay, you could be in for a nasty shock.

3. A sponsor’s word, but no legal contract: In the UAE, contracts may take the form of a verbal agreement, in addition to written or electronic documents. When building a partnership based on trust, it can be tempting to accept the word of a sponsor you think is the perfect fit with the shake of a hand – and think about drawing up papers later.

This would be a mistake. While you may believe that a verbal (and, hence, legal) agreement has been made, it may not stand up in a court of law. For a verbal agreement to be considered a valid contract in the UAE, sufficient evidence is required to support its existence and authenticity, whether electronic records or paper.

When you are confident in a local sponsor, get a comprehensive contract drawn up as soon as possible. That way, in the event of a disagreement between you and your sponsor (or if they attempt to back out at the eleventh hour) you can rest assured prior agreements will be legally binding.

4. Delays in getting a sponsor’s signature: When starting a new venture, many ambitious entrepreneurs are eager to get the ball rolling. However, a major stumbling block, especially while sorting out the legalities, is waiting for local sponsors to sign the paperwork.

Leading tax and law advisors in the UAE claim that this can be a ‘challenging process’ as obtaining a DED Mainland license is stricter in terms of documentation and legalities. In addition, both parties have to sign the documentation before the company can be established. 

5. The sponsor attempts to claim ownership: While this next challenge is by no means the norm, it is a risk to consider.

There have been cases in which local sponsors have attempted to take full ownership of a company. Needless to say, this is a nightmare scenario for entrepreneurs because it threatens everything that has been so tirelessly built.

There have been cases in which local sponsors have attempted to take full ownership of a company. Needless to say, this is a nightmare scenario for entrepreneurs because it threatens everything that has been so tirelessly built.

More common are instances in which a sponsor interferes and oversteps boundaries previously agreed upon. This is yet another important reason to ensure legally binding contracts are drawn up from the start.

6. The unexpected death or retirement of a local sponsor: When it comes to choosing a sponsor, we want to consider every possible contingency. The unexpected death or early retirement of a local sponsor can cause an array of issues. For one, company shares may become the legal property of the sponsor’s heirs.

If the heirs in question do not wish to be sponsors themselves (and, thus, carry out the standing agreement), it may require that the company ceases trading until another viable solution is found.

To save yourself money and stress, obtain assurances up front about who the 51% of shares would fall to should the worst occur, and ensure that they agree to the same terms as your local sponsor.

7. When a sponsor disappears without a trace: Unfortunately, entrepreneurs have reported cases of sponsors disappearing without a trace. In truth, a very small percentage of local sponsors who advertise their services online are fraudulent. That being said, it’s worth pointing out that however slim the risk, it can still prove disastrous.

If your sponsor were to disappear, you would be left in a precarious position that would likely disrupt the day-to-day operations of your company. There are few safety nets in place here, which means that it would fall on you, as the business owner, to seek legal advice and assistance. And as you may have guessed, legal proceedings can be long and extremely costly. 

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Solutions to the challenges of finding a reliable local UAE mainland sponsor

Perhaps you noticed that many of the issues above arise because of a lack of time, know-how or resources to invest in the necessary research, vetting and relationship building.

Finding a credible sponsor with whom you have a strong connection, direct channel of communication, or mutual business interests can help to mitigate the challenges listed above.

If you do not already know a reputable sponsor, there is another option available to foreign entrepreneurs looking to set up a company in mainland UAE. 

The benefits of corporate sponsorship

While newcomers may be under the impression that a local UAE sponsor is the only way to set up a mainland company, another solution exists.

Corporate sponsorship offers the same benefits as dealing with an individual sponsor, while providing services that are designed to address the challenges that can arise.

Here are three core advantages of this approach:

1. No interference from the sponsor: With corporate sponsorship, entrepreneurs maintain complete control over their business, despite the sponsor holding a narrow majority of shares. As a rule, corporate sponsors do not get involved in the day-to-day running of the company, allowing business owners to continue to have full management of their staff, clients, and service offering.

2. 100% of the financial benefits: Much like an individual sponsor, a corporate UAE mainland sponsor becomes a 51% shareholder in the company. However, one of the major benefits of this option is that you, as the business owner, retain 100% of the financial benefits.

3. In-depth protective contracts: Side agreements are often a difficult part of the process. Luckily, this is another area in which corporate sponsorship may be advantageous. Many corporate sponsors offer detailed contracts drafted by first-tier legal counsel, so that the rights of business owners and their shareholders are fully protected. 

Choosing the right sponsor

Selecting an appropriate sponsor for your business is key to launching a mainland enterprise. Explore the options out there. Be familiar with the risks and advantages. After all, the individual or corporation on that dotted line will be a partner in your business.

Last but not least, when considering which option is best for you, don’t be afraid to ask what kind of setup support and security your sponsor can bring to the table.

Virtuzone Mainland is dedicated to helping clients open a company on the UAE mainland, providing advice and assistance with every aspect of the company formation. To set up a consultation, please call us on +971 4 457 8200, send an email to maria.capin@vz.ae or click here.

 

About the author: John Hanafin, CEO at Virtuzone Business
About the author: John Hanafin, CEO at Virtuzone Business

With 25 years of experience in the company formation industry, John Hanafin is well known in the UAE and beyond as a specialist in corporate services, and shares a passion for helping others establish and grow their own businesses across the UAE and wider region. John joined Virtugroup in 2017 after spending 12 years with The Sovereign Group as their Global Sales Director, and two years as CEO of Arton Capital.