Mainland company formation in Dubai affords many opportunities, while there are a variety of special corporate regulations and legal requirements to be adhered to. An essential aspect of this process is the role of local sponsors. Foreign investors should have a clear understanding of the role played by their local sponsors, the obligations and duties imposed on local sponsors, and the benefits they accrue from the sponsors’ help and collaboration in the setting up of businesses.
Understanding the role of local sponsors can ease the way of doing business in Dubai. Knowing the local sponsorship requirements and obligations is a basic step for any new entrepreneur interested in tapping into the thriving market of Dubai in order never to derail their processes while doing business. The blog ‘The Role of Local Sponsorship in Mainland Company Formation’ says the rest, keep reading.
Who is a Local Sponsor?
A local sponsor is a UAE national who operates as your partner with a mainland business. Their roles may vary according to the sponsorship agreement, yet mainly serve as your local representative for compliance with UAE laws.
Types of Local Sponsors
- Corporate Sponsors
These are UAE-based companies that sponsor your business. This type is ideal for larger enterprises requiring a more structured partnership.
- Individual Sponsors
An Emirati individual sponsors your business and holds a 51% stake. This option is common for smaller businesses.
- Government or Local Authority Sponsors
These sponsors are governmental entities, often necessary for businesses in specific sectors such as oil and gas.
Why is Local Sponsorship Necessary?
The requirement for local sponsorship stems from the fact that the UAE is trying to protect its national interests and, at the same time, encourage foreign investment. It strikes a balance between allowing foreign businesses to operate and live in the UAE and helping in the local economic growth.
Benefits of Having a Local Sponsor
Having a local sponsor in the UAE comes with a quite long list of benefits such as:
- Access to the Mainland Market
Local sponsorship is your ticket to operating across the UAE without geographical restrictions. Unlike free zones, mainland companies can trade anywhere, allowing for unlimited growth. This expanded market access opens doors to a wider customer base and business opportunities.
- Simplified Licensing and Registration
A local sponsor can streamline the licensing and company registration processes by navigating government procedures and legal requirements on your behalf. Their local knowledge helps expedite the setup, saving you time and effort in completing paperwork.
- Improved Credibility
Having a UAE national as your sponsor lends credibility to your business, building trust with local clients and government authorities. This connection can also provide a competitive edge in a market that values local relationships.
- Ease of Government Liaison
Local sponsors are well-versed in UAE regulations and can act as a bridge between your business and government bodies, ensuring smooth operations. Their established relationships with authorities can facilitate quicker approvals and smoother communication.
Risks and Challenges of Local Sponsorship
While local sponsorship offers numerous advantages, it is not without challenges.
- Ownership Concerns
The mandatory 51% shareholding by the sponsor can be unsettling for some entrepreneurs, especially those unfamiliar with UAE laws. However, well-drafted agreements can mitigate these concerns. It is important to establish a clear understanding of decision-making power to avoid misunderstandings.
- Cost Implications
Sponsorship fees vary widely, depending on the sponsor’s role and the business type. Negotiating fair terms is crucial to avoid financial strain. You must ensure that all costs are transparent from the start to avoid hidden fees later on.
- Finding the Right Sponsor
Choosing a sponsor who aligns with your business goals is critical. A misaligned partnership can lead to operational hiccups and disputes. Taking the time to vet potential sponsors thoroughly can help prevent costly mistakes.
- Legal and Regulatory Compliance
Navigating the legal environment in Dubai can be complex, particularly for those unfamiliar with local laws. A proactive sponsor can help ensure compliance with regulations. Failing to stay compliant can result in fines or delays in business operations.
- Cultural Differences
Cultural differences can sometimes create misunderstandings in business operations. Building mutual respect and understanding of local practices is essential for success. Awareness of local customs can foster smoother interactions and build stronger partnerships.
- Dependence on the Sponsor’s Reputation
Your business’s success can be tied to your sponsor’s reputation. Make sure that the sponsor has a solid standing to avoid reputational risks. A damaged reputation can severely impact your ability to attract clients and partners in the local market.
How to Choose the Right Local Sponsor?
You might be stuck on what factors to consider while choosing a local sponsor. The following tips will help you to a great extent.
1. Research and Due Diligence
Choosing the right sponsor starts with research. Assess their background, reputation, and industry experience. A knowledgeable sponsor can guide you effectively through the setup process. Engage with other businesses they’ve sponsored to understand their reliability and support level. This helps ensure your sponsor is a trustworthy partner for your business.
2. Draft a Detailed Agreement
A detailed contract is essential to avoid misunderstandings. Outline the sponsor’s responsibilities, roles, and financial commitments. Set clear expectations on the duration of their involvement and consult a legal expert to ensure the contract complies with local laws and includes dispute resolution provisions.
3. Consider Corporate Sponsorships
If working with an individual sponsor feels too informal, corporate sponsorships offer a more structured option. Corporate sponsors typically provide a professional approach, established processes, and a larger network, which can benefit your business in the long run.
4. Leverage Consultancy Services
Consultants specializing in business setup can save you time and effort. They can help identify reputable sponsors and assist in negotiating terms that are favorable for your business, ensuring a smooth partnership and successful business establishment in Dubai.
In recent years, the UAE has introduced reforms that allow total foreign ownership in certain sectors. However, the recent developments mostly deal with some technical and professional services and with other specific fields. In many sectors, local sponsorship is still a mainstay of mainland company formation in UAE. Hence, these changes must be fully understood to figure out whether local sponsorship is still required for your business.
