Does the concept of a 'permanent establishment' apply when a foreign person invests in real estate and, if so, how much does it cost to set up such a permanent establishment, how long does it take and what corporate governance requirements apply?
Yes. The cost depends on the type of permanent establishment being set up. The decision as to what type of corporate vehicle to use for holding a real estate asset in Dubai will be determined largely by the nationality of the shareholders.
Real estate which is not designated for foreign ownership can only be owned by GCC nationals (ie nationals of the United Arab Emirates, Qatar, Kuwait, Oman, the Kingdom of Saudi Arabia and Bahrain), companies wholly owned by them or public joint-stock companies (PJSC). Therefore, such nationals may use a local limited liability company (LLC), a Private Joint-stock Company (Private JSC), or in some cases a PJSC, if they wish to hold the real estate asset through a company. It is essential to include 'real estate' in the 'permitted activities' of the company authorized by the Dubai Economic Department.
Foreigners (ie nationals of countries other than those forming the GCC) can use an LLC, a PJSC or a Private JSC where the real estate is in a designated area but, under current laws governing the ownership of these vehicles, at least 51% of the shares in these vehicles must be held by a UAE national (or company owned by UAE nationals). If the asset is to be wholly owned by foreigners (and therefore in a designated area), a Dubai land Department (DLD) Direction in 2011 confirmed that the shareholders are permitted by the law to use a 'JAFZA' offshore company only to purchase and register the land interest (regulated by the Jebel Ali Free Zone Authority in Dubai and 'accepted' by the DLD), and foreign companies in other jurisdictions are no longer permitted to register land ownership interests. The issue becomes more complicated if the intention is for the company to develop the land and sell units/villas etc. Specific advice must be sought in such circumstances.
On 1 June 2021, the UAE Commercial Companies Law was amended to allow foreign shareholders to own up to 100% of UAE companies incorporated outside of the UAE's designated free zones (ie the onshore UAE companies) in certain sectors of the economy if such sectors do not appear on a list of strategic activities. The sectors of the economy currently listed as strategic include (i) security, defence and military activities; (ii) banks, exchange houses and finance companies; (iii) insurance; (iv) currency printing; (v) communications; (vi) Haj and Omra services; (vii) Quran centres and (viii) fisheries.
Pursuant to this amendment, the respective licensing authority of each Emirate has been empowered to create its own list of activities that permit 100% foreign ownership. These list currently include the majority of activities available but there remain certain activities (other than strategic ones) which still limit foreign ownership to 49%. Furthermore, certain activities that are regulated by other competent authorities are still subject to foreign ownership limitations. Since the start of 2022, we have seen more activities added to the permitted list of each respective Emirate and anticipate further additions to be made.
There are also a number of 'free zones' in the UAE. These are authorities under which companies can be established with a 100% foreign shareholding. Free zone companies can own property in the free zone they are incorporated in, subject to the laws of the particular free zone but, with regard to property outside the free zones, free zone companies are generally not permitted to hold real estate assets in such areas. Specific advice should be sought regarding free zones because each one is different in terms of its rules, regulations and practices.
Whatever type of establishment is used, there will be additional costs, such as taking legal and possibly tax advice on the most appropriate vehicle and structure to use. There will also be costs associated with drafting the constitutional documents for the company to regulate the rights and obligations of each shareholder. This is particularly important in the case of a LLC being owned by a local and a foreigner because a detailed shareholders agreement will be required. The profit share of the shareholders in a LLC might be different from the percentage of shareholding.
An LLC in Dubai usually takes six to eight weeks to become operational from the date that the required documents are received in Dubai in case one or more of the shareholders is a non-GCC national. If all the shareholders are UAE or GCC nationals the process is likely to be quicker.
The corporate governance requirements of an LLC are minimal but do include the appointment of a UAE licensed auditor and a general manager. The shareholders of the LLC can choose whether to have a board of directors or not.