Legal Obligations and Responsibilities of Local Sponsors in the UAE

 

 

When establishing a business in the UAE, especially for foreign investors, understanding the role and legal responsibilities of local sponsors is critical. The UAE’s legal framework requires that certain businesses seeking to operate in mainland UAE partner with a local sponsor. Here’s an overview of the legal obligations, responsibilities, and the crucial role local sponsors play in facilitating business ventures in the UAE. 


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What is a Local Sponsor?

A local sponsor is a UAE national or a company owned entirely by UAE nationals that helps foreign companies or foreign investors set up their businesses in the UAE mainland. In most cases, UAE laws and regulations require that a foreign investor seeking to open a business in the UAE must have a local sponsor who will hold a 51% stake in the company, while the foreign investor retains 49%.

However, thanks to recent legal reforms, certain business activities and sectors are now exempt from this rule, allowing 100% foreign ownership. Still, for many types of businesses, particularly those in commercial sectors, a local sponsor is necessary.

Legal Obligations of Local Sponsors in the UAE

Local sponsors in the UAE are legally obligated to assist foreign companies in complying with UAE laws and regulations. Their responsibilities include:

  1. Providing Legal Authority: The local sponsor acts as the company's legal representative in matters related to government documentation and licensing. They are responsible for ensuring that the foreign company complies with local laws and regulations.

  2. Ensuring Compliance with UAE Laws: Foreign companies must adhere to the UAE’s regulatory framework. The local sponsor is responsible for assisting the foreign company with any compliance issues, ensuring that the business adheres to UAE laws and regulations.

  3. Obtaining Necessary Approvals: In many cases, a foreign company or investor must obtain approvals from various UAE government authorities. The local sponsor is responsible for assisting the company in acquiring the necessary licenses and permits.

  4. Acting as a Liaison: Sponsors act as intermediaries between the foreign investor and UAE authorities, ensuring smooth communication and facilitating the legal processes required to establish and operate a business. They play an integral role in negotiating with local authorities and navigating administrative challenges.

  5. Financial Responsibility: While the foreign investor retains ownership and control over business operations, the local sponsor’s involvement often extends to financial oversight. They may ensure that certain financial transactions comply with UAE laws and that the foreign company fulfills its tax obligations.

Responsibilities of Foreign Investors in the UAE

While the local sponsor has several obligations, foreign investors also have their share of responsibilities:

  1. Respecting Local Regulations: Foreign investors must work with their sponsors to ensure that their business adheres to all UAE laws and regulations.

  2. Financial Obligations: Foreign companies are responsible for paying agreed-upon compensation to the local sponsor for their services. This compensation varies depending on the sponsor and the nature of the business.

  3. Maintaining Transparency: Foreign companies should maintain transparent relationships with their sponsors. Ensuring open communication regarding the company's operations, profits, and legal matters is crucial for both parties.

Recent Legal Reforms and Changes in Sponsorship Laws

In recent years, the UAE government has introduced significant reforms to its laws and regulations governing foreign business ownership. The introduction of the Foreign Direct Investment (FDI) law in 2018 has allowed foreign companies in certain sectors to operate with 100% ownership. This move has attracted increased foreign investment and provided foreign investors with greater confidence in the UAE's business landscape.

These changes reduce the reliance on local sponsors for specific business activities and sectors, but many sectors, especially commercial trading companies, still require the involvement of local sponsors. It is crucial to consult with a legal expert to determine the specific legal requirements for your business.

Conclusion

The role of a local sponsor in the UAE is pivotal to establishing a business. Their legal obligations include ensuring compliance with UAE laws and regulations, facilitating communication with local authorities, and obtaining necessary permits and licenses. For foreign companies and investors, working with a trusted local sponsor ensures that their business interests are protected and that they can successfully navigate the UAE’s complex regulatory environment.

As laws and regulations evolve, it’s essential for foreign investors to stay informed about any changes that may affect their operations in the UAE. By doing so, both the local sponsor and the foreign company can ensure a mutually beneficial relationship and continued success in the UAE’s vibrant business market. 


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