The business requirements for a company in the UAE may change and evolve as the organization’s base grows. If those organizations wish to engage in different activities, the company may need to restructure or move jurisdiction within the country. Companies may wish or need to change their legal form from a Foreign Branch to a Limited Liability Company (LLC).
In this article, you will learn everything about how to convert a Foreign Branch to an LLC. We will discuss some things you should be aware of before doing some movement. Hence, you will see step by step. Let us observe:
Foreign Branches and Subsidiaries
A Foreign Branch is an additional location of your company that operates solely in another country. Consider it a global extension of your main office, similar to adding an extension to your current office.
A subsidiary, on the other hand, is a new company in another country. They consider it as a separate legal entity. This has several distinct advantages and disadvantages depending on your foreign growth objectives and the internal resources available to manage this new entity.
Hence, a subsidiary may serve a completely different purpose than its parent company, whereas a branch serves the same purpose. It is important to say that your corporation must own more than half of all available voting stock through a subsidiary.
What exactly is an LLC?
LLC is an abbreviation for Limited Liability Company. This is one type of legal entity that you can form to own and operate a business. LLCs are popular because they provide the same limited liability as corporations while being easier and less expensive to form and run.
What are the prospects of forming an LLC?
Anyone starting a business or running a business as a sole proprietor should think about forming an LLC. This is especially important if you want to limit your legal liability as much as possible.
You can use LLCs to own and operate virtually any type of business. However, in some states, certain types of professionals need to form special professional LLCs. Any type of business can use an LLC, from sole proprietorships to multi-ownerships.
In addition, LLCs are the most common legal entity used to own rental and commercial property.
What are the advantages of a Limited Liability Company?
Personal asset safeguarding
An LLC limits the liability of its owner or owners. This means you, as the LLC owner, are not personally liable for any debts incurred by your LLC business or most business-related lawsuits.
Creditors or people who file lawsuits against your LLC cannot collect against your assets, such as your bank accounts, personal car, or home; this is because you are not personally liable. They are only allowed to collect from your LLC’s assets (for example, its bank account).
Taxation by pass-through
This business structure provides LLC owners with pass-through taxation. Profits (or losses) incurred by the business are passed through to the owner’s tax return. They tax profits of this type at the owner’s tax rates.
They typically tax SMLLCs (single-member limited liability companies) in the same manner as sole proprietorships. Hence, they report the profits, losses, and deductions of the LLC on IRS Schedule C, which is filed with the owner’s tax return.
For tax purposes, an LLC with two or more members is usually treated as a partnership. They report profits and losses on the owners’ tax returns and are taxed at their rates.
In addition, in Connect Group, you can find the most effective tax consultancy services.
Simplicity
An LLC is the simplest business entity to set up and run. It is not necessary to have officers and directors, board or shareholder meetings, or any of the other administrative burdens that come with being a corporation.
Credibility
Creating an LLC to own and run your business lends credibility. It reassures customers that your company is legitimate. You will also have a legal business name to call yourself.
Key Considerations and Steps For Converting
In the UAE, a Mainland LLC structure is a truly local company that allows access to a much broader range of activities. An LLC can engage in trading activities. Also, a Mainland company in Abu Dhabi or Dubai can import and export goods to and from the country.
A Foreign Branch cannot, for example, engage in trading or import activities. Furthermore, an LLC is a truly Limited Liability structure that provides legal protection unlike a Foreign Branch. This separates business and personal liabilities, so they protect assets and owners are not liable for business debts.
The LLC’s shareholders are only liable up to the maximum amount of their share capital. With a foreign branch, the parent company is fully responsible for the activities of its branch. In addition, the income of the foreign branch is usually accounted for by the parent company. So the country of origin of the parent company taxes the income.
Before making any legal changes to your company’s structure, keep the following in mind:
- Prepare for the change by involving key employees, shareholders, and managers.
- Communicate the status of planning to the entire organization.
- Seek the help of experts in business setup and restructuring to plan the documentation and process.
- We will outline the steps required to convert your business from a Foreign Branch to an LLC in the sections that follow.
How to convert a Foreign Branch to a Limited Liability Company?
Foreign Branches are a useful structure in the UAE because they are 100% owned by the parent company. They do not require a local shareholder, and only require a local sponsor or National Service Agent (NSA)/Local Service Agent (LSA).
The NSA has no management involvement in the business but serves as the government liaison point for PRO services; the Ministry of Labour and Immigration for staff and family visa assistance and licensing matters such as license renewal and obtaining and maintaining the various licenses for the Foreign Branch – Department of Economic Development (DED) and Ministry of Economy (MOE).
The Foreign Branch structure is also useful when a company needs to demonstrate history and experience in a specific industry; it can do so by leveraging the parent company’s connections and experience. The Foreign Branch is merely a division of the parent company.
When the owners/parent company want to expand and formalize their business, take on local investment, limit risk; and expand their location and activities within the UAE, an LLC structure becomes a more viable option. When converting to a Limited Liability Company, you must make several changes. Consider the following things:
Check if you need to change your company’s name
A Foreign Branch’s business name will be the same as the parent company’s name; with “Abu Dhabi Branch” or “Dubai Branch” at the end, for example. A Limited Liability Company, on the other hand, will need to adopt a new name that includes the chosen activity(s). The company must also determine whether or not that name is already in use.
In addition, the name of the Limited Liability Company must always include the suffix “LLC.”
They will be updating corporate documents
The conversion of a Foreign Branch to an LLC is a procedure introduced for practical purposes by the relevant licensing authorities in the various Emirates; rather than an established concept under a specific regulation in the UAE.
The primary goal is to maintain the same business trade license number for the business entity. Additionally, being able to novate all contracts, bank accounts, and other licenses. The license number is the primary means of identifying businesses. This is because it ensures the practical continuity of the business in its relationships with third parties, particularly governmental authorities.
They will amend documents; this is including an amended memorandum of agreement (MOA), a share certificate, and a business trade license. Plus, with us, you can easily obtain this license.
Set up a new bank account
Creating a new bank account in the name of the LLC aids in the separation of business and personal funds. Personal assets, record keeping, and tax reports are all protected by having a separate business bank account.
The Emirate and the relevant registration authority will determine the timeline for changing the legal structure. The government and licensing fees will range from AED 5,550 to AED 10,000. This will be depending on the jurisdiction and activities, as well as any other government departments involved other than the DED.
To notarize the Memorandum of Association (MOA) and conversion documentation, all shareholders must appear in front of a notary public. Then, you must communicate the changes to the appropriate registration authority, such as the DED.
Once they have amended all of the documents, they will notify all clients, and the owners will be able to resume operations.
Department of Economic Development will be reconstructing new legal documents
To change the legal structure of their company, owners must submit several documents to the Department of Economic Development (DED). The Memorandum of Association is one of the most important documents (MOA). MOAs play a role in the regulation of a company’s external activities. It includes the following details:
- Name of the company.
- Location of the company’s headquarters.
- Objectives and activities of the organization
- Shareholders are personally liable.
- The capital of the company.
- The company’s first customers.
- They describe the powers of the company’s Managers in detail.
- The company’s lifespan.
Collaboration with a local UAE partner
Under the current Commercial Companies Law, UAE Mainland companies must have a UAE national sponsor. This sponsor will own at least 51 percent of the company’s shares. As a result, as part of the conversion to an LLC, the Foreign Branch will need to hire a local partner.
The company can choose a UAE Corporate Nominee shareholder to hold 51 percent of the LLC’s shares. Using a Corporate Nominee provider, such as Connect Group, allows the foreign party to maintain greater management control and effective ownership of the LLC.
Advantages of a Limited Liability Company over a Foreign Branch in the UAE
The Ministry of Economy requires foreign branches to deposit AED 50,000 as a bank guarantee. This guarantee must remain with the Ministry of Economy for the duration of the branch’s existence and is only returned upon deregistration. As a result, Foreign Branch fees are slightly higher than LLC fees.
As a Foreign Branch, you are not allowed to do certain activities; particularly, a Foreign Branch cannot import or trade in goods within the UAE.
The parent company has full responsibility for the foreign branch, and liability is not limited. Furthermore, the parent company tax the income from the Foreign Branch; so there is no benefit from the UAE’s zero tax rates.
How can Connect Group help you?
Changing the legal structure of your business entity requires a thorough understanding of the regulatory environment. Also, it would be necessary to understand the various steps and government processes in the UAE.
Connect Group assists and consults business owners who want to convert their organization’s legal structure from a foreign branch to an LLC. Our team of company formation and legal experts will walk you through every step of the legal transformation, including the license requirements and any regulatory approvals required for the company.
Would you like to contact us to obtain more information about business structures in the UAE? If you have any questions, call us at +971 43 316 688. You can also email us at contact@connectgroup.co. We look forward to helping you!
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