Setting Up a Joint Venture in the UAE: Opportunities and Challenges

Joint venture is one of the most beneficial strategic alliance models to expand your business in the UAE. The country’s dedication to innovation makes it a hub for cutting-edge technological advancements and world-class infrastructure, making it a preferred choice for joint ventures.   A joint venture is a commercial arrangement between two or more parties pooling their resources and expertise to achieve business goals while sharing between themselves risks relating to the planned project.     The Key benefits of setting up an UAE joint venture are:

• Limits costs and administrative burdens of setting up fully fledged operations 
• Decreases level of local footprint,
• Significantly reduces time of business licensing process,
• Secures ownership over the investment and returns from it, while allowing for mitigating negative business impacts,  

  Simultaneously, the Joint Venture model allows access to favorable tax and customs setups resulting in competitive advantages.    However, joint venture structuring requires careful planning so businesses can seize opportunities and navigate challenges associated with such alliances.   This blog explores all the opportunities and challenges you might face when setting up a joint venture in the UAE. Before that, let’s briefly understand how joint ventures work in the UAE.

Understanding Joint Ventures in the UAE

When it comes to corporate structuring, the UAE offers a choice between the following:   Mainland License: Registered with the local government, Mainland companies can operate UAE-wide, not just in specific free zones and international areas. The UAE government actively promotes and supports foreign investments in the mainland. So, Mainland License for joint ventures can benefit from easier and streamlined licensing procedures.   Free Zones: Conversely, free zone companies are restricted to their specific zones and require the proper licences to operate beyond these areas. This structure provides 100% foreign ownership, world-class infrastructure, and strategic locations for local and international markets.

Selecting Legal Framework for Joint Venture in the UAE

Selecting the legal framework for a joint venture depends on factors like liability exposure, level of control, tax implications, etc. The most common options are:  

• Limited Liability Company (LLC): Flexible management structures and limited liability protection for partners.
• Limited Liability Partnership (LLP): It is similar to an LLC, but one partner’s negligence does not impact the others. 
• Partnership: Unlimited liability for partners, putting their personal assets at stake in case of debt.
• Contractual Joint Venture: No separate legal entity is required, and partners create a detailed contract to agree on how to collaborate.

Opportunities in Establishing a Joint Venture in the UAE

Joint ventures in the Emirates bring many lucrative opportunities to involved businesses. These are as discussed below:

Easier and Faster Market Entry

When it comes to global expansion in another country, market entry is the first challenge. Every jurisdiction has laws and rules regulating the business landscape and foreign investments in its country. Navigating these laws can be time-consuming and troublesome, causing delays and costs to businesses looking for expansion.   Joint ventures allow businesses easier, faster, and more cost-effective entry into the UAE market than forming a new business. By leveraging the local partnerships of the UAE-based parties, you gain quick access to established distribution channels and customer bases. Non-resident partners can access knowledge of local marketplace and legal frameworks, thus increasing the chances of success.   These benefits are more prominent to small to medium enterprises (SMEs) with limited capital, resources and expertise required to pursue this opportunity. A resident partner with a strong reputation brings acceptance and credibility to your joint venture. This is particularly valuable in strictly regulated industries, where having a recognised local partner can accelerate regulatory clearances and approvals. 

Resource Sharing and Risk Mitigation

Whether it’s infrastructure, knowledge, technology, or talent, collaborating businesses share their resources for maximised efficiency, cost-effectiveness, and increased profitability.    However, like any other business structure, joint ventures are also not without risks. The best thing is that the companies involved share risks associated with market entry and business operations, thus minimising the impact. Risks are shared in multiple ways, including profit-loss sharing, resource allocations, distribution of responsibilities, etc. Each partner should clearly understand the sharing of potential rewards and risks associated with the partnership.   Risk mitigation is another major benefit of joint ventures. All parties work together to develop effective risk mitigation strategies to address risks and ensure business success.

Cultural and Market Insights

Joint ventures bring together different corporate cultures, a diverse group of skilled people, and local and international expertise. This diversity translates into opportunities to share valuable skills and develop worthy partnerships. In addition, diversity fosters a sense of belongingness and respect among your teams, where everyone works towards a common goal.

Challenges in Establishing a Joint Venture in the UAE

There are many challenges in setting up a business in the UAE, and joint ventures are no exception. Here are the topmost challenges discussed for such business structures:

Regulatory and Legal Challenges

The UAE has a complex legal framework that results in regulatory challenges for joint ventures.   Foreign ownership restriction in the mainland is one major regulatory challenge in the UAE. While 100% foreign ownership is allowed in some sectors, other industries still need a local Emirati partner to claim 51% shares. This limits the foreign entity’s control over everything.   Joint venture agreements detail ownership structures, responsibilities, exit strategies, and other important aspects of the collaboration. It is easy to make mistakes in the agreement largely because of cultural and legal differences in business practices, which are influenced by Islamic laws, Sharia principles, and local customs in the UAE.

Partner Selection and Alignment

Selecting a local partner who is familiar with local laws and reputable in the country is pivotal. The partner can be an individual or a business entity (latter fully owned by UAE nationals). The choice of partner affects the venture’s success, so it has to be a strategic decision. All partners must be compatible with each other in terms of business objectives, vision, and operational strategies. A poorly selected partner means mismanagement, conflicts, and legal disputes.   However, identifying suitable local partners with aligned business objectives is easier said than done. You do not want silent investors but rather partners that can add value to the venture’s growth, especially if you are setting up a mainland business and the Emirati partner may hold 51% of the shares. Partners must align with your business goals and vision and can contribute valuable market knowledge and connections.   Finding trustworthy and reliable local partners for joint ventures in the UAE can be challenging and laborious.

Cultural and Operational Differences

Foreign businesses and Emirati partners with different legal and cultural approaches to business may lead to conflicts during decision-making, contract enforcement, and work culture differences.   The UAE’s business culture is shaped by Islamic traditions and local customs, which differ greatly from the Western world. So, businesses from other countries must learn and respect these differences to ensure smooth, conflict-free collaboration.   The UAE corporates value long-term relationships over quick decision-making. So, the process may slow down for foreign partners, requiring them to have patience. Differences in labour laws, work culture, decision-making, and management styles bring more challenges. Foreign companies with a collaborating approach might struggle to adapt to the UAE’s hierarchical approach.

Setting Up a Joint Venture in the UAE: Seizing Opportunities & Overcoming Challenges

Joint ventures present great opportunities for mutual success. However, we cannot overlook the challenges of planning, communication, and cultural and legal differences. The good news is taking proactive steps for business partnerships can help seize the opportunities and address challenges. With the right guidance and professional support, joint ventures can thrive in the Emirates.   Connect Group is available to guide and support you in ensuring your joint venture is structured in compliance with local laws. We provide efficient business services for finding the right resident partner and help navigate legal frameworks. Connect Group enables businesses to achieve shared success in joint ventures through strategic support, transparent communication, and meticulous planning. Let us handle the setup so you can focus on your business goals and vision.