When considering the best way to establish a business in the Middle East, many overseas companies consider using a branch or representative office. However, to date, not all Middle East countries have allowed foreign entities to establish branches and some countries regulate the types of activities which branches and representative offices may conduct. This article takes a more detailed look at establishing a branch across the region, and the advantages and disadvantages of doing so.
What is a branch or a representative office?
In basic terms, a branch is an extension of the foreign company's activities in an overseas jurisdiction, which does not have a separate legal personality from its "parent" company and all rights and obligations of the branch or representative office are directly those of its parent.
In the Middle East, where foreign ownership restrictions exist in many countries to limit the percentage of capital a foreign individual or company may hold in a company incorporated in that country, a branch or representative office looks an attractive option. It enables the foreign company to operate directly in that Middle East jurisdiction without sharing the capital with a local company. However, it is common in Middle East countries (such as the UAE, outside of the freezones) for a branch or representative office to require a local "sponsor" to represent the branch or representative office before the office is licensed. The "sponsor" is paid a fixed fee for its services. In this case, the sponsorship agreement may have to be filed with the authorities.
It is also important to note that, because of the direct and unlimited liability of the parent for the activities of its branch or representative office, these establishments are not suitable if the foreign company wishes to cap its liability in the relevant Middle East country to the amount of its investment. Investors may, however, wish to consider using a wholly owned subsidiary with limited liability in another jurisdiction as the parent of the branch to limit liability to the capital of the parent, although it should be noted that it may not be possible to establish a branch of a newly incorporated company. Some countries, such as the UAE, require the parent to have a track record in the activities which the branch wishes to conduct in their jurisdiction.
What is the difference between a branch and a representative office?
A representative office is usually more restricted in the type of business activities, such as marketing and promotional activities.
A branch is generally permitted to perform more commercial activities, although the scope of these will be limited to the trade of its overseas parent. It is usual for a branch to be able to make a profit from its activities.
What other restrictions do you find on the establishment or operation of a branch office?
Although a branch office is normally permitted to undertake commercial activities on behalf of its parent in most Middle East countries, some jurisdictions impose other commercial restrictions on the establishment of a branch.
It may not be possible to establish a branch office other than to fulfil a contract awarded to the overseas parent by the government of that country. This is the case in Qatar, Oman and Iraq (other than Kurdistan), for example. In this circumstance, the branch establishment is only permitted to exist in the Middle East country until the termination of the contract, unless the commercial licence is renewed for another project. There are often exceptions to this rule where it applies, however. This is commonly seen in the case of banks and insurance companies which are often permitted to operate through a branch.
By way of another example, in the UAE it is currently government policy that a branch cannot import goods for resale. This rules out a commercial retail business operating in the UAE through a branch structure and makes them suitable only for the provision of services.
In which countries can I rule out the option of establishing a branch or representative office?
Kuwait is the one country in the GCC which does not permit foreign company branch or representative offices. However, it was reported in May 2011 that the Kuwaiti Minister of Trade and Industry has issued a ministerial decision relaxing the restriction so that wholly GCC owned companies can now establish a branch operation in Kuwait. However, if the GCC company has any foreign shareholders, the prohibition continues.
In other countries, such as Egypt and Lebanon, the lengthy process required to establish a branch means that it is usually advisable to establish a presence in those countries using a different type of entity.