There are a variety of options open to companies for structuring their businesses to serve the Abu Dhabi energy market including joint participation ventures, appointing commercial agents and establishing a branch or a limited liability company, according to Angela Ewen, head of Andrews Kurth’s business registration and licensing team for the Middle East and North Africa.
Originally from Scotland, she has been living in Dubai since 1999 and has a breadth of experience both in Scotland and in the Middle East in several sectors, including oil and gas. Angela graduated with a BA in Law and Management from Robert Gordon University in Aberdeen, Scotland.
UAE Law recognises the concept of a joint participation venture (JPV) where the foreign player alliances with a local company holding the requisite local trade licence and ADNOC vendor registrations and the local company serves as the client contractor and employer of all relevant personnel engaged in the operations.
Angela Ewen said: “The JPV model has some attractions during the early stages of a business’s evolution in Abu Dhabi but experience suggests that the model will quickly have limitations which will impact on operational needs and legal risk management.
The second option is to appoint a registered commercial agent under the UAE Agency Law. Although unregistered agency agreements are allowed in the UAE, current ADNOC policy effectively means that a registered agency with a local Abu Dhabi entity is necessary to do business in this market. The UAE Agency Law is protective of the local agents and key issues which need to be addressed are statutory rights to exclusivity, commission on any sales into the territory and compensation on termination or non-renewal.
In practical terms, the local agent must also be 100% owned ultimately by Emirati nationals, must carry the necessary trade licence and must carry the necessary vendor registrations at ADNOC. In many cases, a registered agency will be put in place to allow business activities to commence pending a full company registration and licensing.”
The third and fourth options are to establish a registered entity in Abu Dhabi which carries its own trade licence and Supreme Petroleum Council (SPC) approval, which can be done either by registering a branch of a foreign company or establishing a limited liability company (LLC).
“Registration of a branch allows 100% ownership but the engagement of a local service agent will still be required. The registration and licensing process is notoriously cumbersome, expensive and time-consuming. In some cases, the authorities will not allow a branch to be registered unless local manufacturing is a key aspect of the business case,” said Ewen.
Further problems can arise through the exposure of the home assets of the company used to establish the branch to legal risk in the region and, in some cases, the loss of the UAE’s zero corporation tax rate on the UAE profits of the branch, which may end up being taxable in the home jurisdiction of the company. For these reasons, an LLC arrangement tends to be the preferred option for investors in Abu Dhabi.
Each LLC established in the UAE must have a UAE national shareholder (either an individual who is a UAE citizen or a company wholly owned by UAE nationals) which holds at least 51% of the shares of the LLC.
“We have developed a number of mechanisms for safeguarding the rights of the foreign investor shareholder, where they are in a minority shareholding position. In particular, shareholders’ agreements are deployed for the purposes of giving the foreign shareholder de facto control of the LLC, notwithstanding their minority shareholding position. Other mechanisms such as a call option in relation to the local shareholder’s shares and provisions dealing with profit share may be employed,” explained Ewen.
“Generally, the shareholders are permitted to agree that the profits should be distributed in proportions which deviate from the shareholdings, meaning that the amount of profits to be distributed to the foreign shareholder may exceed their percentage shareholding (in some cases, up to 95%). In practice, the local shareholder does not play an active role in the LLC and simply receives a fee for supporting the foreign investing party.”
Documentation may also be put in place which will give the foreign shareholder full rights and powers to appoint and remove all managers and directors of the LLC and the local shareholder will agree to take no active role in the management of the LLC, including its finances and bank accounts. The management of the LLC is delegated to a general manager (appointed by the foreign shareholder) pursuant to a power of attorney.
“The risks associated with the 49/51 structure may be further managed by contractual arrangements with group companies and by holding key assets and cash reserves in a 100% owned related party. Risks associated with transfer pricing for services/equipment supplied from other group companies will generally be regulated by an intercompany services agreement,” added Ewen.
It takes, on average, between six and 12 months to establish and license an LLC so an interim agency agreement is usually entered into with the local shareholder, enabling the parties to get the business up and running while the LLC is established.
“Registration of the agency agreement is required, in order to facilitate tendering for government contracts. Employees deployed in country during the agency period would be employed and sponsored through the agent but once the LLC is established, the agency agreement is terminated and the business is conducted by the LLC, without any further need to appoint an agent,” said Ewen.