The President of the United Arab Emirates, His Highness Shaikh Khalifa bin Zayed Al Nahyan, has issued a decree abolishing the minimum capital requirement for setting up a limited liability company in the UAE.
Summary of the new law
The decree amends Article 227 of Federal Law No.8 of 1984 (UAE Companies Law) which provided that the minimum share capital of a limited liability company must be no less than AED 150,000 divided into equal shares of minimum value of AED 1,000 each.
Under the amended law, prospective business partners seeking to establish a limited liability company will have the freedom to determine the capital requirements of their new company and there will be no minimum par value for the company’s shares. The law provides that the limited liability company must have a “sufficient capital … to achieve the object of incorporation”.
The amended law will come into effect on publication of the decree in the UAE Gazette, but will apply retrospectively to companies established on or after 1 June 2009.
Reactions of the business community
The amendment has been widely welcomed by business leaders for reducing barriers to entry in the UAE which, according to the World Bank, has comparatively high establishment costs for new businesses. Historically, UAE authorities have required limited liability companies to have a minimum capital of AED 300,000 in Dubai and AED 150,000 in the other emirates, with more capital often being required depending on the activities of the company.
The removal of the compulsory capital requirement is viewed as being of particular benefit to small and medium sized enterprises seeking the benefits of limited liability, but without the capacity to invest substantial start-up funds. It is also being seen as an attempt by the UAE Government to provide assistance to small businesses that have struggled to overcome tightening credit and declining orders across many sectors of the economy.
The removal of the minimum capital requirement of AED 150,000 from the UAE Companies Law is likely to encourage the incorporation of establishments currently operating in the UAE with unlimited liability. It is also likely to encourage new entrants to the market for whom the previous capital requirements were difficult to meet and make incorporation less complex where the foreign shareholder is also paying the capital contribution of the UAE national shareholder (as often happens).
Whilst the minimum capital requirement will be removed from the law, it seems likely nonetheless that the UAE authorities will closely review the proposed capital for a new limited liability company to ensure that it is appropriate for the planned activities of the company. It is not clear yet what criteria the authorities will apply when determining the appropriateness of the capital and this discretion is likely to create some degree of uncertainty, at least initially.
Certain types of business activity such as construction and finance have their own minimum capital requirements. This amendment to the UAE Companies Law is unlikely to affect those requirements.
It is also important to note that limited liability companies will still have to comply with other aspects of the UAE Companies Law relating to capital, such as Article 289 which provides that if the losses of a limited liability company amount to half its capital, the matter must be referred to the shareholders to decide whether to dissolve the company.
All in all this is a positive step and maybe the first stage in the long awaited overhaul of the UAE Companies Law.