The UAE Federal Government has issued a decree amending Article 227 of the UAE Commercial Companies Law, Federal Law No. (8) of 1984 (Companies Law) with the effect of abolishing minimum share capital requirements in respect of limited liability companies (LLCs) in the UAE.

Amendment To The Companies Law

Prior to the amendment to the Companies Law, LLCs were required to have a minimum share capital of AED 300,000 in Dubai and AED 150,000 in the other Emirates of the UAE, to be divided into equal shares of a minimum value of AED 1,000 each.

According to the amendment to the Companies Law, which applies retroactively to LLCs set up on or after 1 June 2009, shareholders have the right to determine the share capital of their LLCs, provided that the LLC will have sufficient capital to achieve its objects. The shareholders will also have the right to determine the par value of the shares, as no minimum amount is prescribed.

Impact Of The Amendment

The amendment to Article 227 impacts on certain other provisions of the Companies Law, as set out below.

Article 255 of the Companies law requires an LLC to retain 10% of its net profit in each year in order to create a statutory reserve, thus leaving the remaining 90% of profits to be distributed as dividends. Once the statutory reserve amounts to half of the share capital of the LLC, the shareholders may suspend the retention of such profits, thus allowing all future profits of the LLC to be distributed as dividends. If an LLC is established following the above legislative amendment with a minimal share capital, it is likely that the shareholders will have a larger pool of funds to be distributed as dividends, as the retention of half of the share capital ought to be easier and quicker to attain.

Article 289 of the Companies Law, which relates to the dissolution of an LLC, provides a trigger event for dissolution by the shareholders if the LLC sustains losses amounting to one half its capital. Any new LLC incorporated with a minimal share capital amount may easily reach the losses prescribed in this Article resulting in the winding up of the LLC (unless the shareholders elect to recapitalise the LLC).

Reason For The Amendment

It is intended that the amendment will ease the process of establishing a business in the UAE (for example, the provision of a share capital certificate from a local bank confirming the deposit of the minimum share capital is no longer required to be produced to the authorities to incorporate an LLC) and less costly, thereby stimulation economic growth by encouraging especially small and medium size enterprises to establish businesses in the UAE. However, it remains to be seen whether this amendment to the Companies Law will be sufficient to result in any such growth. Indications are that more radical changes to the law will be required, such as the long awaited easing of the restriction on the percentage of equity that may be owned by foreigners in LLCs in the UAE.

Despite the amendment to the Companies law, the UAE authorities may also continue to impose minimum share capital restrictions in respect of certain activities or objects for which an LLC is established. For example, an LLC established to undertake construction related activities has historically required a higher share capital than that prescribed by the Companies Law. It is not yet clear however how the changes will impact the requirements of the UAE authorities.

Conclusion

While the amendment to the Companies Law may help to reduce the barriers to entry to the UAE market, changes to the foreign ownership requirements continue to be a live issue and would further attract foreign investment in the UAE. Foreign ownership requirements remains an important issue for the UAE Federal Government and it has, once again, recently been reported in the UAE media that such amendments to the Companies Law are under study and likely to be finalised and submitted to the UAE Cabinet within the next few months.

Regardless of the desire or potential for future changes to the Companies Law, the removal of the minimum share capital requirement is a significant de-regulatory measure.

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