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UAE Update: Difficulties with your branch sponsor?

11 September 2018
Difficulties with your branch sponsor? Read this article by Head of Dispute Resolution in the Middle East, James Fox.

Key Points

  • It is possible to set up as a branch of a foreign (non UAE) company in order to operate in the UAE (a Branch) (Article 328 of the Commercial Companies Law (Federal Law 2 of 2015)).
    A Branch is required to have a UAE national or a company wholly owned by UAE nationals as its sponsor (commonly referred to as a local sponsor, agent or national service agent)
    (the branch Sponsor).
  • It is possible for a foreign company to change its Sponsor, however, a branch must have a sponsor at all times. The termination of the existing Sponsor must be immediately followed by the appointment of a new Sponsor.
  • If the existing Sponsor does not agree to their termination, termination can be costly, difficult and time consuming. It is essential to properly prepare before attempting to terminate the existing Sponsor.

Common reasons why a foreign company may wish to change its branch sponsor

There are a number of reasons why a foreign company may wish to change its branch sponsor, including:

  • Price - generally the drop in the oil price has seen more competition amongst sponsors driving down prices.
  • Consolidation - it is common where a foreign company has a number of subsidiaries with different sponsors for it to wish to consolidate under 1 agent.
  • Compliance - foreign companies also frequently look to change their agent where their current agent is not able to satisfy their compliance requirements.
  • The Sponsor – the relationship may have broken down with the existing Sponsor or the foreign company may believe a different Sponsor is a better fit for the business.

The procedure to change a branch Sponsor

The procedure to change a branch sponsor is, in theory, relatively easy. Amongst other administrative procedures, the legal representative of the foreign company attends at the notary public with the existing sponsor to sign the termination agreement before signing a new sponsorship agreement with the new sponsor.

What if the existing Sponsor refuses to agree to termination

A relatively easy procedure can become complicated and therefore expensive. Notwithstanding any contrary terms of the sponsorship agreement, the Notary Public will require the existing
Sponsor to sign the termination agreement. This means that a Sponsor may simply refuse in an attempt to hold the foreign company to ransom. Further, if the relationship deteriorates the Sponsor may refuse to perform his role as Sponsor (including for example the arrangement of work visas new staff or assisting in the cancellation of the work visas for departing staff). In short, the situation can quickly turn ugly.

The solution

The solution will be fact dependant, but may include: negotiation; establishing a new legal entity or issuing proceedings (each of these alone or in combination). There is almost without exception a solution, the skill lies in identifying the best solution for the circumstances and not making a difficult situation worse.

Further Reading