How To Choose The Best Local Sponsor For Your Business

4th September 2019

Engaging a local sponsor can be daunting and shouldn't been undertaken lightly, so here are eight questions to help you choose the best local sponsor for your business in Abu Dhabi or Dubai.

Depending upon the legal structure of your onshore business, it will be necessary for your organisation to engage with a local partner either in the form of a local sponsor (LLC) or a service agent (Foreign Branch), until such time the restrictions are lifted/reduced in some sectors under the UAE's Foreign Direct Investment Law. Choosing the right partner is crucial to the future success of your business. Making a hasty or ill-informed decision could be catastrophic. It’s essential to do your research first and understand the implications for your business when you set up and, more importantly, further down the line when your business is operational.

Consider this relationship with your local sponsor like a marriage. The courtship is all about getting to know each other; the engagement is about setting the terms for the future relationship; the marriage is the day-to-day relationship and if it all turns sour, the divorce (or breakup of the relationship) is often lengthy, stressful and expensive.

8 questions to choose the best local sponsor for your business

1) What do you want from your local sponsor?

2) Will the local sponsor deliver what they promise?

3) Will a high-profile local sponsor deliver?

4) Will the local sponsor be available when you need them?

5) How does your local sponsor manage other companies it sponsors?

6) What happens to your business if something happens to your local sponsor?

7) What will your financial commitment be?

8) Is there an exit strategy?

1) What do what you want from your local sponsor?

Are you looking for a sponsor to be actively involved or silent? An actively engaged sponsor will contribute to the set up and operational costs of the business; be active in the day-to-day operations of the business and decision making; and, take their entitlement to profits. Alternatively, a professional corporate sponsorship platform, will act as a ‘nominee’ partner; minimizing the risks associated with appointing an unknown individual and granting operational and financial control to the foreign party; and, rather than taking a share of the profits, a fixed annual fee is agreed.

2) Will the local sponsor deliver what they promise?

It’s easy to be seduced by high profile individuals and also to be wooed by promises of ‘open doors’, introductions and contracts; however, how can you ensure such promises will be delivered? Regularly, they aren’t and turn out to be empty promises, by which time it is too late. Consider setting up a contract to remunerate the individual/organisation based upon what they deliver rather than structuring your company based around such promises.

3) Will a high-profile local sponsor deliver?

What is your purpose for wanting to engage with a high-profile sponsor? If it is to have their name on your commercial license, then be sure to check in advance if this will be the case or whether one of their companies will be listed, in which case your objective may be defeated. Will you have access to the individual once you have signed a contract? In reality you are very unlikely to have day-to-day contact with such an individual due to their hectic schedules. Instead, their staff of administrators and PROs (Public Relations Officers) will often take care of the sponsorship and administrative responsibilities. It’s very important to understand how these responsibilities will be administered to ensure timely availability and efficiency for duties such as document signings during the incorporation and ongoing running of your business, in order to avoid unnecessary delays which can impact financially and operationally.

4) Will your local sponsor be available when you need them?

Consider the availability of your sponsor. You will need them during the incorporation or registration of your company in Abu Dhabi or Dubai. However, once the company is established you will need them on an ongoing basis for signing of documents, perhaps to assist with something in a government department or to supply their e-signature card (if your company doesn’t have its own) when processing visas for staff.

5) How does your local sponsor manage other companies it sponsors?

Sometimes we hear of individuals sponsoring hundreds of companies. How do they manage these to ensure that they all remain compliant without having a dedicated administrative team in place? Individuals not ensuring their sponsored companies remain complaint put all of their other sponsored companies at risk. It is possible for a sponsor to get a block in the Ministry of Human Resources and Emiratisaton (MOHRE) which affects all the companies they sponsor. The impact of this would be that until the block is removed (ie. the cause of the block is rectified) all of the sponsored companies would be prevented from processing visas. What would this impact be on your business if you were in the process of bringing in staff for a contract, but unable to process their visa?

6) What happens to your business, if something should happen to your local sponsor?

If selecting an individual as your local partner, it’s crucial to understand what happens in the event of their death. Sharia law determines that when a person dies, their estate is distributed among the next family layer. However, do you know the beneficiaries and what their intentions will be for their share of your business? What would happen to your business if the heirs had a feud over the estate? By engaging with a corporate sponsor, the foreign party is provided with business continuity in times of succession. This prevents unnecessary disruption and uncertainty.

7) What will the financial commitment be to your local sponsor?

The financial remuneration to a local sponsor will be dependent upon the terms of their engagement. An actively engaged partner will take a share of the profits. However, a professional corporate nominee, will assess the risk and liability of the activities of the company and the number of their employees to determine a fixed annual fee. The added benefit of this, is that it helps foreign companies to budget and have the peace of mind their profits are protected.

Also be sure the agreement with your sponsor clearly indicates how fees may be increased in the future to avoid any nasty surprises or disagreements further down the line.

8) Is there an exit strategy?

Terminating agreements in the UAE can be difficult. Local sponsors naturally don’t want to lose the business, but also the cultural aspect of viewing a liquidation as a failure can have a significant impact, even if a large exit fee is involved. Ensure that a clear exit is clearly defined at the outset and this does not need to include fees! We regularly hear of companies wanting to change their local sponsor, but the incumbent local sponsor tells them they have to pay a fee to be released from the agreement - if this wasn't previously agreed between the two parties, you are not obliged to pay it and sadly many companies aren't aware of this and feel compelled to remain with their incumbent local sponsor as a result, thinking they are saving fees, when in reality they don't have to pay them anyway.

Conclusion

Too often we hear of companies jumping into an agreement with a local sponsor to get their business up and running quickly without understanding the true implications for their business. For avoidance of doubt further into the relationship, be sure to have the terms of your agreement clearly documented at the outset.

Gateway Group provides unique corporate nominee local sponsor packages. It is a special purpose vehicle structured to provide protection of your business and profits. It is also designed to give management control to the foreign company. For more information about Gateway's local sponsor packages, please email: info@GatewayToUAE.com

Written by Jenny Hunt, Founding Partner & CEO

Gateway Group of Companies, Abu Dhabi & Dubai UAE