Welcome to Lawgical with Ludmila. I’m Ludmila Yamalova, the managing partner of a Dubai-based law firm. In today’s episode, I will be discussing the process and various nuances of closing down a business in the UAE.
Setting Up vs. Closing Down a Business
Establishing a company in the UAE is a fairly straightforward process, thanks to the country’s business-friendly environment, strategic location, and numerous free zones. However, closing down a business is a very different process, often more complex and requiring careful planning, compliance with legal formalities, and significant costs.
A common misconception among business owners is that simply allowing a company license to expire results in liquidation. This is not the case. A company remains legally active and obligated to fulfill financial and regulatory duties until it is formally liquidated. Proper closure requires a structured liquidation process, which includes appointing a liquidator, submitting audits, and settling outstanding obligations.
The Legal Framework of Business Liquidation
To understand the process of closing a business, it’s crucial to first understand how businesses are set up in the UAE. The UAE is a federal country with seven Emirates, each with its own regulations for company formation and liquidation. While federal laws govern corporate existence and dissolution, the specifics of setting up and closing a business depend on the Emirate and economic zone in which the company operates.
Within each Emirate, businesses may operate in either the mainland, regulated by the Department of Economic Development (DED), or in various free zones, each governed by its own regulatory authority. The process for liquidation varies depending on where the company is registered, as each Emirate and free zone has its own procedures, requirements, and timelines.
The Legal Necessity of Liquidation
Many business owners assume that once a company’s license expires, the company ceases to exist. However, in legal terms, the company remains active and subject to obligations until it undergoes formal liquidation. Failing to close a company properly can lead to ongoing liabilities, fines, and complications.
The liquidation process ensures that businesses fulfill their financial and legal responsibilities before ceasing operations. This includes settling debts, resolving contracts, canceling visas, and obtaining clearance from relevant authorities. In some cases, liquidating a business can take anywhere from three months to over a year, depending on the complexity of the case.
Governing Laws and Regulations
Company liquidation in the UAE is governed by various laws, including:
- Federal Decree-Law No. 32 of 2021 on Commercial Companies, which outlines corporate dissolution and liquidation requirements.
- Cabinet Resolution No. 58 of 2020, which mandates disclosure of Ultimate Beneficial Owners (UBOs) during liquidation.
- Tax Laws, including Federal Law No. 8 of 2017 (VAT) and Federal Decree-Law No. 47 of 2022 (Corporate Tax), which require businesses to clear all tax liabilities before liquidation.
- Free Zone Regulations, which vary by jurisdiction (e.g., DMCC, DIFC, ADGM).
- Immigration and Labor Laws, which require businesses to cancel employee visas and settle all dues before closure.
Steps in the Liquidation Process
- Issuing a Shareholder Resolution
- The shareholders must formally resolve to liquidate the company.
- The resolution must appoint a liquidator and, in some cases, an auditor.
- If multiple shareholders exist, unanimous agreement is required.
- The resolution must be registered with the relevant economic authority.
- Appointing a Liquidator
- The liquidator can be an auditing firm, an accounting company, or a law firm.
- Some free zones have pre-approved liquidators.
- The liquidator is responsible for overseeing the winding-down process and preparing a final liquidation report.
- Conducting a Final Audit
- An audit report is required to assess the company’s financial position.
- The audit outlines assets, liabilities, and financial obligations.
- The report is integrated into the final liquidation dossier.
- Publishing a Public Notice
- A notice of liquidation must be published in local newspapers or official gazettes.
- This serves as an opportunity for creditors to submit claims.
- Settling Outstanding Obligations
- All creditors, including employees, suppliers, and banks, must be paid.
- Tax clearances must be obtained from the Federal Tax Authority (FTA).
- Labor clearances must be obtained from MoHRE (for mainland companies) or the relevant free zone authority.
- Immigration clearances must be obtained to cancel all employee and partner visas.
- Bank Clearance and Closure
- Bank accounts must be closed, and clearance letters obtained.
- Any outstanding loans or liabilities must be settled before account closure.
- Final Submission to the Authorities
- The liquidation report, along with clearance certificates from tax, labor, immigration, and banking authorities, must be submitted to the relevant economic zone.
- Additional compliance requirements, such as disclosure of Ultimate Beneficial Owners (UBOs), may be requested.
- Final Payment of Fees
- Fees must be paid for the liquidation process, including:
- Liquidator and auditor fees.
- Government authority fees for document processing.
- Any outstanding licensing fees (businesses must clear unpaid license fees before liquidation can proceed).
- Fees must be paid for the liquidation process, including:
Alternatives to Liquidation
Given the time and cost involved in liquidation, some businesses explore alternative options:
- Selling the company: If a buyer can be found, selling the business (even at zero value) may be faster and cheaper than liquidation.
- Transferring shares: Transferring ownership to another party can avoid the liquidation process.
- Restructuring: Some businesses choose to restructure rather than close.
Key Takeaways
Closing a company in the UAE is far more complex than setting one up. Business owners should:
- Understand the regulations and legal implications of liquidation before forming a company.
- Seek professional guidance when setting up a business to avoid costly mistakes.
- Plan ahead and allocate sufficient time and resources for the liquidation process.
Thank you for tuning in to this episode of Lawgical with Ludmila. You can find me on TikTok, YouTube, Facebook, LinkedIn, and more, where I provide regular updates on UAE laws and regulations. If you have a legal question or would like to schedule a consultation, visit our website at lylawyers.com.
Until next time, stay safe and stay informed.