Corporate governance of international groups of companies

Corporate governance of international groups of companies

How to build a decision-making system in a holding that banks, regulators and partners recognize

Mainstream

The creation of a holding in the UAE is not the final structuring, but its beginning. The real challenge is to set up corporate governance so that the group is not perceived as an “empty shell”.

The key risk for international groups using companies in the UAE is not tax claims per se, but the failure to comply with the corporate veil, locking bank accounts due to opaque ownership structures, or challenging management decisions.

Effective corporate governance is based on three tests:

1. Where the key decisions are actually made.
2. How these decisions are documented and legitimized
3. How is the responsibility between parent and subsidiaries divided?

If these issues are not resolved, the entire holding’s design could be deemed a fiction with catastrophic consequences – from the personal liability of the beneficiary to the disruption of M&A transactions.

When an audit of the management system is required

The issue of setting up corporate governance in the UAE is particularly acute in the following situations:

• the group registers an operating company in the mainland (Mainland) or in the free zone (Free Zone) of the UAE;
• a corporate bank account is opened and the compliance department of the bank requests a detailed management structure (organizational chart and governance manual);
• a holding company in the UAE is used to hold assets in other jurisdictions;
• Nominee Director is introduced and its powers should be delineated.
• A beneficiary from one country manages the assets through a board of directors meeting in Dubai or Abu Dhabi.
• the group prepares for an audit, investment or exit structuring (exit);
• The perimeter of the group includes companies from offshore, onshore and low-tax jurisdictions.

The mistake that most beneficiaries make

Many business owners believe that if they are a sole shareholder and a general manager, no special management procedures are required.

That's a dangerous misconception.

The right question is not “who is in charge,” but “how do we prove that a company’s decisions are its own?” The absence of meeting records, mixing accounts, managing through informal instructions in messengers is a direct way to the fact that the court or the creditor recognizes the company as simply the “alter ego” of the beneficiary, ignoring the protection of limited liability.

Step 1. Audit the current decision-making structure

The first step is not to write job descriptions, but to do legal due diligence on corporate governance.

The following should be analysed:

• Memorandum of Association of all companies of the group;
• the existence and terms of Shareholders’ Agreements (corporate agreements);
• the composition of the boards of directors and their real role;
• Managers have valid authority to sign contracts and bank mandates.
• history of corporate decisions (resolutions) over the past 2-3 years;
• the nature of the cash flow between the group companies (loans, dividends, payment for services) and their documentary justification.

Weakness at this stage is not always a problem. Often, the absence of protocols can be made up for by subsequent ratification or memorandums of decision, but this must be done before a dispute arises.

Step 2. Distinguish levels of ownership and levels of management

The classic mistake is to mix the competence of shareholders and management.

The management structure should clearly include:

• what decisions are made exclusively by the shareholder (sale of shares, liquidation, change of directors, approval of major transactions);
• what decisions are within the competence of the Board of Directors (strategy, budget, large contracts, opening of branches);
• what issues are solved by executive management (operational contracts, hiring of personnel, current payments).

For groups using companies in the UAE (especially in financial areas such as DIFC or ADGM), having a Board Charter and a clear Authority Matrix is a requirement of the regulator, not just a wish of the consultant.

Step 3. Legitimize cross-border solutions

If the CEO of a company in the UAE receives instructions from a beneficiary located in Europe or the CIS, it is necessary to create a legal mechanism that turns these instructions into legal corporate acts.

This can be done through:

• Formal Board Meetings with video recording and minutes;
• Written Resolutions signed by all directors
• Corporate Secretary Institute in DIFC/ADGM jurisdictions
• Special Powers of Attorney (SPOA) for specific transactions.

In mainland Dubai, bilingual protocols, notarized and legalized, are not bureaucracy, but proof that the company has made the decision in due course. Without this, any contractor can challenge the authority of the signatory.

Step 4. Provide economic presence (Economic Substance) and content

Corporate governance is not only about paper, but also about actual activities.

A company in the UAE that claims tax advantages and avoids tax resident status in other countries must demonstrate:

• Key management decisions are made in the UAE (resident directors);
• that the company has qualified staff, office and operating expenses;
• that the meetings of the Board of Directors are held in the UAE (physical presence of quorum);
• The company is not an “intermediate” (conduit) for the simple transit of funds.

Regulators do not look at the number of offices rented, but rather at the location of the strategic decision-making center (POEM). The minutes of the meetings, with the place and participants, are the best evidence.

Step 5. Set up banking mandates and financial controls

The UAE banking system is extremely sensitive to governance issues. Compliance procedures require disclosure not only of shareholders, but also of all signatories and account control.

It's critical here.

• define signature groups (A, B or joint) in the banking mandate;
• • Prescribe limits for different levels of management (who can approve payments over a certain amount);
• link bank mandates with corporate resolutions on the appointment of managers;
• ensure that any action on the account has a corporate basis, which is especially important when moving funds within the holding (Treasury Management).

A blurred banking mandate or delay in updating the information about the change of director is one of the main reasons for blocking accounts in the UAE.

Step 6. Protect the directors: divide up

A nominee or professional director in the UAE carries serious risks, including criminal liability for a range of financial crimes and administrative fines (for example, for late filing of reports).

To protect management and beneficiaries, it is necessary to:

• to conclude Indemnity Agreements (loss compensation agreements) between the director and the shareholder;
• clearly specify in employment or service contracts with directors the limits of their powers;
• D&O Insurance, which is the standard for mature structures.
• Establish the process of informing directors about all significant facts of the company’s activities.

The director cannot invoke ignorance if he formally holds the position. The management system should provide him with access to information.

Step 7. Develop and implement corporate policies

An international group of companies cannot work “by concepts”. It needs a package of documents (Governance Framework), which becomes mandatory for all subsidiaries.

This package usually includes:

• Corporate Governance Code (CGD)
• Conflict of interest policy;
• Related Party Transactions Policy (Related Party Transactions Policy)
• Regulations for the storage of corporate documents (Record Keeping Policy);
• Dividend Payment and Intra-Group Finance Policy.

This not only reduces management risks, but also significantly increases the capitalization of the business in the eyes of auditors, banks and potential investors.

Typical Mistakes in Managing International Groups from the UAE

1. The statement “pay the bill” in WhatsApp is not a corporate decision and destroys the company’s protection.
2. If the board has not met in years, it is used as evidence of the lack of real governance in the UAE.
3. Sole Shareholder Resolutions must be written, especially for large loans or a change of director.
4. Backdating documents in the UAE can be regarded as a criminal offence (forgery). Lost protocols should be restored through ratification, not forgery.
5. Failure to submit or untimely update data to the Register of Beneficial Owners leads to severe fines and blocking of any corporate actions.
6. Paying the beneficiary’s personal expenses directly from the company’s corporate account in the UAE is the quickest way to lose limited liability.

Checklist for the beneficiary

Before you consider the management system built, answer 12 questions:

1. Are directors appointed in all the group companies and are their powers clear?
2. Is there a current register of beneficial owners and is it maintained in accordance with the requirements of the UAE?
3. Have all the key decisions (loans, changes of leadership, dividends) been made in the form of written resolutions?
4. Does the bank mandate specify who is managing the account and on what basis?
5. Does the actual management of the company’s registration documents conform?
6. Where and how are the shareholders’ records, charters and registers kept?
7. Do nominee directors have an indemnity agreement and have limits on their actions?
8. Has the company’s economic presence (ESR) been audited in the UAE?
9. Is the procedure for approval of interested party transactions documented?
10. How do we prove that the decision-making center is located in the UAE?
11. Do we have a working matrix for delegation of authority?
12. Does every manager understand the limits of their responsibility?

Structure of good governance: four-line protection

1. Legal Substance: Constituent documents, registers, protocols, trust declarations. A foundation without which everything else doesn’t matter.
2. Economic Substance: Office, staff, expenses. Proof that a company is not just a folder of documents.
3. Banking & Treasury: Mandates, compliance, audit. Ensures uninterrupted operation of accounts and the passage of KYC.
4. Management circuit (Decision Making) Council meetings, authority matrix, real management. The company is managed professionally and autonomously from the will of one person.

FAQ

Can I run a company in the UAE while in another country?

It is possible, but it is necessary to build a legally correct mechanism. If you make decisions abroad and simply broadcast them to a local manager, the company faces the risk of being recognized as a tax resident of that other country and losing its residency in the UAE. Decisions must be made by local management within delegated authority, or you must attend meetings.

Do I need a real office to prove my management?

In most cases, yes. Flexible solutions like flexi-desk in free zones are good to start with, but for a mature holding structure with multiple employees and banking services, having a physical office is an important element of substance.

Can I make changes to the protocol retroactively?

Absolutely not. It's a case of law. If a decision has been made but not formalized, it can be formalized by the current date as a “ratification” of actions or a written resolution with an explanation of the circumstances can be prepared.

What if I am the only owner and director?

The fact that a shareholder and a director coincide in one person is an acceptable practice. But that puts a triple responsibility on you: to record their decisions in writing, not to mix personal and corporate funds and strictly follow formal procedures. If you do not do this, in court your company may be considered a fiction, and you will be deprived of protection from personal liability for debts.

Related services

• UAE Corporate Structuring & Holding Company Formation
• Corporate Governance, Board Support & Company Secretarial
• Economic Substance Regulations (ESR) Compliance
• International Tax & Private Wealth Structuring
• Cross-Border M&A and Joint Ventures

Related material

• How to Choose Between Mainland and Free Zone in the UAE for a Holding Company
• Economic Substance Rules: practical guide for holdings
• How to Protect Assets with Trusts and Funds in the UAE
• Due Diligence when buying a business in the UAE: What to look at in documents
• Nominal service in the UAE: How not to lose control of the company

Conclusion

Corporate governance of international groups of companies from the UAE is not a set of bureaucratic rules, but a technology for protecting business and personal assets.

A solid design is not based on registration certificates, but on how management decisions are made, formalized and proven. Without this base, any, even the most elegant international structure, risks being recognized as a blank shell.

The winner is not the one who has saved on the corporate secretary and protocols, but the one who from the first day builds a management system ready for questions from banks, tax authorities, investors and partners.