Employee Incentives and Stock Options: Navigating UAE Law for Tech Firms

Tech companies in the UAE face a specific problem: how to offer equity incentives that actually work under local law without creating cap table chaos, tax surprises, or unenforceable promises.

The answer depends on where your company is incorporated. A mainland LLC, a private joint stock company, and a DIFC or ADGM entity each operate under different rules, and each requires a different approach to employee equity.

This guide explains what UAE tech founders can actually do, what they cannot do, and where the friction points lie.

The Jurisdiction Problem

Before designing any incentive plan, identify which regime governs your company.

Mainland LLCs: The Constraints Are Real

Most UAE tech companies start as mainland LLCs. The structure is simple to form, allows 100% foreign ownership in most sectors, and does not require minimum capital. But it creates genuine obstacles for equity incentives.

The 50 Shareholder Cap

Article 71 of the CCL limits an LLC to 50 partners. Once you exceed that threshold, you must convert to a joint stock company or restructure. A startup with 30 employees cannot grant direct equity to all of them without consuming most of the cap.

Pre-Emption Rights Apply to Every Transfer

Unlike joint stock companies, LLCs do not benefit from an ESOP-specific exemption to pre-emption. Under Article 80 of the CCL, any transfer of shares to a third party must first be offered to existing shareholders, who can dispute the price and trigger a formal valuation.

This makes option exercise painful. An employee who wants to buy shares must wait for pre-emption to clear, and existing shareholders can delay or obstruct the process.

Notarisation and DED Approval

Every share transfer in a mainland LLC requires notarisation and registration with the Department of Economic Development. This is not a formality. It adds cost, time, and administrative burden to what should be a routine equity transaction.

What Actually Works for Mainland LLCs

Phantom shares (virtual stock plans): The company grants employees a contractual right to a cash payment tied to the company's value at a future date (typically an exit event). No shares change hands. No shareholder cap issues. No pre-emption.

Stock appreciation rights (SARs): Similar to phantom shares, but the payout is based only on the appreciation in value from the grant date to the settlement date. This is a cash bonus linked to company performance, not actual equity.

Contractual profit participation: A simpler arrangement where employees receive a percentage of defined profits or exit proceeds, documented in an employment side letter or participation agreement.

These structures avoid the statutory constraints but require careful drafting. The employee has a contractual claim against the company, not an ownership stake. Enforceability depends on the terms, the documentation, and whether the company has the cash to pay when the obligation matures.

The 2025 Amendments: Room to Structure, Not Turnkey ESOP

Federal Decree-Law No. 20 of 2025 introduced multiple share classes for LLCs. This allows differentiated voting, dividend, and liquidation rights by class, which creates new structuring options for employee equity.

However, this is not a ready-made ESOP framework. The practical questions remain:

• Will the competent authority accept and register differentiated share classes without friction?
• Do pre-emption rights still apply to transfers within and between classes?
• How do buyback and leaver provisions interact with the new structure?

Until registry practice clarifies these points, treat the amendments as an opportunity to explore, not a solved problem.

Joint Stock Companies: The Article 228 Track

If you need a true equity plan with share issuance, the joint stock company structure provides a statutory pathway.

What Article 228 Allows

Article 228 of the CCL permits a company to increase its share capital to implement an employee share incentive scheme. The key features:

• Requires a special resolution approved by the general assembly (75% majority)
• Participation is limited to employees; directors are explicitly excluded
• Existing shareholders do not have pre-emption rights over shares issued under the scheme
• The board must present the scheme to the general assembly for approval

This removes the pre-emption obstacle that makes LLC equity plans impractical. Employees can receive shares without existing shareholders blocking or delaying the process.

SCA Regulations for Listed Companies

For public joint stock companies listed on the Abu Dhabi Securities Exchange or Dubai Financial Market, the Securities and Commodities Authority imposes additional requirements under SCA Chairman Resolution No. 22/R.M of 2016, Articles 30 bis 1-4:

• 10% cap: Total incentive shares issued under all schemes cannot exceed 10% of paid-up capital
• 3-year interval: Minimum three years between successive schemes
• Scheme content: Must specify number of shares, pricing mechanism, vesting conditions, performance objectives, employee eligibility, and leaver treatment
• Committee requirement: A committee of non-board members (HR, finance, legal specialists) must administer the scheme
• Disclosure: Annual financial statements and governance reports must disclose scheme data, including employee names, share allocations, amounts paid, and market values

Private Joint Stock Companies

PrJSCs are governed by the CCL and Ministry of Economy Decision No. 539 of 2024, which clarifies the implementing rules.

For employee incentive plans:

• Participation is restricted to employees of the PrJSC itself (not parent, holding company, or subsidiaries)
• Shares issued under the plan are treated as treasury shares with no voting rights until vested
• The board cannot impose restrictions on voting rights after vesting

PrJSCs do not face the full SCA disclosure regime, but they do require Ministry approval for capital increases and must follow the statutory framework.

DIFC and ADGM: The Flexible Lab

Free zone companies in DIFC and ADGM operate under common law frameworks that accommodate equity tooling more cleanly than mainland structures.

DIFC

The DIFC Companies Law No. 5 of 2018 and Companies Regulations provide flexibility for employee share schemes:

• Pre-emption carve-outs: Companies can disapply pre-emption rights in their Articles of Association. Grants below 10% of issued share capital typically do not require a shareholder vote.
• No standalone ESOP regulations: The rules are embedded in the general company law framework. There is no ESOP-specific cap or approval process beyond what the Articles require.
• Registry process: Share issuances and transfers are registered through the DIFC Registrar of Companies, typically processed within 5-10 business days.
• DFSA involvement: Only required if the company is regulated for financial services. For most tech companies, ESOP administration is purely a corporate matter.

DIFC is well-suited for VC-backed startups, fintech companies, and holding structures where clean cap table management is a priority.

ADGM

The ADGM Companies Regulations 2020 similarly allow pre-emption rights to be disapplied under Section 525.

For employee share schemes:

• FSRA registration: Required if the scheme involves more than 10% of shares or more than 10 participants. The process follows a clear pathway: board approval, plan documentation, FSRA registry filing (2-4 weeks total).
• Simplified capital procedures: Schemes under 15% equity face reduced paperwork.
• Common law flexibility: Trusts, nominees, and SPVs can be used to pool ESOP shares cleanly.

ADGM is particularly attractive for Abu Dhabi-based companies and those in the clean energy and fintech sectors.

What Free Zones Do Not Solve

Free zone incorporation does not eliminate all friction:

• Beneficial ownership compliance: SPVs and nominee arrangements must comply with DIFC and ADGM beneficial ownership disclosure requirements.
• Visa and employment linkage: Equity grants do not automatically affect visa sponsorship. Employment must be managed through the relevant free zone authority.
• Liquidity: Free zone shares are no more liquid than mainland shares. Employees still face the same realisation problem.

Plan Design: What VCs Look for and What Breaks in Due Diligence

Investors reviewing a UAE company's ESOP will check for specific structural features. Getting these wrong creates friction at funding rounds.

Pool Size

• Standard range: 10-15% of fully diluted equity for early-stage startups
• VC expectation: The pool should be sized to cover current grants plus anticipated hires through the next funding round
• Common error: Undersizing the pool, then needing to expand it (diluting existing shareholders) or overpromising to candidates

Vesting Schedule

• Market standard: 4-year vesting with a 1-year cliff
• Cliff mechanics: No shares vest until the first anniversary; then 25% vests immediately, with the remainder vesting monthly or quarterly over the next 3 years
• Acceleration: Single-trigger (change of control alone) or double-trigger (change of control plus termination) acceleration clauses should be documented in the plan

Exercise Price and Valuation

• Strike price: Should be set at fair market value on the grant date
• Valuation methodology: Use an independent fair market valuation from a qualified appraiser. Common approaches include discounted cash flow, comparable company analysis, and recent transaction pricing.
• Common error: Setting the strike price arbitrarily low, which creates accounting issues (IFRS 2 expense recognition) and potential tax complications for employees in their home jurisdictions

Leaver Provisions

• Good leaver: Resignation for personal reasons, retirement, disability, death, or termination without cause. Typically retains vested options with a defined exercise window (90 days is common).
• Bad leaver: Termination for cause, breach of contract, gross misconduct. Typically forfeits all options, including vested options, or is required to sell at nominal value.
• Exercise window: Define how long after departure an employee has to exercise vested options. Too short (30 days) is punitive; too long (10 years) creates cap table uncertainty.

What Breaks in Due Diligence

• No written plan: Promises made verbally or in emails without a formal plan document
• Inconsistent grant letters: Different terms for different employees without a master plan framework
• No board approval: Grants issued without proper corporate authorisation
• Pre-emption not addressed: For mainland LLCs, failure to structure around pre-emption creates blocking rights for existing shareholders
• No valuation support: Strike prices set without a defensible methodology
• Leaver provisions unclear or unenforceable: Ambiguous definitions of good/bad leaver, or provisions that conflict with UAE employment law

Leaver Disputes: UAE Employment Reality

Good leaver/bad leaver provisions are common in international ESOP practice. In the UAE, enforceability depends on how well the provisions are drafted and documented.

UAE Labour Law Context

UAE employment law (Federal Decree-Law No. 33 of 2021) governs the employment relationship, including termination. ESOP provisions that conflict with mandatory labour law protections may not be enforceable.

Key considerations:

• Arbitrary dismissal: An employee dismissed without valid cause may have claims under labour law, regardless of how the ESOP classifies the departure.
• End-of-service gratuity: ESOP forfeiture does not affect the employee's statutory entitlement to end-of-service benefits.
• Contractual clarity: ESOP terms should be documented separately from the employment contract, with clear language that the employee has read, understood, and agreed to the plan rules.

Practical Safeguards

• Define "cause" specifically: Do not rely on general language. List the specific acts or omissions that constitute bad leaver events.
• Document performance issues: If termination is for performance reasons, maintain a paper trail of warnings, improvement plans, and documented failures.
• Use a participation agreement: Require employees to sign a separate agreement acknowledging the ESOP terms, including leaver provisions, before any grant.
• Buyback mechanics: If the company has a right to repurchase shares from leavers, specify the price (fair market value, book value, nominal value) and the process for determining it.

Liquidity: The Uncomfortable Truth

Most UAE startup equity is illiquid. There is no public market for private company shares. Employees cannot sell their holdings until a liquidity event occurs.

When Employees Realise Value

• Exit event: Sale of the company, IPO, or merger. This is the most common path to liquidity.
• Secondary transaction: Some companies facilitate periodic buybacks or allow employees to sell to approved third parties (often incoming investors).
• Buyback windows: The company offers to repurchase vested shares at defined intervals, typically annually, subject to board discretion and cash availability.
• Cash settlement: For phantom shares and SARs, the company pays cash based on a valuation at the settlement date.

What the Plan Must State

• Liquidity path: Be explicit about how and when employees can expect to realise value. If the answer is "exit only," say so.
• Buyback rights: If the company can repurchase shares from leavers, define the circumstances, pricing, and timeline.
• Transfer restrictions: Most plans prohibit transfers without company consent. This protects the cap table but limits employee options.
• Cash availability: For cash-settled plans, consider whether the company can actually fund the obligation when it matures.

Managing Expectations

Equity is not cash. Employees who receive options at a Series A may wait 5-10 years for a liquidity event, and there is no guarantee the company will exit at a price that makes the options valuable.

Be honest with employees about:

• The speculative nature of startup equity
• The timeline to potential liquidity
• The risk that options may expire worthless

Overpromising destroys trust. Clear communication builds it.

Tax Treatment: What You Can Safely Say

UAE Position (Employees)

The UAE does not impose personal income tax. Employees receiving shares or exercising options do not face a UAE tax liability on grant, exercise, or sale.

This is a significant advantage compared to jurisdictions where equity compensation triggers immediate tax obligations.

Corporate Tax (Employers)

UAE Corporate Tax, effective from June 2023, applies to taxable income exceeding AED 375,000 at a rate of 9%.

For ESOP expenses:

• Deductibility follows general principles: expenses incurred wholly and exclusively for business purposes are generally deductible.
• Accounting treatment follows IFRS 2 (Share-based Payment), which requires recognition of share-based payment expense over the vesting period.
• Equity-settled plans: Expense is measured at grant date fair value and recognised over the vesting period.
• Cash-settled plans: Expense is remeasured at each reporting date until settlement (liability accounting).

Consult a UAE tax advisor for plan-specific guidance. Deductibility depends on the facts and the structure.

Cross-Border Employees

UAE-based employees who are tax residents of other countries may still have tax obligations in their home jurisdictions. Common issues:

• Grant date taxation: Some countries tax the benefit at grant, not exercise.
• Exercise date taxation: Many countries tax the spread (market value minus strike price) at exercise as ordinary income.
• Sale taxation: Capital gains on subsequent sale may be taxable in the employee's home country.
• Reporting obligations: Employers may have withholding or reporting obligations in the employee's home jurisdiction.

For multinational teams, cross-border tax advice is essential. The UAE's zero-tax environment for individuals does not extend to employees' home country obligations.

Implementation Checklist

Mainland LLC (Phantom Shares / SARs)

• Draft a master plan document covering eligibility, vesting, settlement events, and leaver treatment
• Prepare individual participation agreements for each employee
• Obtain board approval for the plan and each grant
• Establish a valuation methodology and document the initial fair market value
• Define settlement mechanics: cash payment, timing, and source of funds
• Review UAE employment law implications with counsel
• Communicate plan terms clearly to employees before grant

Private Joint Stock Company (Article 228 Track)

• Prepare the employee share incentive scheme document
• Obtain 75% shareholder approval at general assembly
• Submit capital increase application to Ministry of Economy
• Establish the scheme committee (non-board members)
• Prepare grant agreements specifying vesting, exercise price, and leaver terms
• Implement share registry and cap table tracking
• Document valuation methodology

DIFC / ADGM Company

• Review Articles of Association for pre-emption and share issuance provisions
• Amend Articles if necessary to allow ESOP issuance without shareholder vote (typically <10%)
• Draft master plan and grant agreements
• Obtain board approval
• If ADGM with >10% or >10 participants: file with FSRA
• Register share issuances with Registrar of Companies
• Consider SPV or nominee structure for pooling (with beneficial ownership compliance)
• Document valuation and exercise procedures

Summary: Choosing the Right Structure

Frequently Asked Questions

Can a mainland LLC grant actual shares to employees?

Yes, but it is impractical for most startups. The 50 shareholder cap, pre-emption rights, and notarisation requirements create friction. Phantom shares or SARs are usually a better fit.

Do directors really have to be excluded from ESOPs?

Under Article 228 of the CCL, directors cannot participate in employee share incentive schemes. This is a statutory prohibition for joint stock companies. For mainland LLCs and free zone companies, the restriction does not apply in the same way, but separate director incentive arrangements may be appropriate.

What is a typical ESOP pool size for a UAE startup?

10-15% of fully diluted equity is standard for VC-backed startups. The SCA imposes a 10% cap for listed companies. DIFC and ADGM companies set pool sizes contractually based on investor expectations.

How do employees pay tax on stock options in the UAE?

They do not pay UAE tax. There is no personal income tax on grant, exercise, or sale of shares. However, employees who are tax residents of other countries may have obligations in their home jurisdictions.

Is the company's ESOP expense tax-deductible?

Generally, yes. UAE Corporate Tax allows deduction for business expenses, and ESOP costs accounted for under IFRS 2 are typically deductible. Specific treatment depends on the plan structure and accounting classification.

What happens to unvested options if an employee leaves?

Most plans provide that unvested options are forfeited on departure. The treatment of vested options depends on the leaver classification (good leaver vs. bad leaver) and the plan terms.

Can employees sell their shares before an exit?

Usually not. Most plans prohibit transfers without company consent, and there is no public market for private company shares. Some companies offer buyback windows or facilitate secondary transactions, but this is not standard.

What valuation methodology should we use for strike price?

Use an independent fair market valuation. Common approaches include discounted cash flow, comparable company analysis, and recent transaction pricing. The methodology should be defensible and documented.

Do the 2025 CCL amendments make LLCs ESOP-ready?

Not yet. The amendments allow multiple share classes, which creates new structuring options, but the practical implementation - registry acceptance, pre-emption interaction, buyback mechanics - remains untested.

What is the difference between DIFC and ADGM for ESOPs?

Both offer common law flexibility and similar outcomes. DIFC has a slightly simpler process for schemes under 10%. ADGM requires FSRA registration for schemes exceeding 10% of shares or 10 participants. Choose based on your company's location and ecosystem.

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