The 2025 Legal Landscape of Employee Stock Option Plans (Esop) in the UAE: a Comprehensive Guide
Mainland approvals and pre-emption limits, DIFC and ADGM flexibility, and the tax and labour points
How the Commercial Companies Law treats share incentive schemes on the UAE mainland, what a mainland plan must have approved and documented, and why pre-emption rights often lead companies to phantom stock or SARs. It then compares the DIFC and ADGM regimes and covers Corporate Tax, personal income tax and points on termination and the employment contract.
Reviewed by Mohamed Noureldin, Founder, Managing Partner & Senior Legal Consultant
Whether employees in a UAE share plan end up holding equity or a cash right can depend on where the company is incorporated. On the mainland, a joint stock company may increase its capital for an employee stock option plan (ESOP) under a Special Decision of its general assembly. Pre-emption rights, particularly in Limited Liability Companies (LLCs), often lead companies to use phantom stock or share appreciation rights, which pay cash without transferring equity. In the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM), direct equity options are common.
Companies, particularly in the start-up and technology sectors, are increasingly turning to incentive mechanisms, among them ESOPs, to attract, retain and motivate employees. The legal framework is split between the onshore (mainland) jurisdiction and the various free zones, most notably the DIFC and ADGM. Nour Attorneys offers mainland company formation services. It also offers free zone company formation services.
Article 228 of the CCL
The primary legislation governing ESOPs for companies established on the mainland is Federal Decree-Law No. 32 of 2021 on Commercial Companies (CCL).
Article 228 of the CCL formally recognises share incentive schemes and helps companies use them.
Key provision (Article 228): a company may, under a Special Decision, increase its capital by applying a share incentive scheme for its employees. This provides a solid legal foundation for ESOPs.
Resolutions, capital and regulator approval on the mainland
For a mainland company to implement an ESOP legally, several mandatory corporate actions and approvals must be secured.
| Requirement | Detail | Legal basis |
|---|---|---|
| Shareholder approval | The board of directors shall submit the scheme to the general assembly. The capital increase is made under a Special Decision, passed by a majority vote of shareholders who own at least three-quarters of the shares represented in the general assembly meeting. | Federal Decree-Law No. 32 of 2021 (as amended) |
| Capital increase or allocation | The company may increase its share capital under a Special Decision by applying the scheme. This must be clearly documented and approved. | CCL provisions on capital management |
| Regulator's conditions | For Public Joint Stock Companies (PJSCs), the Board of Directors of the Securities and Commodities Authority (SCA) may issue a decision setting the conditions and mechanism to implement the scheme. | SCA regulations |
| Plan documentation | An ESOP document must be drafted, detailing the eligibility criteria, vesting schedule, exercise price, transfer restrictions, and treatment upon termination of employment. | Best practice & corporate governance |
Pre-emption rights, phantom stock and SARs
A persistent challenge in mainland ESOPs, particularly for LLCs, is the restriction on the transfer of shares. Under the CCL, an LLC partner who wishes to assign membership interests to a person other than a partner shall notify the other partners.
To mitigate this, companies often structure their ESOPs as phantom stock options or Share Appreciation Rights (SARs). These grant the employee a cash payment equivalent to the increase in the share value, without the actual transfer of equity. They are legally simpler, but they do not provide the employee with true ownership rights.
Contractual freedom in the DIFC and ADGM
The financial free zones, particularly the DIFC and ADGM, offer a significantly more flexible and internationally aligned framework for ESOPs. That makes them the preferred choice for many multinational corporations and high-growth start-ups.
The DIFC Companies Law, DIFC Law No. 5 of 2018, provides a clear mechanism for share incentive schemes: the legal system is based on common law principles and allows greater contractual freedom in drafting the ESOP agreement.
The ADGM Companies Regulations 2020 similarly offer a modern and flexible approach. ADGM's framework is also common-law based and provides similar advantages to the DIFC, allowing for clear and efficient ESOP implementation.
See our free zone company formation services.
The mainland and the free zones compared
The choice between a mainland company and a free zone company significantly affects the complexity and structure of an ESOP.
| Feature | Mainland UAE (CCL) | DIFC / ADGM (free zones) |
|---|---|---|
| Governing law | Federal Decree-Law No. 32 of 2021 | Common law principles (DIFC Companies Law / ADGM Regulations) |
| Shareholder approval | Special Decision of shareholders owning at least three-quarters of the shares represented in the general assembly meeting (joint stock companies). | Standard board or shareholder resolution (as per the Articles of Association). |
| Share transfer | Subject to pre-emption rights and statutory restrictions. | Highly flexible. |
| Preferred structure | Phantom stock or SARs often preferred for simplicity. | Direct equity options are common. |
Corporate Tax and personal income
The UAE maintains a favourable tax environment, but the introduction of Corporate Tax and the evolving employment framework require careful consideration for ESOPs.
Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (Corporate Tax Law), which applies to Tax Periods commencing on or after 1 June 2023, has a direct, albeit generally positive, impact on ESOPs. As of 2025, the UAE does not impose personal income tax on salaries or employment benefits.
Unvested options on termination and the employment contract
- Vesting and termination: the ESOP agreement must clearly define how options are treated upon termination of employment, resignation or dismissal. A poorly drafted ESOP could lead to disputes over whether unvested options constitute a recoverable benefit.
- Contractual integration: the ESOP should be referenced in the employee's employment contract or a separate side letter to ensure its enforceability.
For support if such a dispute arises, see our courts and litigation services.
Nour Attorneys also offers contract drafting, including master service agreements, and legal consultation services.
Disclaimer: the information in this article is for general informational purposes only and does not constitute legal advice. Readers should seek professional legal advice tailored to their specific circumstances before making any decisions or taking any action based on it.
