Learn how to avoid common mistakes when incorporating and licensing a company in the UAE
A company in the UAE is a highly profitable tool that allows you to solve a variety of business problems. Incorporation of local, free zone or offshore companies, and creating international holdings and trust structures, opens the way to doing business without taxes. It enables you to create a settlement and cash center, obtain UAE tax resident status, and permits the wide use of international tax planning tools.
12 common mistakes when starting a business in the UAE
Wait and see attitude
Entrepreneurs are often cautious before starting a business in the UAE, trying to find an "anchor client" first, which is a huge mistake.
Wrong choice of place of incorporation
Inexperienced business people with a focus on the domestic market mistakenly open companies in Free Trade Zones, which are subject to severe restrictions.
Mistakes in licensing
A typical and serious mistake frequently made by foreign investors in the UAE is trying to carry out one activity under the guise and license of another.
Getting a business partnership confused with legal formalities
If you have met a partner who is ready to participate in promoting your business, you should not make him or her a co-owner of the company.
Attracting an individual as a local partner
Choosing an individual as a partner can cause a lot of trouble. People have different attitudes towards their responsibilities and not all behave as we would like.
Mistakenly motivating a manager with company shares
Giving a manager a block of shares changes the situation dramatically because your manager turns into a minority shareholder.
Staff recruitment mistakes
Unregistered employees are a gross violation of UAE legislation and government agencies will interpret this as attracting illegal labor.
Сost-cutting on offices
Without a recognizable local center of management for the business a business person may face difficulties when opening and closing bank accounts.
Mistakes when opening a bank account
Concealing relevant facts or providing false information is a mistake many make. Bank compliance regulations and KYC processes usually uncover these efforts.
Mistakes in settlement and cash services
Be ready to provide the bank with full and comprehensive information about your business, financial results, foreign assets and counterparties.
Keeping the books carelessly
Neglect or carless record keeping or basic accounting leads to mistakes in business and negligence in preparing the company's internal paperwork.
Failure to meet the requirements for confirmation of Economic Substance
Take steps to prevent your international operations from being considered illegitimate by the UAE authorities. You would be at risk of fines and having your license frozen.
Trust the professionals to avoid mistakes when starting a business
Understanding the local business environment, the nuances of legislation and the specifics of incorporation are fundamental factors that will ensure the success of your business in the UAE. When deciding to open a business in the Emirates, the best course of action would be to engage the most trustworthy consulting company that will not only design a business model and development strategy for you, but also make sure that your plans come to fruition.
The difference between engaging professionals to set up a business or choosing other options:
Starting a business on your own
Without the help of professionals, you have to:
Build a business model and form a development strategy for your business
Choose a place of incorporation, determine the type of license and form of ownership
Find out what approvals are required - study laws, interact with state departments and accreditation agencies
Analyze logistics - choose the best options for business allocation, storing goods (and getting permits for storage) and choice of carrier
Draft a package of documents for incorporation - translate and certify documents, fill out applications correctly, communicate with government departments
Pass bank checks when opening accounts - study KYC standards and confirm actual presence in the United Arab Emirates
Starting a business with professional help
Professional companies will undertake:
Formation of a unique business organization strategy, taking into account all local peculiarities
Selection of the incorporation jurisdiction in the UAE and form of ownership that suits your goals
Analysis of legislation and clarification with government bodies regarding what permits and approvals are required to conduct your activities
Some departments have requirements about the storage of goods, and certain licenses require compliance with safety standards
Submission of a package of documents for incorporation is carried out by PRO staff who speak Arabic and know all the standards for document processing
Professional companies accompany their clients when undergoing bank checks, provide an office and communicate with bank officers
Learn more about common mistakes and how to fix them
SORP experts analyzed more than 500 of our own business cases based on real examples of opening and relocating a business in the UAE. You will learn more about this in our expert article:
Wait and see attitude
The UAE is a very vibrant market where business decisions are often made instantly. If an investor is too slow then the market niche or opportunity will be taken by more proactive, confident and capable participants. Foreign investors are often cautious, trying to find anchor customers or a starting point first, and only then proceeding with launching a business. All business in the Emirates is strictly licensed and, in the eyes of local entrepreneurs, a foreigner who does not already have a local business incorporated and licensed is just a tourist offering dubious deals.
If you are confident in the prospects of your business in Emirates market, act quickly. Incorporate, obtain a license, open a bank account and office. Only having established a presence in the UAE market will you find your "anchor customer".
Choosing a license and form of legal entity, incorporation of local and free zone companies
Opening bank accounts
Cooperating with leading UAE banks and understanding their compliance procedures
Proving Economic Substance in the UAE
Confirming that management and operations actually take place at the registered address
Wrong choice of place of incorporation
Under UAE legislation, it is possible to incorporate a company in any of approximately 40 free trade zones (FTZ) in different parts of the country or in the local (mainland) territory. You choose the place of incorporation depending on your business strategy and target audience.
Investors often make mistakes when choosing the place to incorporate because they lack sufficient awareness of the rules governing each jurisdiction. Free trade zones are controlled by European management that uses advertising and PR technologies to attract clients. They convince foreign business people that starting a company in a FTZ is much more profitable, easier and cheaper. By contrast, there are no advertising campaigns by the government that promote the local market instead and the bulk of the relevant information is in Arabic.
This is how business people seeking to exploit the domestic UAE market mistakenly incorporate in a FTZ. They don’t realize that these companies are severely restricted and prevented from operating in the local UAE market outside the FTZ.
Our recommendation is to choose a place for incorporation depending on where your target audience is located. If you plan to operate in international markets and/or wholesale in the UAE, then set up your business in one of the free trade zones.
Alternatively, if you intend to operate in the UAE domestic market offering goods or services to end-users, expect a significant turnover, and want to bank with local UAE banks for added credibility, then incorporating a local (mainland) company is the only way to go.
Incorporation of legal entities in the UAE
Incorporation of onshore companies, building holdings and structures for opening accounts in Emirati banks
Allocation in SORP business center
5000 sq. m. (54,000 sq. ft.) of various office spaces to rent for any duration, with a registered business address
Economic Substance in the UAE
Confirmation that management and operations actually take place at the registered address.
Mistakes in licensing
All business in the UAE must be licensed. Licensing in the UAE is a hidden tax, with governmental control of companies’ activities and authorized signatories (not owners) for counterparties and banks.
A typical mistake made by foreign investors in the UAE is to attempt to disguise one activity by another. Or attempting to save costs by clouding complex activity behind a simple license. Working with the wrong license in the UAE is the same as working without one. That's why supervisory authorities will seriously punish you if they find any inconsistency. In that scenario, a company will be fined a substantial penalty and the owner must get the appropriate license.
Another mistake is attempting to operate in the local market under a license obtained by setting up a company in a FTZ with a similar sounding name. It costs a lot less, of course, but it means also operating without a license and is severely punished.
Our recommendation: We suggest you take it up with specialists who will help to avoid many mistakes and fines. Only a competent approach will help to build a solid and professional reputation among your clients and contractors.
Company incorporation and licensing
Choosing a place of incorporation, legal form of the company and obtaining permits
Remotely incorporating in FTZs and in the mainland territory without leaving home
Mandatory annual renewal at the registration and supervisory authorities of the UAE
Attempting to motivate a manager with company shares
Investors incorporating companies in the UAE make the right decision when engaging managers with local working experience and familiarity with the intricacies of Emirate business practices. Naturally, business owners try to motivate hired managers with various incentives. But they make a huge mistake when making a manager a shareholder also, as a form of deferred remuneration.
This mistake is made due to ignorance of the peculiarities of UAE legislation. The government robustly protects shareholders from unscrupulous managers. When problems arise, the state immediately takes the side of the investor. However, when you hand over a block of shares to the manager, the situation changes dramatically because the manager becomes a minority shareholder. Now you and the manager have similar rights. In a conflict situation in court, it will be difficult to prove that the unscrupulous manager did not invest a cent in the business and the share given to him was motivational only.
Our recommendation is not to motivate the manager by granting a stake in the business. Moreover, it is necessary to be very careful in drawing up a contract with a company manager, outlining rights and obligations, remuneration and motivational mechanisms. Never offer shares in the company.
Nominee and technical founders, directors for functional roles and tasks
We will draft contracts related to new relations within the group framework, transfer of assets and finance
Consulting business support
Tax, administrative, legal, PRO and accounting support for operations in the UAE
15 years of practical experience in successfully implementing projects in the Gulf countries
The SORP group of companies operates a corporate structure that has the legal right to act as a local partner.
We have a large business center located in a prestigious area of Dubai, offering the possibility of renting offices of any size and layout.
Get the advice of an expert
Staff recruitment mistakes
According to UAE law, all employees working locally must hold a company resident visa and obtain a Ministry of Labor card. If your employee has a visa from a third-party employer (or sponsor), then the law requires their written consent that this person can work for you. After that, you make a Labor card for your employee.
Hiring workers without registration is a gross violation of UAE legislation, and government bodies will interpret your actions as attracting illegal labor.
In addition, the existing recruitment regulations in the UAE provide for the signing of standard contracts developed by the Ministry of Labor or free trade zones. Entrepreneurs sometimes mistakenly limit themselves only to such agreements.
Our recommendation is: First, apply for a resident visa and labor card for each employee. Secondly, in addition to the standard contract, sign provisions and regulations that clearly stipulate professional duties and areas of responsibility. It is better to play it safe and apply the wide provisions of good HR management, which will help in case of unforeseen labor conflicts.
SORP services include legal, tax, immigration, accounting and PRO support
Drafting a policy and methodology for tax reporting and recruiting personnel in the UAE
A complete package of documents for onboarding employees and obtaining work visas
Cost-cutting on offices
International standards and UAE legislation regarding local companies require them to have an office - a physical center of management and control, at which the business is registered and the staff are located.
However, many Free Trade Zones, chasing a competitive advantage, allow companies to be incorporated without registered offices, which attracts entrepreneurs looking for cheap solutions. Business people wishing to operate in the local market make mistakes by renting cheap low-quality offices in non-prestigious areas, or even signing a fictitious lease agreement which is totally unacceptable.
Such false savings threaten the investor with serious trouble. Without the advantage of a credible and established office for managing the business, an investor may find it difficult to open a bank account (or it can lead to the closure of existing accounts), or when interacting with the Immigration service and Ministry of Labor to resolve visa issues.
Our recommendation is to always have a respectable physical office that inspires trust in banks and regulatory authorities. If your company has a small staff or you work remotely, contact specialist organizations that have a "business center" license. Here you will be able to accommodate your business in a cost-effective manner. Note that if an existing tenant offers to sublet premises that do not have a "business center" license, he has no legal right to sublet.
Accommodation in SORP business center
5000 sq.m. (54,000 sq.ft.) variable size offices in SORP business center for any lease duration
Registered business address
Physical or virtual office with a registered address that confirms economic presence in the UAE
Virtual office in the UAE
Reduce costs, simplify business processes and generate revenues from anywhere in the world
Mistakes in opening a bank account and cash management services
Emirati banks take the Know Your Customer (KYC) procedure very seriously when opening accounts and providing settlement and cash services. Therefore, be ready to provide the bank with detailed information about your business, financial results, foreign assets and counterparties.
Investors often make the mistake of hiding information or providing false information. They are motivated by unfounded fears about possible leakage of confidential data to third parties, or about the transfer of information by banks due to the procedure for automatic exchange of information (CRS) now in place globally. These fears are groundless because UAE credit institutions provide specific guarantees to preserve bank secrecy from third parties, and the automatic exchange of information can be avoided by obtaining tax residency status.
Be careful when sharing information about counterparties with banks. It will impact you negatively if one or more is found to have a dishonest reputation (which you might not even know about), is on the sanctions lists or does business in jurisdictions that are undesirable for the UAE.
We recommend taking your interaction with UAE banking institutions very seriously. Carefully check documents requested by banks when opening current accounts and performing settlement and cash services. Generate all primary documentation and save it. Be sure to sign contracts for all operations, and clearly define the center for making management decisions, which is the actual office from which your business is managed and operates.
Required to prepare consolidated financial statements and confirm transactions
Opening bank accounts
Cooperation with leading UAE banks and understanding their compliance procedures
Establishing lines of communication with a bank representative to facilitate interaction
Neglecting accounting and outsourcing
Since January 1, 2018, 5% VAT has been introduced in the UAE. Enterprises are now obliged to submit VAT reports but the legislation does not require businesses to maintain full-fledged bookkeeping and financial accounting.
Because business people often do not have wide experience of doing business in the UAE and naturally tend to focus on their narrow areas of business, they overlook engaging outsourcing companies of which there are many in all sectors of the economy.
Accounting, tax reporting, and initial incorporation are important components of starting a company's key business processes. These can be outsourced to market professionals, reducing overheads and saving time.
Our recommendation is not to neglect or overlook bookkeeping and financial accounting. This is not a chore but an excellent managerial tool that allows you to effectively plan and manage the company's activities. It is also a significant advantage in communicating with banks, tender committees and counterparties. Well-prepared and thorough documents and records will also carry considerable weight in court, should any disputes or conflicts arise. You can achieve this desired outcome without employing an expensive full-time accountant by outsourcing your accounting needs to a professional company.
We will help reduce payroll overheads compared with hiring highly paid staff.
Business consulting services
Solutions for successful operations in the Emirates and internationally.
Accounting, secretarial, PRO, legal and preparation of tax returns
Failure to comply with Economic Substance Regulations
The global trend towards increased control over business leaves fewer legal methods to reduce the tax burden, optimize cash flows and allocate funds to accounts. To minimize the risks of your international business activity being considered illegitimate or suspicious, we recommend that you comply with all legislative requirements regarding confirming Economic Presence (ESR) in the UAE.
The modern reality is a discernible policy tightening by local banks and increased constraints of international tax planning schemes. These oblige entrepreneurs to take the measures necessary for confirming Economic Substance requirements and the location of the UAE decision-making center for your business.
Some investors mistakenly believe that non-compliance with these legal requirements will not affect doing business in the UAE. That is simply untrue. If you evade confirming ESR obligations, you risk being subject to serious penalties, even having your business license revoked. That would mean you could not confirm details of your operations and you would be unable to pass KYC checks to open a UAE bank account. In addition, your data would be shared with your country of residence in accordance with CRS procedures.
Our unequivocal recommendation is to comply fully with the requirements for confirming ESR exactly as demanded by the law, and not to disregard the recommendations of experts regarding the conduct of your business, both internationally and in the local market.
International tax planning
Minimization of international taxes, freedom of settlements with the protection of tax information
Obtaining tax domicile
Confirmation of belonging to the UAE taxation system and ensuring the provisions of the DTT. are met
Evaluation and business analysis
Activities of all your business units to reduce the risks of non- compliance with the law
SORP Group will become your reliable long-term business partner in the UAE
We are the UAE’s leading consulting group providing a full range of services for the incorporation, support and management of business in the UAE and abroad. We have an impeccable reputation, broad capabilities and deep asset base.
SORP offers comprehensive support for acquired companies and their shareholders: from licensing, maintaining Bank accounts to obtaining the status of a tax resident of the country
Your requirements are unique. That is why we treat every business individually to tailor the right services to achieve your priorities.
15 years of successful work
We have helped thousands of clients acquire, build and develop businesses in the UAE
Assistance in choosing a bank that is suitable for your purposes, support with bank accounts opening and passing KYC procedures (know your customer).
Successful solutions for any difficulties
We are ready to take over your tax and financial accounting, which will become an effective mechanism for planning and managing the company's activities.
We also provide a wide range of outsourced services for you to choose from, to help run your business smoothly.
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