Common mistakes when starting
a business

Learn how to avoid common mistakes when incorporating and licensing a company in the UAE

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SORP.AE

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.

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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".

Company incorporation

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.

Online incorporation

Remotely incorporating in FTZs and in the mainland territory without leaving home.

License renewal

Mandatory annual renewal at the registration and supervisory authorities of the UAE.

Inviting an individual as a local partner

Many foreign entrepreneurs appoint a UAE citizen as a local partner (“nominal shareholder”) of their company, either in an attempt to save money or through incompetence.

The choice of an individual as a partner can cause a lot of trouble for foreign business people. Individuals can be unreliable and they can have different attitudes towards their responsibilities. Take an example where a foreign investor needs urgent assistance from the appointed individual in obtaining a residence visa, but that person has unexpectedly gone on vacation. More importantly, should that partner die, the share in the business will go to the heirs with no guarantee that they will continue to cooperate, or that they will behave in the way you would want.

Our recommendation is to comply with the legal requirements for engaging a local partner by using the services of a registered corporate structure that has the legal right to provide nominee services (to be a 51% nominee shareholder). They understand all the legal intricacies of the Emirates and are highly competent to correctly draw up documents and fulfil the requirements of a nominee in a reliable and professional manner.

We provide an authorized corporate structure

Nominee service from SORP Investment, LLC with a waiver of rights in a Dubai court.

Agreements with a local nominee
partner

Drawing up agreements and reviewing them professionally to ensure fullest protection of investors' interests.

Change
of local
partner

Assistance in the re-registration of existing arrangements in favor of a trustworthy nominee service.

Confusing business partnership and legal formalities

When entering the Emirati market, foreign investors identify a UAE citizen who is ready to help them with business connections. This is a normal situation, which you should definitely take advantage of by forming a business partnership with special agreements that provide payment for solving specific issues.

Foreign business people make a mistake when they combine a business partnership and legal formalities – when a local businessman involved in promoting their business is also appointed as their local partner, giving him 51% of the shares. The error is recognized in the event of legal proceedings.

In the event of conflicts with the “nominee shareholder”, the courts, taking into account business tradition and well-prepared company documents, unambiguously take the side of the real business owner - the foreign investor. However, the situation changes if a local partner provides a foreign investor with assistance in solving any business problems. In this case the court will interpret their union as a real partnership and be guided by the principle ‘whoever has shares is right’ when making a decision.

Our recommendation: When setting up a local mainland company, always use the services of a nominee shareholder if the legislation requires the involvement of a local partner. If you have met a partner who is ready to participate in promoting your business, you should not make him a co-owner of the company. It is inadvisable to combine business working relationships with legal formalities.

Local sponsor or agent

Professional nominee service from SORP with waiver of rights in the court of Dubai.

Legal support

We will provide prompt legal support for your international business around the world.

PRO business support

Representation of interests in state immigration authorities and the Ministry of Labor.

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 Emerati 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 service

Nominee and technical founders, directors for functional roles and tasks.

Legal support

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.

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.

Outsourcing services

SORP services include legal, tax, immigration, accounting and PRO support.

Review methodologies

Drafting a policy and methodology for tax reporting and recruiting personnel in the UAE.

Immigration procedures

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.

Accomodation 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.

Comprehensive audit

Required to prepare consolidated financial statements and confirm transactions.

Opening bank accounts

Cooperation with leading UAE banks and understanding their compliance procedures.

Banking support

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.

Outsourcing services

We will help reduce payroll overheads compared with hiring highly paid staff.

Business consulting services

Solutions for successful operations in the Emirates and internationally.

Business support

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 of companies provides the widest range of consulting services in the United Arab Emirates. As experts in the analysis and selection of business strategies in the UAE, we will show you how to implement your business ideas in the fastest and most effective way. In addition, we will provide clients with advice on choosing the place of incorporation and provide comprehensive assistance in licensing. We will help you avoid mistakes in launching and doing business in the Emirates.

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.

Expert status

Tap into our specialist expertise and proven formula for organizing manufacturing businesses. Benefit from our knowledge, processes and tools for solving challenges

SORP Business Center

A prestigious address based on our business Center in Dubai will confirm the reputation of a reliable counterparty for your clients and partners

Integrated approach

Creating a secure structure, legal and secretarial support, confirmation of the control center, and much more on the Sorp Group platform

15 years of experience

Expert knowledge in opening and supporting companies working in any field of business activities