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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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

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 draft contracts related to
    new relations within the group
    framework, transfer of assets and
    finance

  • 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 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
    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.

  • 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.

  • 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.

Comprehensive services

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

Individual approach

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

Banking support

Assistance in choosing a bank that is suitable for your purposes, support with bank accounts opening and passing KYC procedures (know your customer).


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