Common mistakes whenstarting a business
12 common mistakes when starting a business in the UAE
Wait and seeattitude
Wrong choice ofplace of incorporation
Getting a business partnershipconfused with legal formalities
Attracting an individualas a local partner
Mistakenly motivating a manager withcompany shares
Staff recruitment mistakes
Сost-cutting on offices
Mistakes when openinga bank account
Mistakes in settlement and cashservices
Keeping the books carelessly
Failure to meet the requirements forconfirmation of Economic Substance
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 professionalsto set up a business or choosing other options:
- 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
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Learn more about common mistakes and how to fix them
Wait and see attitude
Wrong choice of place of incorporation
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.
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.
Mistakes in licensing
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.
Inviting an individual as a local partner
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.
Confusing business partnership and legal formalities
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.
Attempting to motivate a manager with company shares
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.
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Staff recruitment mistakes
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.
Cost-cutting on offices
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.
Mistakes in opening a bank account and cash management services
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.
Neglecting accounting and outsourcing
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.
Failure to comply with Economic Substance Regulations
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.
SORP Group will become your reliable long-termbusiness partner in the UAE
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 also provide a wide range of outsourced services for you to choose from, to help run your business smoothly.