5 Fundamental Factors to be Considered Before Setting up a Business in Dubai
Many entrepreneurs have a dream to set up a business in Dubai due to the numerous opportunities and the business-friendly atmosphere it offers. However, a foreign entrepreneur may find it tough if he or she is not well-versed with the local laws and regulations. Every move in terms of establishing a company in Dubai must be a carefully calculated move as one misstep may cause the entrepreneur dearly. Right from selecting a jurisdiction, careful study and preparation are required before making any move. In relation to company formation, the entrepreneurs need to consider some crucial factors that will decide the smooth running of the company in Dubai. Though it may appear complex, all these can be executed with ease by hiring the services of a reputed business setup consultant in Dubai.
The following are the key factors that every investor needs to consider while establishing a company in Dubai:
1. Selecting a Jurisdiction (Free Zone) & VAT Implication on it.
The strategic decision of selecting the right jurisdiction is the most crucial step in the company formation process in the UAE. The foreign investors who wish to set up their business in any of the 40 free zones in the UAE should know whether the free zone of their choice is a designated zone (DZ) or Non-designated Free zone. The Federal Tax Authority (FTA) has categorized around 20 free zones as designated for VAT purposes. As per the Cabinet Decision No.59 on Designated Zones of UAE VAT Law, separate provisions of VAT are applicable for the DZ. The transaction of goods within the DZ and to/from DZ to DZ is out of the scope of the VAT. However, the goods transacted with DZ from non-DZ, and to non-DZ are subject to VAT. The services provided in the UAE are chargeable to VAT irrespective of DZ & Non-DZ. Since the choice of the right jurisdiction for the company formation is a strategic decision, the companies are advised to consult the best business setup consultants in Dubai.
2. VAT in the UAE in General
Dubai is an attractive location for investors to set up their businesses mainly due to the lack of corporate tax here. However, the UAE introduced the consumption tax VAT on 1st January 2018, nearly 2 years ago and the VAT registration is mandatory for businesses if their taxable supplies and imports exceed the registration threshold of AED 375,000. A business is also allowed to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500. The VAT Law also mandates that the businesses must maintain their books of accounts for the VAT purpose. For VAT registration and other VAT-related services, the companies hire a one-stop-shop business setup consultant who also offers VAT consultant services in Dubai.
3. Increased Due Diligence due to AML
Not long ago, the businessmen in Dubai were able to receive money by cash or by bank transfer freely from various undisclosed sources out of Dubai, UAE against the invoice. However, after the implementation of Anti-Money Laundering (AML) Regulations, businesses can’t receive money or bank transfer from undisclosed sources and high-risk countries that means money should be transferred by an approved list of customers declared at the time of the due diligence while opening the bank account. It has become mandatory that the transfer should be supported by the invoice, and transfer should be from an approved customer. As a result of the new AML guidelines, the banks are required to ensure that customers, new and existing, should adhere to the due diligence guidelines. The banks have introduced new KYC forms and guidelines for its existing and new customers, which require all the information like top customers, top suppliers, area of operation and main products. The increased due diligence has made the company formation process a complex affair especially for startup entrepreneurs who operate in co-working spaces in free zones in UAE.
4. Economic Substance Regulation (ESR)
As per the UAE Cabinet of Ministers Resolution No.31 of 2019, the UAE companies, offshore, onshore and free zones, that carry out relevant activities are required to have demonstrable economic substance in the UAE. The Economic Substance Regulations (ESR) have been introduced as part of the UAE’s commitment towards addressing the issues of shifting of profits by the companies that have no real economic activities in the UAE. The companies that conduct the relevant activities in the UAE need to prepare and submit a compliance report to the regulatory authority which contains information in relation to compliance with the Economic Substance Test. The relevant activities are:
- Investment fund management
- Leasing and finance
- Headquarter Business
- Intellectual property Business
- Holding company business
- Distribution and service centers
5. The Herculean Task of the Opening of the Bank Account in UAE
The process of bank account opening is the major challenge faced by the startups in Dubai, especially after the introduction of the AML Regulations. The banks, under high compliance pressure, have made the KYC procedures very stringent for the startups. Since EU had put UAE into its blacklist in 2017 and then had moved it to its grey list in 2018 after UAE committing to meet the standards required by EU, the banks in Dubai are going haywire in closing the accounts for existing customers who fail to meet the standards and rejects the new customer’s applications who don’t meet the standards such as no physical office or no UAE resident visas or who choose to operate in co-working space popularly known in Dubai, UAE as Flexi desk/ hot desk which has no tenancy contracts. The new companies or entrepreneurs opting for Flexi desk in the free zones are struggling to open the bank account in Dubai UAE. The Bank may reject the account opening for the following reasons:
- No background and experience of the shareholder or entrepreneur
- No UAE visa
- No physical office with tenancy contract (ejari)
- Trade with high-risk 17 countries (such as Africa, Iran, Iraq etc)
- Seventeen High-risk nationalities (such as Africa, Iran, Afghanistan, Iraq etc)
- Dealing with High-Risk Product or Services (such as Gold, real estate and consultancy)
Seek Help From Business Setup Consultants in Dubai
The process of establishing a business in Dubai needs careful preparation and meticulous execution right from the start. Every entrepreneur should bear in mind that though Dubai’s business-friendly atmosphere is a plus, the investors need to adhere to the regulations strictly. The entrepreneurs should ensure that their business is complying with regulations such as AML, VAT, and the Economic Substance Regulations to successfully operate their company here. However, all these challenges can be converted into opportunities if the investors are hiring well-established business setup consultants in Dubai.
Jitendra Business Consultants (JBC) is a reputed company formation service provider in Dubai, UAE with years of commendable experience in assisting entrepreneurs and multinational corporations. JBC’s highly qualified business setup consultants and VAT consultants ensure that the investors are setting up their business in Dubai in compliance with all the regulations. JBC is a one-stop-shop for all the services and the entrepreneurs can assure themselves that they are complying with AML guidelines, ESR, and VAT obligations. By availing JBC’s services, the clients can have run their businesses with peace of mind.