Strategic insights for venture-backed founders: considerations when incorporating your business in the UAE
As venture-backed founders consider expanding their businesses into new territories, the UAE’s dynamic economy, strategic location, and robust infrastructure make it an attractive destination for establishing a presence in the Middle East. However, navigating the complexities of UAE regulations and structuring your business appropriately are crucial to success. This article outlines the key considerations of incorporating a business in the UAE, including dos and don’ts, to help VC founders to streamline the process and ensure compliance with UAE laws.
Do
Be careful with the choice of jurisdiction
The UAE offers a variety of jurisdictions including the UAE mainland, financial free zones like the Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC), as well as over 40 other free zones. Each has unique advantages and regulatory requirements. Founders must carefully assess their business activities to determine the most suitable jurisdiction for incorporation.
Ensure business activities match your desired structure
It’s essential that the business activities listed in your trade licence align with your operational structure and comply with sector-specific regulations. Unlike many other jurisdictions, the UAE requires a trade licence for all entities, and the listed activities must be precise.
Certain activities will require the approval of external authorities in addition to the licensing authority (for example, banking and insurance-related activities are additionally regulated by the UAE Central Bank for most jurisdictions). If your activities change, you must update the trade licence accordingly.
Be mindful of employment requirements
Foreign employees in the UAE need work permits and residence visas, typically sponsored by the employer. Recent changes have introduced several alternatives for obtaining residence visas. Employment agreements must be completed for work permits and residence visas, with enhanced commercial terms for senior employees. Additionally, companies with 20 or more employees must meet sector-specific UAE national employment quotas.
Consider taxation
Be aware of VAT and corporate tax obligations, including registration and reporting requirements. Ensuring compliance with these requirements is vital to avoiding penalties and maintaining good standing.
Do not
Forget foreign ownership restrictions
Certain sectors, such as insurance and banking, have foreign ownership limitations in the UAE. Founders should investigate any applicable restrictions to ensure their business model complies with local regulations.
Ignore residency requirements at incorporation
Understand the residency requirements for UAE visas and authorised signatories, which vary by free zone. For example, the DIFC does not require resident directors, while the ADGM mandates at least a UAE resident authorised signatory. Practical operations, like opening bank accounts, also generally necessitate a UAE resident manager or authorised signatory.
Neglect economic substance requirements
Compliance with UAE economic substance regulations is crucial. This includes maintaining adequate premises and management in the UAE to meet regulatory standards.
Underestimate Ultimate Beneficial Owner (UBO) reporting
Adherence to UBO reporting requirements is strict. Accurate and timely reporting is required for foreign shareholders, with detailed documentation needed for company resolutions and attestation processes, given the UAE's non-signatory status to the Hague Convention.
Forget CRS and FATCA compliance
Ensure annual reporting under Common Reporting Standards (CRS) and the Foreign Account Tax Compliance Act (FATCA) is fulfilled. This applies particularly to entities in the DIFC and ADGM but may also be required for entities outside these zones, depending on their classification.
Key questions for founders
What activities will your UAE entity conduct, and where will it be located?
Will the UAE entity have staff and premises? If so, where?
Will you have managers or directors based in the UAE?
Will UAE residence visas be necessary for your staff?
Will services be provided to related group companies?
Will you hire employees based in the UAE?
Where will your investors be located?
Conclusion
By keeping abreast of UBO, CRS, and FATCA obligations, venture capital founders can set their businesses up for success in this vibrant market.
Understanding and navigating these aspects will not only help in avoiding potential pitfalls but also in leveraging the full potential of the UAE’s business environment.