Regulations for new businesses Image Credit: Supplied

After a tumultuous year ravaged by the COVID-19 pandemic, the dawn of 2021 has given a new fillip to the environment of business set-up in the UAE. As per the official statistics, Dubai Economy issued 4,796 new licenses in February 2021 compare to the 4,639 licenses issued in the same period last year. The increase in the number of new licenses indicates that the investors have reposed their faith in the proactive steps taken by the government. However, foreign entrepreneurs have to rethink their strategy for company formation in Dubai in the wake of the sweeping regulatory reforms rolled out by the government in recent times.

Unlike in the past, the cost of business set up and choosing a location (multiple free zones and mainland) were the foremost concern for the foreign investors seeking to set up their businesses in Dubai but times have changed, and now the investors must ponder over requirements such as Economic Substance Regulations (ESR), Ultimate Beneficial Ownership (UBO) regulations, and Anti-Money Laundering (AML) regulations before choosing office facilities, legal structure, and business activity. Foreign entrepreneurs need to educate themselves about such laws before jumping to the UAE market because changing status from a small office to a big office or board of director's presence in the UAE is a tough decision required by the ESR laws.

Following are the set of advise from Jitendra Business Consultants (JBC) in the light of recent impact of new regulations:

Choose the Right Legal Structure

Selecting an appropriate legal structure is one of the major decisions that every investor must make before opening a company in Dubai. Depending on the number of shareholders, an investor can establish a Limited Liability Company (LLC) in mainland or Free Zone Establishments (FZE), Free Zone Company (FZC), Sole Establishments etc. Earlier, the location (free zone vs mainland), number of partners and activities used to be the determining factors for choosing the proper legal structure.

Now, the investors must take into account the requirements as per ESR and UBO before finalising the legal structure. Companies that carry out relevant activities and earn an income from such activities require either a managing director or a senior management team member who is physically based in the UAE or running the company. Board meetings must be held in the UAE with written minutes signed by all the directors. In the case of corporate shareholding, every year UBO information must be filed to the regulatory authority. Lastly, any amendment in the legal structure has to be informed within 15 days to the regulatory authorities.

Select an adequate office space to suit ESR

As a flexible and cost-effective office space option, investors mostly rent a Flexi desk in a free zone or a mainland business centre. Now, the entrepreneurs need to rethink their office space strategies in accordance with the requirements outlined in the ESR law. The companies need to have an adequate number of qualified employees to meet the Economic Substance Test and should submit documents to prove it has a sufficient amount of office space to accommodate the employees.

Apart from an adequate number of employees, adequate physical assets are also mandatory for meeting the Economic Substance Test. It would be hard for a company that is categorised as a Licensee to meet the Economic Substance Test if it is operating out of a Flexi desk or coworking space. Business setup consultants in Dubai advise investors to consider the impact of ESR before renting an office space as it would be difficult to move into a bigger office space later on.

Identifying the ultimate beneficial owner

Secrecy is the thing of the past, as entrepreneurs now need to identify and disclose the real beneficial owner's name while registering their companies in Dubai and at the time of the annual renewal. The investors are required to supply information about the company's real owner to the licensing authorities (mainland, free zone & offshore), which would enable the banks and lenders to recognise who they are doing business with. As per the law, the companies should maintain a Real Beneficiary Register (RBR) and Partners or Shareholders Register (PSR) and submit to the authorities. A Real beneficiary is defined as an individual who owns or controls directly or indirectly, 25 per cent of the capital. Or has voting rights for at least 25 per cent of the shares, or who exercises ultimate control over a 'legal person'.

ESR and AML impact on business activities

Investors seeking to incorporate a business in Dubai would require to be vigilant in the high-risk activities that may delay their bank account opening process. Activities such as insolvency services, investment business, trust and company services, aggressive tax schemes, real estate management, payroll services, consultancy services, oil, general trading, gold and precious metals are high-risk activities. Banks may ask for more information from investors dealing in such activities that are vulnerable to money-laundering. Further, bank account opening may be delayed for businesses that carry out cross-border trading involving high-risk countries Iran, Iraq, Ghana, Botswana, Syria, Yemen etc.

Lastly, if any company is formed in the UAE with the purpose to buy/sell goods or serve to a foreign group company or earn interest from a loan to a foreign group company, it will be subject to ESR and will have to file the notification within six months and ES report within 12 months to avoid the penalties.

Impact of ESR and UBO on companies shutting down the operations

So much has been said about the obligations for investors who initiate the business set up in Dubai, but entrepreneurs often overlook the importance of ensuring compliance while closing down their companies. A company undergoing liquidation must ensure it meets the requirements of UBO and ESR to successfully exit its operations in the UAE. As per Cabinet Resolution No. (58) of 2020 on Ultimate Beneficial Ownership, the owners should handover the RBR and PSR within (30) thirty days from the date of the liquidator's appointment.

Further, the company administrators or the liquidator need to maintain the Registers for at least five years from the date of liquidation. When it comes to ESR, the company (liquidated) which was subject to ESR regulations ( carries on a Relevant Activity and derives Relevant Income) must file the ESR notification, ESR Reports, and meet the Economic Substance Test in the year in which it was closed. And hey! if you want to de-register the VAT account, must start the proceedings within 20 working days of the last sales invoice to avoid AED 10,000 penalties.

The right way of incorporating or closing a business in Dubai

Businesses in the UAE have been getting used to with the VAT but with the introduction of AML, ESR and UBO regulations, the landscape of business setup in Dubai has undergone drastic changes. Investors now need to think about meeting the ESR test and reveal the Real Beneficiary Owner before choosing a legal structure or office space in Dubai. In this changing business environment, going solo for setting up a new business in Dubai is no longer recommended.

The expert assistance of the reputed business setup consultants in Dubai, such as Jitendra Business Consultants (JBC), will help the investors establish a business while ensuring regulatory compliance. JBC's team of company formation specialists in Dubai will help the entrepreneurs tackle the rigmarole of starting a business in Dubai by providing robust advice on making the right decisions in compliance with the new laws.