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New Business Regulations
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After a tumultuous year ravaged by the COVID-19 pandemic, the start of 2021 has reinvigorated the business environment in the UAE. According to official statistics, Dubai Economy issued 4,796 new licenses in February 2021, compared to 4,639 licenses issued in the same period last year. The increase in the number of new licenses shows that investors have rebuilt their confidence in the government’s proactive steps. However, foreign entrepreneurs need to rethink their strategy for starting a business in Dubai in the wake of major regulatory reforms recently introduced by the government.

Unlike in the past, the cost of setting up a business and choosing a location (multiple free zones and mainland) has been the main concern of overseas investors looking to set up their businesses in Dubai, but times have changed and now investors need to think about requirements like ESR ( Economic Substance Regulations), UBO (Ultimate Beneficial Ownership) and AML (Anti-Money Laundering) before deciding on office space, legal structure and business operations. Foreign entrepreneurs need to find out about such laws before entering the UAE market as changing the status from a small office to a large office or having a board of directors presence in the UAE is a difficult decision to make under ESR laws is required.

The following are Jitendra Business Consultants (JBC) recommendations for the recent impact of new regulations:

Choose the right legal structure

Choosing an appropriate legal structure is one of the most important decisions any investor must make before starting a business in Dubai. Depending on the number of shareholders, an investor may form a Limited Liability Company (LLC) on the mainland or in Free Zone Operations (FZE), Free Zone Companies (FZC), sole proprietorship, etc. The number of partners and activities used to be the determining factors in choosing the right legal structure.

Now the investors have to consider the requirements according to ESR and UBO before determining the legal structure. Companies that carry out relevant activities and generate income from such activities require either a director or a member of the senior management team who is physically based in the UAE or who runs the company. Board meetings must be held in the UAE with written minutes signed by all directors. In the case of company investments, UBO information must be submitted to the regulatory authority every year. Finally, any change in the legal structure must be reported to the regulatory authorities within 15 days.

Choose a suitable office space for ESR

As a flexible and inexpensive office space option, investors usually rent a flexi desk in a free zone or a business center on the mainland. Now entrepreneurs need to rethink their office space strategies in accordance with the requirements of the ESR law. Companies must have a sufficient number of qualified employees to pass the economic substance test and submit documents to demonstrate that there is sufficient office space for the employees.

In addition to an adequate number of employees, adequate physical assets are also required to pass the economic substance test. It is difficult for a company classified as a licensee to pass the economic substance test when operated from a flexi desk or coworking space. Dubai business creation consultants recommend investors to consider the impact of ESR before renting office space as it would be difficult to move to larger office space later.

Identification of the ultimate beneficial owner

Nondisclosure is a thing of the past as entrepreneurs are now required to identify and disclose the actual beneficial owner name when registering their business in Dubai and at the time of annual renewal. Investors must provide licensing authorities (mainland, free zone and offshore) with information about the real owner of the company so that banks and lenders can see who they are doing business with. According to the law, companies should keep a Real Beneficiary Register (RBR) and a Partner or Shareholder Register (PSR) and present them to the authorities. A real beneficiary is a person who directly or indirectly owns or controls 25 percent of the capital. Or has voting rights for at least 25 percent of the shares or exercises final control over a “legal person”.

ESR and AML affect business operations

Investors looking to start a business in Dubai need to be vigilant about risky activities that can delay opening their bank account. Activities such as bankruptcy services, investment business, fiduciary and corporate services, aggressive tax systems, real estate management, payroll, advisory services, oil, general trade, gold and precious metals are high risk activities. Banks may request further information from investors engaged in such activities that are susceptible to money laundering. In addition, there may be a delay in opening a bank account for companies that conduct cross-border trade with high-risk countries such as Iran, Iraq, Ghana, Botswana, Syria, Yemen, etc.

If a company is formed in the UAE with the aim of buying / selling goods or serving a foreign group company, or earning interest on a loan to a foreign group company, it is subject to the ESR and must submit notification within six months and ES Report within 12 months to avoid the penalties.

Effects of ESR and UBO on companies that cease operations

Much has been said about the obligations for investors who initiate the Dubai based company, but entrepreneurs often overlook the importance of regulatory compliance when closing their businesses. A company in liquidation must ensure that it meets the requirements of UBO and ESR in order to successfully complete its operations in the UAE. According to Cabinet Decision No. (58) of 2020 on Final Beneficial Ownership, the owners should hand over the RBR and PSR within (30) 30 days from the date of the appointment of the liquidator.

In addition, the company administrators or the liquidator must keep the registers for at least five years from the date of liquidation. When it comes to ISR, the company (liquidated) that was subject to the ISR rules (carries out a relevant activity and derives relevant income) must submit the ISR notification and the ISR reports and pass the economic substance test in the year, in which it was closed. And hey! If you wish to deregister the VAT account, you must initiate the procedure within 20 working days of the last sales invoice to avoid fines of AED 10,000.

The right way to start or close a business in Dubai

Businesses in the UAE have got used to VAT, but with the introduction of AML, ESR and UBO regulations, the business creation landscape in Dubai has changed dramatically. Investors now need to think about passing the ESR test and identifying the owner of the real beneficiary before deciding on any legal structure or office space in Dubai. In this changing business environment, starting a new business on your own in Dubai is no longer recommended.

Expert support from renowned business start-up consultants in Dubai, such as Jitendra Business Consultants (JBC), will help investors start a business while ensuring regulatory compliance. The team of JBC Dubai Business Incorporation specialists will help entrepreneurs cope with the problems of starting a business in Dubai by providing in-depth advice on how to make the right decisions in accordance with the new laws.