Myths and facts about doing business in the United Arab Emirates

Many entrepreneurs believe that doing business in the United Arab Emirates is easier than in other countries. Despite the excellent conditions for entrepreneurship, the reality is far from idealized ideas. Managing Partner of SKY Consulting Group Kristina Tantsyura talks about the main myths and shares the real conditions of doing business in the UAE.

No reporting in the Emirates

There is mandatory reporting in the Emirates. First, there is an annual accounting audit that every company must do. Secondly, the UAE has introduced ESR reporting (Economic Substance Regulations) since 2019 for companies engaged in certain types of activities:

• banking and insurance;
• financial and leasing;
• activities of headquarters and holding companies;
• activities in the field of intellectual rights;
• activities of shipping companies and companies providing service centers;
• activities of distribution companies.

Fines for failure to submit ESR reports can reach 50 thousand dirhams — this is about 1.3 million rubles, and in case of repeated violations, the business may be deprived of its license.

Thirdly, reporting on value added tax and corporate tax. It is important to understand that even those companies that are registered in free zones (tax-free territories) must undergo an audit and maintain reports.

Examples of such zones: Dubai Airport Free Zone, Dubai Design Centre, Ajman Free Zone, Jebel Ali Free Zone, Twofour54, Abu Dhabi Airport Free Zone and many others. There are more than 50 of them.

What we recommend

Be sure to familiarize yourself with the current legislation, or get advice from a tax and legal consultant, so that even before registering a company, you will receive complete information about what kind of reporting and in what order your company will have to submit. After registration, hire an accountant or enter into an agreement with a specialized company for accounting and auditing.

There are no taxes in the Emirates

The UAE is known for its low tax burden, but they still exist there. Basic taxes in the Emirates:

• VAT introduced in 2018. It is 5%. Failure to pay taxes can result in heavy fines.
• Corporate tax introduced on 1 June 2023. It is 9% of profits exceeding 100 thousand US dollars per year.

If the company made a profit of more than 100 thousand US dollars per year, the corporate tax will be 9%. If the profit is less than $100 thousand per year, the company receives a benefit and does not pay corporate tax. It is important that all companies, including those registered in free zones, are required to report taxes. But the rate of both VAT and corporate tax can be 0% for free zone companies.

What we recommend

Consult with a competent accountant about what kind of taxation your company is subject to and whether it is possible to optimize the tax burden. Failure to pay taxes or comply with tax obligations can result in serious consequences.

To register a company you need to have an Arab partner

This requirement was canceled two years ago. Now foreign entrepreneurs can register companies without an Arab partner. Some consultants continue to give incorrect information, which makes registering a business noticeably more expensive.

To register a business in the UAE you need:

• issue a license and resident visa;
• open a bank account and rent an office.

The total costs of registering a company start from 10 thousand US dollars. Annual expenses for subsequent business support are about 12 thousand US dollars, excluding the renewal of the company’s license and payment of fees.

What we recommend

If your consultant insists on the need to attract an Arab partner, contact directly the department of economics of the emirate where you are registering the company for further advice.

In Dubai, you can contact the DED Cafe, where specialists from the Department of Economics and Tourism will provide qualified advice. Also in Dubai, you can use the Invest in Dubai website, which provides all the latest information on company registration.

If a company is registered in the UAE, Russia will not know about it

Not true. Firstly, the Russian tax service can analyze not only reports, but also bank transactions, as well as monitor social networks and news on the Internet. Secondly, this year the UAE and the Russian Federation are actively negotiating to update the agreement on double taxation and exchange of information.

Russian regulatory authorities can obtain information about the presence of a CFC (controlled foreign company) in the UAE and, if reporting was not submitted on time, impose significant fines:

• 50 thousand rubles. for failure to submit (or untimely submission) a notice of participation in foreign organizations or submission of a notice of participation in foreign organizations containing false information;
• 20% of the amount of unpaid tax, but not less than 100 thousand rubles. from a controlling person who has not paid or has not fully paid the tax on CFC profits;
• 500 thousand rubles. for refusal and other evasion of filing financial statements or documents (in the absence of reporting) of the CFC with the tax authorities;
• 500 thousand rubles. for failure to submit notification of CFC on time;
• 1 million rub. for failure to provide documents required by the tax authorities;
• 1 million rub. for failure to provide notice of an identified controlled company, and in certain cases — CFC financial documents.

What we recommend

Not only in the UAE, but also in the Russian Federation, you must have an accountant or consultant who will help you prepare and submit the necessary reports. Detailed information can also be obtained on the website of the Federal Tax Service of the Russian Federation.

There are no risks for business in the Emirates

Like any other country, there are risks for business in the UAE. Risks are associated with three main points:

• The sales cycle for a new company is usually twice as long as in Russia — this should be taken into account when planning;
• marketing is significantly different from Russian: some channels do not work or work differently, while the marketing services themselves are more expensive than in the Russian Federation;
• unavailability of financial instruments, such as business lending for companies under 3 years old.

It is especially worth noting the risk factors:

1. In the UAE, there is no mandatory tax reporting in the form familiar to Russians. Due to the ban on leaving negative reviews on the Internet, it is difficult to check counterparties in this country. Often the most information that can be obtained is whether the license is up to date. It is impossible to obtain information about the presence or absence of debts, legal proceedings and generally make an assessment of the financial condition of the counterparty.
2. Most contractors are ready to work only on full advance payment, while large clients always require a significant deferment of payment — from 45 days. At the same time, we recommend that first contracts with small clients be carried out only with 100% prepayment.
3. A number of business sectors: retail trade, medicine, education, financial activities require additional permits. At the same time, obtaining these permits can take a long time and significantly increase the planned period for reaching the first sales.

What we recommend

Choose your partners carefully. Take the time to conduct test meetings with them and also do market research. Don't be shy about asking for recommendations from their past clients and partners. To avoid wasting time and money, any transactions should be concluded only after a thorough analysis of the potential partner and his reliability.

Contracts are not the main thing, informal relations between partners are more important

Contracts play an important role in protecting business interests. It is important to carefully check and write down all clauses of agreements, including liability for non-compliance. Professional legal support can prevent disputes and minimize risks.

To make life easier for aspiring entrepreneurs, the UAE Ministry of Economy has launched the “Standard Contracts” program, through which they can get free access to the most commonly used contract templates necessary for creating companies and starting various types of business activities.

These include agreements for joint ventures, the provision of consulting services, registration of a limited liability company, purchase and sale of shares, trademark licensing, as well as agency agreements and much more.

What we recommend

Be sure to order the development of standard contract forms for your type of activity from lawyers and subscribe to consultations with a law firm (monthly or on demand) for additional consultations and verification of contracts in complex cases.

No one will look at the company's license

The company license is the main and main document of the company (similar to the OGRN and TIN in Russia), which indicates the types of activities that the company can conduct; Company name; location address; company license manager. If a company conducts activities not specified in the license, the company violates the law and may be fined, deprived of its license, and the founders and CEO may receive a real criminal sentence.

If you, when concluding a contract with an Emirati company, do not check the license of this company and the presence in the license of activities that are consistent with the contract being concluded, then in the event of a conflict with the contractor, you may also be fined for concluding a contract for activities that not specified in the counterparty's license.

What we recommend

Before concluding an agreement, be sure to request a license from the counterparty and check the compliance of the types of activities in the license with the terms of the agreement and the services actually received or goods purchased. If in doubt, seek legal advice.

It is not necessary to comply with labor laws

UAE supervisory authorities promptly respond to complaints about violations of the rights of local employees. Failure to comply with labor laws can result in serious fines and legal consequences. For example, in case of late payment of salaries, for companies registered on the main land of the emirate and in the Wages Protection System, the company will have to pay a fine of US$273 per employee.

UAE courts can now impose fines on employers for violating labor laws:

1. from 5.5 US dollars to 27 thousand US dollars for providing false information to hire a foreign employee;
2. from 13 US dollars to 54 thousand US dollars for illegal employment of an individual or employment of an employee without providing work;
3. from 1.7 US dollars to 274 thousand US dollars for any violation of UAE labor laws.

What we recommend

Carefully study the UAE labor legislation and the responsibility for non-compliance. Hire and fire personnel strictly in accordance with the rules established by the Labor Code. Do not try to save on taxes by hiring employees, especially local ones, bypassing existing rules — unofficially or at a reduced rate. Fines in the UAE are very severe; trying to cheat can cost you much more.

Doing business in the UAE offers many opportunities, but also comes with a number of rules and requirements that must be followed. For a successful business in this country, it is important to be informed and turn to professionals who will help you avoid unnecessary mistakes and problems.