Not long ago, UAE was considered a tax haven and free of the submission of any return. But depleting oil and growing pressure by IMF on the GCC region to diversify the economy has changed the business environment in the GCC. The times have changed since 2018, as businesses are now required to comply with a slew of regulatory requirements that have been implemented to streamline the economy.
First, VAT was introduced on 1st Jan 2018 requiring companies with annual turnover above Dh375,000 to submit the return, depending upon the tax period. Then came AML/CFT regulations in 2019, requiring enhanced due diligence to combat money laundering, making it tough for the startups to start the company and open a bank account. And now Economic Substance Regulations (ESR) in the UAE is introduced, which requires all companies operating in the UAE to notify and submit an annual ESR report if it conducts relevant activities as per the ESR guidelines. And while I am writing this blog, the Ministry of Economy has mandated to make information on all legal entities in the UAE publicly available and has launched NER (National Economic Register) which will public the information about the “Responsible Manager” hence ending the tag of the “Secrecy Haven” in line with the international standards.
The following is an account of how these regulations impacted the company formation process of the startups in the UAE.
a) Value Added Tax in the UAE
The UAE introduced the Value Added Tax (VAT) in 2018 and thousands of companies have registered for it since its implementation. The Federal Tax Authority (FTA) mandates that businesses should register for VAT if their taxable supplies and services exceed the threshold of AED 375,000. Apart from that, there is voluntary VAT registration where a company can register for VAT if its supplies and imports are less than the mandatory registration threshold, but are higher than the voluntary registration threshold of AED 187,500.
The introduction of VAT has forced businesses to ensure VAT compliance and failure of the same would attract hefty penalties by the FTA. The companies are also required to have whether the services and goods in their respective industries are zero-rated or standard rated (5%). Different conditions rule the VAT regulations on industries such as healthcare, education, real estate, etc.
The VAT also affects the startups while making the strategic decision of selecting the right free zones for starting a company. The FTA has categorized the free zones as designated zones (DZ) and non-designated zones. As per Cabinet Decision No.59 on Designated Zones of UAE VAT Law, 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.
b) Anti-money Laundering Regulations
The introduction of the Anti-Money Laundering (AML) Regulations has changed the business environment in the UAE in a big way. In the pre-AML days, the businessmen used to get money by cash or bank transfer from undisclosed sources that are based out of Dubai, UAE against invoices. However, after the AML regulations, the due diligence process has strengthened and the money transfer could be done by an approved list of customers declared at the time of the due diligence while opening the bank account. This effectively stopped the businessmen’s ability to get money transferred from undisclosed sources and high-risk countries.
The startups have to bear the brunt of these new regulations as they still find it tough to open a bank account in the UAE. As a result of the increased due diligence process caused by the AML guidelines, the banks fell under high compliance pressure. The startups are finding it tough to cope up with the stringent KYC procedures.
The bank account opening application may be rejected for the lack of physical address or resident visa status. The startups operating in the co-working spaces in the free zones also find the bank account opening process a challenging task.
The application is likely to get rejected for reasons including:
- Lack of sufficient experience/ background of shareholder/ entrepreneur
- Lack of UAE Visa
- Failure to have a physical office with tenancy contract (ejari)
- Business with 17 high-risk countries (Iran, Iraq, Africa, etc)
- Seventeen High-risk Nationalities (Iran, Iraq, Afghanistan, etc.)
- Business dealings in High-risk products, services (Gold, Real Estate, etc.)
c) Economic Substance Regulations
After the introduction of VAT and the AML, the companies in the UAE are facing a new compliance requirement called the Economic Substance Regulations (ESR). As per the ESR, all the companies in the UAE, offshore, mainland, and free zones, are required to demonstrate the economic substance in the relevant activities they carry out in the UAE.
The companies are forced to comply with the ESR by notifying the concerned regulatory authorities in a specified timeframe whether they carry out the relevant activities or not. If they are subject to the ESR, then the entities need to meet the requirements as per the economic substance test. After the economic substance test, the companies need to file a report to the regulatory authorities. The ESR notification and report filing are required to be done on an annual basis.
The ESR has been introduced in the UAE to prevent base erosion and profit shifting. The companies are required to comply with the ESR in a bid to ensure that they are not being used to attract profits in relation to the relevant activities they carry out within the UAE. Failure to comply with the ESR regulations will attract penalties in the range of AED 10,000 to 50,000, which has put the companies under compliance pressure.
Professional Services of UAE Company Formation by Jitendra Business Consultants
The process of running a business in the UAE has undergone a drastic change since 2018 with the introduction of a slew of regulations including VAT, AML, and the Economic Substance Regulations. The new regulations and the changes it has brought with them are posing many regulatory challenges to the companies. Startup entrepreneurs need to consider these challenges while setting up their business in Dubai, UAE. In a bid to successfully tackle these compliance pressures, the businesses need to have expert professional assistance from a company formation specialist like Jitendra Business Consultants (JBC).
Being one-stop-solution for all the services, the JBC is composed of an expert team of VAT consultants, Business setup consultants, and auditors. JBC’s highly qualified business setup consultants in Dubai will assist the entrepreneurs to establish their companies in Dubai, UAE in compliance with all the regulations including VAT, AML, and ESR. JBC is committed to helping investors run their business in peace of mind to achieve their business goals.