Pitfalls

Patience is key when establishing and doing business in the UAE. Setting up can be a daunting task partly due to the amount of paperwork and length of time it can take. Good planning is important as there are many aspects to consider that one may not have to give a second thought about when facing the same issues back home. Special attention should be given to choosing the right business model, the hidden costs associated with setting up, becoming familiar with the local regulations, ensuring the right employees are on board and of course that the right partner or agent is chosen.

The company’s activities will determine the right business model to adopt and the most appropriate emirate. It is important to know where trading will take place and with who. Are the customers everywhere in the UAE, a particular emirate, a free zone or outside the UAE? Paying consideration to these issues can be a critical step in the future success of a company. For example, the 100% ownership offered by setting up in a free zone is an attractive option, however, strictly speaking, trading is only permitted within the free zone and not with the rest of the UAE. For more details on business models see the Business Types, Free Zones and Commercial Agents sections of this guide. Furthermore, it always works to the advantage of the company¬† to have someone who understands the company’s services / products and goals so they can provide guidance through the process and advise on the right business model that meets the company’s needs.

All unexpected costs related to setting up and maintaining the business should be planned beforehand. These include costs for licensing, sponsorship fees and residency visas, through to travel and accommodation expenses as it may take a few trips before the business is fully operational. It may take some time before the UAE office generates revenue to sustain itself so the costs to support its expenses should be planned for. It is good business sense to conduct a market evaluation beforehand to identify where market opportunities lie and set out the right business and strategy plan for the UAE office. Employing the right people is also vital as there are substantial costs associated with their settlement in the UAE.

Like anywhere, it is good practice to become familiar with the local laws when setting up a business in another country and before making a final decision on anything to avoid problems later on. Entering into a lawsuit in the UAE is a very unclear, lengthy and consuming process. The outmost should be done to avoid finding oneself in a situation such as being fined, jailed, deported and banned from returning to the country. In many cases all four will apply.

Although the UAE Commercial Companies Law provides guidance to courts on how to treat bankruptcy, the laws are unclear and largely untested. They are open to interpretation by the court depending on the case.  Bankruptcy in itself is not a crime in the UAE, however a trader, director or manager may be found guilty of offences connected to bankruptcy. The court has the authority to hold the individuals behind the company responsible. It is also possible when financial difficulties arise that criminal investigations take place.

The law states that a company may file for bankruptcy voluntarily within 30 days of ceasing to pay its debts, however failure to do so, makes the directors of the company liable for bankruptcy by default. This is a criminal offence under the Penal Code. Involuntary bankruptcy is also possible but if the court finds the debtor is able to pay, the creditor faces a fine for unsuccessful petition.

Cheques and specifically post-dated cheques are widely used in the UAE for payment of utilities and invoices. However payment with cheques should be made with caution as bouncing cheques is also a criminal offence. If issuing post-dated cheques, records and bank balances should be kept as they will serve as proof for genuinely believing the funds were available on their due date.

Careful consideration should also be given before choosing a partner and entering into an agreement with a local agent. Checks can currently be performed on publicly listed companies, however private companies and individuals are very reluctant to share information. There is no credit bureau that can provide information, however there have been talks for its establishment in the future. The alternative, although less reliable and more time consuming, can be to perform a reputation assessment. Contacting the relevant Chamber of Commerce is also an option as they offer credit rating services for a fee.

The agreement signed with a sponsor or agent is a binding contract and it is possible that it is in Arabic. A reliable translator and attorney should be consulted before signing. A company should be aware of the agent’s rights as he is entitled to commission on sales of products within their territory whether the sales have been made through the agent or not. The agent also normally has exclusivity over his territory which can be one or more emirates.

The local laws tend to favour UAE entities and nationals and a dispute can end up with major consequences with the foreign entity having to pay out large sums as compensation.

As attractive an option it may be to set up a business in the UAE, decisions and the process should never be rushed. All the above should be considered carefully before, during and after establishment. Besides, during its operation, constant reviews should take place. A potential exit strategy could be established as the process for termination can be very complicated if the parties are in disagreement or there are issues with bankruptcy.

Support is available but the final decision is down to the company itself and its directors and managers who will bear all if not most responsibilities.