Small-business Banking

Four Big Banking Issues Affecting UAE Company Formation

Four Big Banking Issues Affecting UAE Company Formation
Image credit: WAYHOME studio | Shutterstock
Managing Partner of EER Corporate Services
10 min read
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Opening a corporate bank account can be stressful. New and tough international regulations and expectations on banks over the last couple of years, plus strict guidelines, can make it a time-consuming business. The good news is that once you’ve vaulted over this one major hurdle it’s easy to set up a new business in the UAE, as the government has created policies, such as no corporate or personal tax to encourage investors.

And with the new 10-year visa due to be finalized within 2018, next year will see a much-improved business environment. In fact, according to the most recent World Bank Doing Business report, the UAE ranks 21st out of 190 countries for the overall ‘ease of doing business.' So, one thing is certain: To get to this ‘ease’ we first have to understand the tricky part, and that means the challenges faced when setting up a business bank account.

Why is it getting harder to open and keep a bank account? 
Compliance is a major issue for banks. Due diligence, increased sanctions and more are an operational burden felt globally. Banks acting as international corresponding banks are often aggressively fined by the US government for such reasons with the burden of blame firmly at their feet. This makes banks cautious and demands more rigour in account checking and vetting– none of which is free to the bank.

This is a challenge for entrepreneurs in the UAE and worldwide. The role of international corresponding banks is vital in any bank’s operation, and this need for protection is felt by customers as banks become increasingly stringent in an effort to avoid international enquires on their transfers. Most of the global corresponding banks have been fined by the US government in one way or another over the last 10 years. This has caused a downward compliance pressure. This means that all UAE banks must be more careful than ever before with new and existing accounts. The administrative overhead of such an enquiry from a corresponding bank is significant. Wire transfers must be ratified and all details of invoices, contracts and more must be gathered and defended in their legitimacy. It is often more practical for a bank to simply close an account than it is to undertake this process when an enquiry comes in.

Fortunately for UAE entrepreneurs, the technological progression of banking institutions in the area over the last 25 years has been nothing short of miraculous. UAE banks are now technologically sophisticated, helping to somewhat ease the challenges faced when opening an account. It is not just an issue in the UAE, it is a global phenomenon, trying to open and keep open a bank account, especially if you operate in certain parts of the world. It is almost disadvantaging the already disadvantaged from a banking point of view.

The UAE has made more improvements at a faster rate of implementation than almost any other country in the world in terms of global banking progression and sophistication. Challenges do remain, but they are there for everyone, and we must comply and evolve with these challenges.

Why is it harder to get a UAE bank account for some free zones and types of companies? 
As the central bank has issued stricter requirements and regulations, UAE banks have tightened up to prevent the problems referenced above throughout the region. With increased requests for transfer data, banks have implemented stricter rules and closed companies in certain free zones and from certain license types which do not meet their upgraded compliance standards.

It all comes down to substance. Some banks have put a blanket due diligence requirement on some free zones in the northern emirates, while at the same time different license activities have also come under extra requirements. For example, almost none of the UAE banks will open a bank account for a free zone company with a general trading activity, but instead they must already have a general trading company on the mainland and a warehouse. However, all banks in the UAE will allow most mainland companies to open bank accounts pretty quickly once the requirements are met, and with the changes in the ownership rules, you will see a big increase in mainland companies from 2019 onwards.

Mashreq, Emirates NBD and ADIB now require official offices for license applications– no more smart offices and flexi desks for almost all types of trading activities and even management consultancy licenses. As part of Abu Dhabi’s stimulus package it will not require new companies to have a fixed office address for the first two years of business. It is hoped that this message trickles down to the banks on the ground for clients coming into the region.

Our recommendation: Those looking to apply for a bank account in the region are recommended to maintain a local residential address to show commitment to their endeavors and the local economy. Bank signatories should also have a UAE visa and Emirates ID to increase their chances of acceptance.

Share ownership is a further key consideration when setting up. Especially for international corporate and holding structures we recommend that the signatory of the bank account holds the shares of the company, in trust for the purpose of opening the company and its bank account initially. After this is done the shares can be transferred to your chosen holding structure. This, by our estimation, can save businesses six to eight months in processing times for account opening.

To further increase your chances, we also advise creating a robust business plan. Consider a landing page or website that demonstrates your suppliers and customers, and be ready to find physical offices in the most suitable location. Opting for a free zone that matches your brand and purpose is also potentially viable, as this may present your venture in a better light during your application.

Why is it so challenging for an offshore company to open a bank account? 
During the last five years, offshore companies have received negative press when it comes to banking– often for valid reasons, such as the Panama Papers or tax evasion issues. As a result, UAE banks are tending to take a dim view of any offshore companies, whether UAE or international.

Today, UAE banks only want to offer their services to UAE offshore companies under certain circumstances. For example, the Jebel Ali offshore company is used for banking purposes in a group holding structure where there are multiple other free zone licenses involved or where it is the holder of property assets in Dubai as here it is easy to define its purpose, goal and source of income.

At RAK Offshore it is almost impossible for a new client coming into the UAE to get banking facilities. You can only get around this if you have been known to the bank for more than three years, or if you have a particularly strong business case.

The Abu Dhabi Global Market (ADGM), which is in the centre of Al Maryah Island, is one exception. Its offshore equivalent offers easy setup and is mostly used for holding the 49% of mainland companies due to ADGM’s common law status. The only other exception is the DIFC common law holding company- it is hoped this new option will offer structuring capabilities as a holding vehicle similar to JAFZA or ADGM. This will completely change the landscape if the price point is right and will be appealing to international and global investors already comfortable with DIFC.

Our recommendation: Going with what appears to be the easiest or cheapest option can be expensive; you could be delayed by up to six months by the time you get your bank account. Unless you structure your company correctly in the right free zone with the correct visa and residential address, you may never successfully secure banking services.

A strong relationship with your UAE bank is vital. The aforementioned business plan will serve you well, and doesn’t have to exceed three pages of substantial information that describes who you are, where you come from and what your business plans are. It may also benefit you to show commitment to the country by investing in the right free zone rather than a cheaper offshore or other option, in addition to taking out a visa and Emirates ID and a local address.

Why is the bank not classifying me as a resident for banking purposes? 
According to KPMG’s UAE Banking Perspectives, ‘For banks, both here in the UAE and more generally, there is no doubt that regulation is a significant driver of strategic agendas’. In practice, increased regulation makes it harder to achieve resident status when it comes to banking.

For example, the UAE has recently committed to the Common Reporting Standards (CRS), which require all participating jurisdictions to obtain information from their financial institutions –including banks– and automatically exchange this with each other on an annual basis to combat tax evasion. Through the CRS and other information exchanges, as well as other complex new global regulations, banks in countries such as the UAE are seeking greater international recognition and are therefore making changes to be more compliant.

All this is in addition to a move by the US Congress and the Foreign Account Tax Compliance Act (FATCA) in 2010 to prevent offshore tax abuse by people in the US, now applied worldwide and a measure local banks across the Middle East have naturally been willing to help implement.

Our recommendation: You need to prove your commitment to the UAE. Nearly all UAE banks now insist that just having a visa and ID does not make you a resident for banking purposes. If a UAE bank is unsure of your residency or intentions, they are obliged to share your information with other banks under the CRS scheme.

How, then, to prove commitment? We recommend showing that you are living and spending a lot of time in the UAE. You will certainly need a residential address, whether this is through renting or buying real estate. If you rent, you can be viewed as living in the UAE, meaning you have an Ejari lease and DEWA bill. You may still be internationally mobile and not full time in the UAE, but you have shown a commitment to the country that will increase as your business grows.

Owners setting up in the UAE should realize that following these rules will benefit them in the long-term. In Dubai, for example, the government has recently announced that foreign investors establishing a business could secure a visa for up to 10 years with 100% ownership.

The next step 
Don’t let any of the above put you off: there’s no difficulty opening a bank account in the UAE if your company is based in a free zone or onshore, provided you meet all the requirements. It’s important you make the right choices early on to take advantage of government support and the tax-free environment. When it comes to choosing a location, do your research on the various free zones and look to operate in an area suited to your business.

To that end, it is worth taking advice from a relocation, immigration, and company incorporation specialist to set you on the right track. The cheapest route is not always the best option. This will help you save time, money and a world of pain in paperwork and administrative hurdles: essential for any new company investing in its future.

Related: What To Expect From The UAE's New Business Ownership Rules 

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