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Banking issues affecting UAE Company Formation and How to solve them

By Shivangi - 09 Nov 2021 Last Updated: 02 May 2022
Banking issues affecting UAE Company Formation and How to solve them

The UAE banking system is fragmented, with 22 domestic and 30 international banks serving the UAE banking market as of 2021. More than 90% of total domestic assets are held by banks incorporated in Abu Dhabi and Dubai, with the total distributed virtually evenly between Abu Dhabi and Dubai banks.

The conventional banking sector (excluding Islamic banks) is governed by Federal Law 10, which was issued in 1980, and Islamic banking is governed by Federal Law 6, which was enacted in 1985. Islamic banking sector is relatively small component of the UAE financial sector. Banks are prohibited from charging a fixed deposit rate on deposits or loans under Islamic banking laws. The core of Islamic banking is variable interest rates based on a profit/loss sharing paradigm.

The Central Bank of the UAE was also formed under Federal Law 10, and it took over the tasks of the Currency Board. The bank's responsibilities include providing monetary and financial advice to the government, issuing currency, keeping gold and foreign currency reserves, and developing a credit policy. The Central Bank is in charge of all regulatory and supervisory functions. Because the UAE currency is tied to the US dollar, the central bank has a limited involvement in monetary policy and interest rate management; nevertheless, it does exert some monetary and credit controls through the sale and acquisition of certificates of deposits. The central bank is involved in credit policy formulation and monitoring, as well as financial sector supervision. The central bank licences all commercial banks incorporated in the UAE, and they are consequently subject to the central bank's criteria and regulations. The central bank mandated that all banks apply International Accounting Standards (IAS) in 1998, and local banks were told to establish clear corporate structures in early 1999. The UAE central bank also mandates that banks maintain a capital-to-risk-weighted-assets ratio of at least 10% at all times. All banks must be majority held by UAE nationals, according to Central Bank of UAE laws. They must also be registered with the Federal Ministry of Economy and Trade as a "Shareholding Company" as defined by the UAE Companies Law.

Banking Issues affecting UAE Company formation and how to solve them

A slew of Offshore financial scandals, such as the Panama Papers, have prompted regulators to tighten banking compliance standards to their most stringent levels ever. It can be a time-consuming process to open a corporate bank account in any country, including Dubai and the UAE. New international legislation, combined with stricter guidelines, have made opening and maintaining a business account a difficult chore to traverse in the previous two years. The good news is that after you've over this one significant hurdle, it's simple to start a new business in the UAE because the government has put in place incentives to promote investors, such as no corporation or personal tax. According to the current World Bank annual assessments, the United Arab Emirates is placed 16th out of 190 economies in terms of ease of doing business. So, one thing is certain: in order to achieve this ‘ease,' we must first comprehend the difficult element, which is the difficulties encountered when opening a Business bank account.

Why is it getting harder to open and keep a Bank Account?

For banks, compliance is a huge concern. Due diligence, increasing fines, and other operational burdens are felt around the world. The US government frequently fines banks operating as foreign corresponding banks for such reasons, putting the guilt squarely on their shoulders. This makes banks more cautious and necessitates greater rigour in account checks and vetting - none of which comes at no cost to the bank.

Entrepreneurs in the UAE and around the world face a difficult task. Customers are feeling the need for protection as banks become increasingly strict in an endeavour to prevent foreign enquires on their transnational transactions. Over the previous ten years, the US government has punished the majority of the world's largest banks in one manner or another. This has resulted in a downward pressure on compliance. This means that all UAE banks must be more cautious with new and current accounts than ever before. An inquiry from a corresponding bank has a high administrative overhead. Wire transfers must be approved, and all invoices, contracts, and other documents must be compiled and validated. It is generally more convenient for a bank to just terminate an account than than go through this process when an inquiry is received. Fortunately for UAE entrepreneurs, the region's banking institutions have advanced technologically in the previous 25 years in a way that is nothing short of amazing. Banks in the UAE have become more technologically advanced in recent years, which has helped to alleviate some of the difficulties associated with opening an account. Trying to open and maintain a bank account, especially if you operate in certain regions of the world, is a global phenomenon, not just in the UAE. From a banking standpoint, it nearly disadvantages the already disadvantaged.

In terms of global banking progress and sophistication, the UAE has made greater improvements at a faster rate than practically any other country in the globe. Challenges will continue to exist, but they will do so for everyone, and we must adapt to meet them.

Why is it harder to open a UAE Bank account for some Free zones or for certain sorts of businesses?

As the UAE Central Bank tightens rules, the procedure of obtaining a corporate bank account in several Freezones has gotten more difficult. The jurisdiction in which a corporation is based may be the reason for an application's denial in specific situations. As a result, the cheapest free zone may not be the greatest choice for your company. Look for a bank that has a compliant corporate structure that will suit your business and maximise your profits when choosing a bank.

Before opening a business company account for you, some banks may assess your business activity as a free zone company. Having a trade operation onshore or on the mainland earns you bonus points during the screening procedure.

Having a UAE Visa or an Emirates ID is another aspect that boosts your chances of getting approved for a corporate bank account in Dubai. Being a resident demonstrates your commitment to the community and potential contribution to the economy. If you have a company website and a solid business plan to provide credibility, you may be able to breeze through the screening process faster.

For practically all forms of trading activities, including management consultancy licences, Mashreq, Emirates NBD, and ADIB now demand official offices for licencing applications– no more smart offices or flexi desks. As part of Abu Dhabi's stimulus package, new businesses will not be required to have a fixed address for the first two years of operation. It is anticipated that this communication reaches the banks on the ground who deal with clients entering the region.

Another important factor to consider when starting a business is share ownership. We recommend that the signatory of the bank account keeps the business's shares in trust during the initial opening of the company and its bank account, especially for multinational corporate and holding structures. After that, you can transfer the shares to your preferred holding structure. According to our estimates, this can save firms six to eight months in account opening processing time.

To improve your prospects even further, it is recommended to write a solid business strategy. Consider creating a landing page or website that showcases your suppliers and clients, and be prepared to locate physical offices in the best place. Choosing a free zone that corresponds to your brand and mission could also be a good idea, as it will help your venture stand out throughout the application process.

Read More: Jafza Offshore Company Formation

Why is it so challenging for an Offshore company to open a Bank Account?

Offshore corporations have had a lot of bad press in the previous five years when it comes to banking, and it's often for good reason, such as the Panama Papers or tax evasion concerns. As a result, UAE banks are wary of any offshore enterprises, whether they are domestic or foreign.

Currently, UAE banks will only provide services to UAE offshore entities under specific instances. For example, the Jebel Ali offshore company is utilised for banking purposes in a group holding structure involving numerous other free zone licences or if it holds property assets in Dubai because its purpose, goal, and source of income are all well-defined.

It is nearly impossible for a new client arriving in the UAE to obtain banking services at RAK Offshore. Only if you have been known to the bank for more than three years or if you have a particularly compelling business case can you get past this.

One exception is the Abu Dhabi Global Market (ADGM), which is located in the heart of Al Maryah Island. Due to ADGM's common law status, its offshore equivalent is most commonly employed to hold the 49 percent of mainland firms. The DIFC common law holding corporation is the sole other exception; it is intended that this new alternative would provide structuring capabilities as a holding vehicle similar to JAFZA or ADGM. If the price point is correct, this will radically transform the scene and appeal to international and global investors who are already familiar with DIFC.

It's critical to have a great relationship with your UAE bank. The aforementioned business plan will serve you well, and it shouldn't be more than three pages long. It should describe who you are, where you came from, and what your business plans are. In addition to obtaining a visa, Emirates ID, and a local address, it may be advantageous to demonstrate your commitment to the country by investing in the appropriate free zone rather than a less expensive offshore or other choice.

Why is the Bank not classifying me as a resident for Banking purposes?

There is no doubt that regulation is a big driver of strategic agendas for banks, both here in the UAE and more broadly,' according to KPMG's UAE Banking Perspectives. In practise, additional regulation makes obtaining resident status in banking more difficult.

For example, the UAE recently signed the Common Reporting Standards (CRS), which mandates that all participating jurisdictions acquire information from their financial institutions, including banks, and automatically transmit it with one another on an annual basis to combat tax evasion. Banks in nations like the UAE are seeking increased worldwide recognition through the CRS and other information exchanges, as well as other complex new global requirements. As a result, they are making modifications to be more compliant.

All of this comes on top of a drive by the US Congress in 2010 to enact the Foreign Account Tax Compliance Act (FATCA), which is now in effect worldwide and which local banks across the Middle East have naturally been happy to assist with. Owners who are establishing a business in the UAE should be aware that adhering to these rules will benefit them in the long run.

Conclusion

Although there are some challenges as mentioned above but don't allow any of it to deter you. If your business is headquartered in a free zone or onshore, creating a bank account in the UAE is simple as long as you meet all of the conditions. To take advantage of government assistance and the tax-free environment, it's critical that you make the correct decisions early on. When it comes to choosing a location, examine the numerous free zones and look for an area that is appropriate for your business.

A final advice will be to get guidance from a relocation, immigration, and company formation expert at Dhanguard to get you started on the right foot. The most cost-effective solution is not always the best. This will save you time, money, and a lot of suffering in the form of paperwork and administrative hurdles, which is critical for any young company looking to invest in its future.

Dhanguard provides the business setup and company formation services in Dubai, UAE with the guidance of our professional team of consultants. Faster and hassle-free company setup in Mainland and Freezone in UAE.

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