The essentials of regulated business set up in the UAE

With the many free zones operating throughout the UAE and its seven emirates, and the continuing and growing inflow of people wishing to live and work in the UAE, it is important to pay careful attention to the need for proper registration with correct licences, etc, whilst being mindful of both the benefits of such freezones as well as any federal requirements that may be relevant.

As freezones evolve and broaden their appeal to beyond the historical business-cluster approach and related support services to one where zones that are more focussed on providing attractive amenities and locations (as well as zones that are perhaps more focussed on solely costs), the terminology that can appear on licences can be confusing and may differ from one zone to another, and between those that are relevant in mainland UAE outside of the free zones. Some terms may also appear quite open to interpretation in ways that may not be intended.

The key in this respect is to step back and focus on what the business objectives are behind setting-up a new establishment.  Beneficial tax treatment and the speed and ease of establishment are understandably key objectives, but care needs to be taken to assess the underpinning business activity that is supporting a firm’s revenue-raising activities.

The other key factor to keep in mind is that, whilst there may be more than 40 or so free zones, there are only two financial free zones in the UAE (the DIFC in Dubai and the ADGM in Abu Dhabi), whereby the federal jurisdiction of the UAE Central Bank (CB) and the UAE Securities & Commodities Authority (SCA) have been disapplied (within the context of the UAE Financial Free Zone of 2004). In place of the disapplied jurisdiction of the CB and SCA, these two centres have their own legislative bodies that are responsible for the activities within or from these centres, including the existence of financial services regulators.

Conversely, the non-financial free zones do not have financial services regulators and the relevant free zone authorities are not set-up to regulate financial services, nor do they have this ability as UAE financial services legislation is not disapplied in these centres, hence entities within them need to have regard to UAE SCA or CB requirements – which typically require that only a mainland UAE presence is maintained for the purposes of providing financial services to UAE residents.

In other words, the non-financial free zones are not set-up or equipped to have participants that are engaged in financial services. Terminology concerning registration or licensing might appear to indicate a scope that covers financial services (especially where words such as “consultation” or “investment” are used).

What does this mean in practice when setting up a company in the UAE?

In practice, firms need to be mindful of how the SCA defines financial service activities.

The SCA provides licences for activities involving, amongst other things:

• "Financial Consultations”

• “Promotion”

• “Introducing”

These then translate, at one end of the SCA’s prudential licensing scale, to “Arrangement and Advice”.  

The key point to then note is that “Arranging and Advice” can constitute either ‘Promotion’ – in that a financial investment or financial product is being promoted - or ‘Introducing’, where one person is introduced to another person for the purpose of a financial service being provided to the introduced person by the person to whom they have been introduced.

Further up the scale of the SCA’s prudential licensing categories might then be:

• “Managing Securities portfolios”

• “Managing investment funds investments”

• “Administrative services for investment funds”

Anecdotal observations indicate that some businesses are operating on the basis that they have established a private company with private shareholders in a company that invests in a variety of underlying assets.  Whilst this is a perfectly legitimate activity, each business needs to be assessed on its own merits. However, when the company takes on the characteristics of a “collective investment scheme” or Fund (with investors being able to exit their investment by transferring them to another or new shareholder or unit holder, with the price of the units at that point based on the variable value of the company’s investments), the operators of the company may be at risk of being considered as operating or managing a collective investment scheme – which then places this activity within the scope of the SCA with a requirement to be regulated as such.

Risks of operating in grey zones when obtaining UAE business licencing

The risks of undertaking regulated activities without realising this or not having fully considered regulatory requirements in advance are many and varied, and might include one or all of the following:

• Unenforceability of any investment or client agreements.

• Risk of complaints to the SCA from customers (including demands for financial redress or compensation) being upheld.

• Risks of complaints made via UAE courts where it is considered that a firm was not authorised when it should have been.

• Due to a lack of regulatory oversight - when regulation should have been sought - that contraventions of UAE Federal AML legislation may have occurred, which then becomes a criminal law matter.

• Breaches of such laws then can then become breaches of other UAE federal laws UAE sanctions and anti-bribery, and corruption requirements have not been considered or complied with.

What should be done to ensure proper licencing in the UAE?

• Assess your activities and whether you might be providing a financial service or may otherwise be operating at the borderline of needing to be regulated.

• When operating at the borderline, know where the red lines are.

• Take advice from compliance advisors to stay the right side of not requiring regulation or, conversely, confirming that regulation is required.

• Embrace regulation as a solution that can grow your business successfully.

Costs of regulated business licences do not need to be high when setting up in the UAE

By weighing the pros and cons of providing services from different locations such as the DIFC, ADGM or the UAE mainland, we can assist you in optimising your costs and regulatory capital.

Outsourcing various roles can also enable you to get up-and-running without the fixed overheads of permanent or full-time staff. These roles can include General Counsels, Independent Directors, Compliance Officers, MLROs and Finance Officers.

Fine-tuning business plans in the right way in the right place can lead to economies in relation to regulatory capital, as well as optimising regulatory compliance burdens depending by targeting your endeavours (such as the types of clients or products sold) in a way that can reduce or minimise the impact of compliance requirements.

How can Sanctuary help?

It’s important to pick the right local partners to advise your business in the UAE. Sanctuary Corporate Services can deliver to you a seamless mix of advisory, compliance and general corporate services and set-up support.

Each proposal can be tailored to your specific requirements and ensuring you receive and benefit from such services in the most efficient and effective way, leaving you to concentrate on developing and growing your business successfully.

If you require assistance with regulated business services in the UAE, then please get in touch with us via the form on our website, or email ask@sanctuary.ae and one of our dedicated consultants will assist you.

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