By Scott Cairns
One of the mistakes I regularly see international businesses make in the UAE is assuming that the corporate structure they established when first entering the market will remain suitable indefinitely.
It often will not.
A company may initially establish a relatively simple UAE entity because the priority is to start trading, employ someone locally, service a particular client or minimise their cost for market entry. A few years later, the same business may have several shareholders, operations across multiple countries, new business activities, external investors and a very different tax and regulatory position.
At that point, the question is not just whether the existing companies are compliant. It should be whether the structure still makes commercial sense.
When the business outgrows its structure
This is a common challenge for businesses expanding across the GCC. A group might start with one UAE company and subsequently establish operations in Saudi Arabia or another market. Once that happens, matters such as ownership, intercompany transactions, withholding tax, transfer pricing, management charges and where contracts are entered into all become relevant.
Looking only at the UAE entity in isolation can therefore give a misleading picture. In a recent group structuring discussion, for example, we specifically looked at transactions across countries, rather than considering the UAE licences separately.
The same applies when the UAE becomes more than simply another overseas office.
Increasingly, international businesses are using the UAE as a regional base for the Middle East. In this case, it’s wise to reconsider whether operating companies, regional management functions and investments should all sit within the same entity.
A company designed originally for a small commercial presence may not be the appropriate vehicle for a group now managing employees, assets and subsidiaries across several markets. For multinational groups seeking to contract with Saudi government entities, Saudi Arabia’s Regional Headquarters framework may also become an important structuring consideration, subject to the applicable rules and exceptions.
Avoid unnecessary complexity
However, this doesn’t mean establishing additional companies simply for the sake of having a more sophisticated structure. Quite the opposite.
I generally prefer to keep a structure as simple as the business allows. In one recent discussion involving a UAE construction business, we deliberately left manufacturing and distribution entities for a later stage because establishing several companies immediately would increase costs without solving an immediate commercial requirement.
There are, however, situations where separating activities makes sense.
Planning for the next stage
External investment is an obvious trigger. If investors are entering the business, the existing ownership structure should be reviewed before the investment takes place. Shareholder rights, future transfers, governance, exit arrangements and the jurisdiction in which those agreements will operate are all much easier to address before new shareholders arrive than afterwards. We have recently advised businesses to consider a DIFC holding structure where future investor participation was expected for exactly this reason.
SPVs and holding companies can also be useful where a group wants to separate particular investments, intellectual property, joint ventures or international subsidiaries from its day-to-day trading business. They should have a defined purpose though. A passive holding vehicle is fundamentally different from an operating company employing people, entering into customer contracts and invoicing clients.
Cost also needs to be considered properly.
A structure that may offer legal, tax or commercial benefits but creates disproportionate accounting, audit, banking and administrative costs is not necessarily the right structure for the business. Similarly, choosing the cheapest jurisdiction at incorporation can become expensive later if the company needs to amend its activities, employ a larger team, bring in an investor or restructure its ownership.
Build in regular reviews
Once a business has organically added more entities, we often find they have not had a periodic review regarding grouping for tax purposes. This is important to ensure minimal ongoing compliance costs along with taxation obligations.
This is why corporate structuring should not be treated as a one-off company formation exercise.
A review is particularly worthwhile when a business enters a new country, adds significant activities or entities, takes external investment, changes ownership, establishes a regional headquarters, acquires material assets or finds that the existing entity is creating operational or regulatory difficulties.
In my experience, the correct structure is rarely determined by tax or licence cost alone.
Licensing, tax, governance, banking, substance, employees, regulation and administration all need to work together.
Ultimately, the best corporate structure is not necessarily the most complicated one. It is the one that supports where the business is going next, without creating unnecessary cost or risk along the way.
(The author is Founder and Managing Director of Creation Business Consultants)
