5 Things You Should Keep In Mind Before Choosing To Close Your Business In the UAE
UAE is a popular business hub. Major multinational businesses have a branch or an office in the UAE thanks to the government initiatives and incentives that have reduced the cost of doing business in the region. A large number of companies in the UAE have seen individuals launch their career as a freelancer in the UAE to provide the freelancing services that are in high demand like content writing, photography, travel agent and web design. While the initiatives by the government are making most of the businesses that set up in the UAE thrive, there is a universal agreement that a good number of companies do not survive past one year for various reasons.
Business mistakes such as failure to understand their client base, inability to formulate a unique selling point, lack of leadership and failure to create a profitable business model are some of the reasons why most startups fail. If you happen to be in the unfortunate category of businesses that need to close down, UAE has put in place essential steps for closing down a company in the UAE that you will need to follow to wind up your business. However, to make the process effortless, there are things you will need to know.
Things You Must Know When Closing Down Your Company In The UAE
1. Types of closures in the free zones
The special terms in the free zones for setting up a business make it easy for anyone, including foreigners, to launch their business dream in the UAE. The process of closing a business in the free zone is also different. There are three types of closures that you can follow to wind up your business.
Summary winding up: This type of closure is for companies that do not have liabilities or have the ability to pay their obligations within six months. A statement of solvency is required to commence the closure process.
Creditor winding up: This method starts when the business passes a resolution to wind up its operations. A meeting with the creditors follows the resolution.
Bankruptcy: If the business is unable to meet its financial obligations, the court under the UAE commercial transaction law No.18 of 1993 can commence the process to close down your company.
2. Canceling your business license is a requirement
Choosing to close down a business is usually tricky and emotionally draining, but the process does not end once you close the company. You will need to go a step further and notify the relevant government entities that you are no longer in business. Reporting to the government institutions protects you from accumulating fines and penalties that are subjected to businesses upon the expiry of their licenses. It also discharges your business from liabilities towards partners and creditors. It further protects your interests and shares, as well as your business reputation, in case you choose to open a business in the future.
The penalties that you can incur when you fail to cancel your business license include:
- Monetary penalties: The DED has put in place fines for businesses that fail to renew their licenses. The penalty fees vary across the mainland and free zones and thus, you will need to check with the DED website or your respective free zone for the actual penalty for failing to renew your license.
- Blacklisting: Your business will be blacklisted immediately you fail to renew your license preventing you from carrying out any transaction. Your bank accounts will also be frozen and you will need to submit a host of documents to the authority for review to get cleared.
3. If you are not sure, you can freeze your trade license.
If you are not sure whether you should fully exit the region, you can choose to freeze your trade license instead of canceling it. A freelancer in the UAE can keep a trade license inactive for up to three years by paying a freezing fee. Nonetheless, it is worth noting that you can extend the period your license stays inactive beyond the three years. This option is ideal if you are hoping to restart your business in the next three years.
4. Formalities for canceling your business license
The process of canceling your business depends on the type of business. The process is simplified for sole proprietorships and establishments as you only need to apply for canceling with DED and submit all necessary clearance forms. The forms that you will need to provide to get clearance include:
- The directorate of Residency and Foreign Affairs
- Leasing entity
- Ministry of Human Resources and Emiratisation
- Relevant water and electricity authority
Nevertheless, if your company has shares, the process is longer as you will need to liquidate shares, collect debts and pay the creditors before you can clear with the DED. You will need the service of a liquidator if your company is one of the following:
- Limited Liability Company,
- General Partnership
- Private Joint Stock Company
- Simple Limited Partnership
- Public Joint Stock Company
Furthermore, you will need to get approval from the Ministry of Economy if you have a private shareholding company and a clearance from the Securities and Commodities Authority if you have a public shareholding company.
5. Reasons for dissolving a company in the UAE
As per Article 295 of the UAE Companies Law under the Federal Law of 2015, a company can be dissolved for reasons that are not only limited to:
- End of the company term
- Expiry of the purpose of business existence
- Merging with another company
- Losing a significant amount of funds
- Partners’ agreement to terminate the company
- A court order
Wrap Up
Some business owners who no longer wish to operate their businesses in the UAE do not follow the right procedure. They cease to pay their trade license and hope to be struck off the commercial register, but that can be problematic for a freelancer in the UAE as it may subject you to liability and other serious consequences. You should keep in mind that you are liable for obligations and debts until the company is officially dissolved or struck out from the system. It is also worth noting that the easiest process of closing down a company in the UAE is by the agreement of all shareholders. You should also ensure that you have settled all claims before commencing the process of dissolving your company.
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