A cost sheet is a statement prepared to get an idea about the detailed cost of a job or assignment or cost unit or cost centre. It is imperative for an investor or entrepreneur to have an understanding about the ‘estimated cost of business setup’, before starting a new business in Dubai. “Business Setup Cost Sheet (BSCS)” has been developed as a handy and easy to use tool to estimate the cost of starting a business in Dubai. If the investor is knowledgeable about the cost of setting up and running a business in Dubai, he will be in a much better position to prepare the business plan and financial plan for the proposed business. That will also help him to assess the financial viability of the start-up idea.
The cost of setting up a business in Dubai is depending on many factors like:
+ The jurisdiction in which the business is planning to setup
+ The legal form of the business
+ Number of shareholders or partners
+ Business activity selected by you
+ The office space or facility required to start a business
+ Minimum number of visas and staff required
+ The remuneration to the local service agent or partner
The above list is not exhaustive and it is only indicative. For starting a business in Dubai, first of all you need to select the jurisdiction – either Free Zone or Mainland. The jurisdiction selected for starting the new business has significance in deciding your business setup cost. For instance, many of the Free Zones charge a registration fee for setting up a company. It is a one-time fee applicable in the first year only. In subsequent years, you will not incur that cost. At the same time all the Free Zones in UAE offer a wide variety of “ready to start” office solutions suitable for different budgets. There are more than 20 sector focused free zones in Dubai, which offer all the required infrastructure and ecosystem for starting and growing the respective business segments.
You can setup a company in Dubai and United Arab Emirates in different legal forms like Sole Establishment, Civil Company, Limited Liability Company (LLC), Partnership, Public Shareholding Company, Private Shareholding Company, Branch or Representative Office of Foreign Company, Branch of Local Company. The normal legal forms permitted in most of the Free Zones are Free Zone Establishment (FZE), Free Zone Company (FZCo) and Branches. The legal forms selected by you may slightly affect your Business Setup Cost, because of the difference in related fee.
The business activity selected by you may influence the cost of setting up business in two way. One, the license fee of certain activities like “General Trading” is higher than other normal activities. Two, certain business activities regulated by other regulatory bodies like Roads and Transport Authority (RTA), Dubai Municipality (DM) and Telecommunications Regulatory Authority (TRA) may require approval of the concerned authorities. You may be required to pay specified fee for getting those approvals. Both Free Zone and Mainland jurisdictions are indifferent as far as this cost is concerned.
A physical office is mandatory to register a company in Dubai mainland. Many free zones offer a flexi desk facility with restrictions on visa eligibility. Flexi desk facilities in free zones are suitable only for start-ups planning to start within limited budget. There is minimum legal requirements related office space for setting up a business in Dubai. Your cost of business setup in Dubai is also influenced by the annual rental of your office space. A percentage of the annual rental will be charged as part of the total license fee. The visa eligibility for the company is also dependent on the office space. If you require more numbers of visas, naturally you need to lease a larger office. Definitely, it will affect your business setup cost.
Except for certain specified professional activities, foreign nationals are not allowed to hold more than 49 per cent shares in a company. The remaining 51 per cent should be held by a UAE national partner. Where foreign nationals are permitted to hold 100 per cent shares, it is mandatory to appoint a UAE national as Local Service Agent (LSA). He is not a partner or shareholder in the company, but an agent to represent the company before authorities. He is entitled for a fixed remuneration as agreed in the LSA agreement. While estimating the cost of setting up and operating a business in Dubai, you should consider the remuneration of the local service agent or local partner also. All free zones in UAE allows 100 per cent foreign ownership and you are not required to appoint a Local Service Agent. So, the remuneration to LSA or local partner will not incur, if you are setting up a business in Free Zones.
The above description was intended to give an idea about “how various factors influence your business setup cost?” Let’s look at a “Business Setup Cost Sheet Model”. This cost sheet will give you an idea about the items of cost included in your total cost of setting up a business in Dubai.
As a first step of setting up a business in Dubai, you are required to reserve a trade name for your company. For knowing more about trade name reservation, read this article. For reserving a trade name, you are required to pay the stipulated fee to the Department of Economic Development. If you are planning to setup your business in a free zone, the license package may include the “trade name reservation fee” or they may charge the fee additionally. In nutshell, you are required to consider this cost element while estimating the business setup cost.
After selecting a business activity, legal form and local partner you are required to obtain an initial approval from the Department of Economic Development, Dubai. For that, you need to pay a nominal “Initial Approval Fee.” Most of the free zones do not charge initial approval fee separately. Their license package includes it. Interestingly many free zones charge a one-time registration fee for setting up a company.
The next cost item is associated with the drafting of Memorandum of Association or Local Service Agent Agreement. This is a legal document which needs to be drafted in Arabic and English. The drafting and translation of this legal document requires professional support, which involves a cost.
After drafting the memorandum of association or local service agent agreement, it needs to be notarized by the notary public. You are required to pay a notarization fee at the ‘Dubai Court’ to get the document attested.
Every company registered in Dubai must have a Post Box Number. So, you have to obtain a Post Box Number by paying the required fee at the post office. So, this is also an inevitable part of your Business Setup cost.
Your company should affix the official stamp in most of the applications and legal documents. So, you have to make an official seal of your company and the cost incurred will also form part of your total cost of starting a company in Dubai.
The newly setup company should also obtain Establishment Card from department of immigration and human resources (labour). The fee for obtaining labour and immigration establishment cards also form part of the total cost of setting up a business.
The next import cost element is related to your office rent. The rent will depend upon the area of office and locality selected by you. Normally, the annual rent is paid in one ‘down payment’ plus three installments. Naturally you can assume a quarter of the annual rent as the immediate cash outflow at the time of business setup. In addition to that, usually tenants are required to give a security deposit to the landlord. Even though it is a refundable deposit, this will also result in an immediate cash outflow. In most situations, you should also consider paying a commission to the real estate company, which is also a cash outflow. In addition to that, you may be required to pay a nominal fee to register the tenancy contract with the Ejari system of Real Estate Regulatory Agency.
The next cash outflow is related to deposit for obtaining electricity and water connection from Dubai Electricity and Water Authority (DEWA). The other cost is linked to telephone and internet connection. It depends on the package and equipment selected by you.
In addition to all the above, you are required to type various applications and online forms related to business setup, visa, Emirates ID and Medical Test. You may add the typing charges also to your total business setup cost.
*The cost of visa, medical test and Emirates id of partners and employees are not included in the cost sheet because it varies depending on the number of partners and employees.
One-time Costs and Recurring Costs
While estimating the cost of business setup in Dubai, you should also differentiate between one-time and recurring cost. For instance, the immigration establishment card is valid for more than one years (say, 3 years). So, it is not a recurring cost, though you need to spend the money at the beginning. Similarly, the costs associated with drafting of memorandum of association and notarization are a one-time fee. So, differentiating the costs as one-time and recurring will give you a clear idea about the cost associated with license and office in subsequent years. Many free zones charge a one-time registration fee which is not applicable in subsequent years.
Cost Vs. Deposit and Guarantee
As an investor, you should also differentiate between costs and deposits. A deposit which can be recovered at a later point of time is not a cost, but the money will not be available for the use of business during that period of time. So, while calculating the total investments required for the business, it is advised to consider the mandatory deposits and guarantees also. For example, you may be required to deposit specified sum of money as guarantee for obtaining approval for certain business activities. In that case, the deposit should be kept as it is, so long as you run the business. I am of the personal opinion that considering the small deposits like DEWA deposit and office deposit as costs will not affect the decision making significantly.
Letter from Bank as Proof of Capital Introduction
As of now, it is not mandatory to submit a bank letter as proof of capital introduction for registering a company in Dubai mainland. At the same time, some of the free zones require confirmation from banks for introducing capital to complete the registration procedures. In most of such cases the money deposited can be utilized within a shorter period of time. As an investor, you must be prepared to deposit the capital in your company’s bank account if you are planning to setup the company in a free zone.
Many entrepreneurs ignore the step costs while setting up a business. Step cost is a cost which move step by step. For example, you may have 35 employees and you are using a single bus to transport them. If the number of employees increase by 2 or 3, you may have to find transportation for them also. In that case you will incur additional expenditure for a mini-bus which can accommodate 15 employees. This cost is known as step cost. Up to 35 employees, your transportation cost will continue the same. If the number of employees increase to 36, your transportation cost will increase and it will remain the same till you reach the mark of 51 employees. Step cost will pose a lot of tricky questions in your decision making.
Fixed and Variable Costs
The costs of operating your business can be fixed or variable. Fixed costs remain the same irrespective of the volume of operations. On the other hand variable cost moves proportionately with volume. For instance, take the case of varying telephone bills. It moves in direct proportion to the number of calls. If it is a fixed package with unlimited usage, that cost will become fixed. Similarly, your PO Box charge is fixed. This bifurcation of costs into fixed and variable will also give a lot of valuable inputs in your decision making.
Before setting up a business, very investor should study the costs of setting up business and the associated recurring costs in subsequent years. A clear understanding about the nature and type of costs will also help the entrepreneur in his decision making.
Mr. Baiju Masoodu is a Free Zone Business Set-up Consultant. Our ‘corporate service firm’ can advise and assist you to set-up a business in Dubai and UAE Free Zones. For a free consultation & cost estimate, call me on: +971 50 214 1476 or mail me at: email@example.com