UAE’s start-up costs could do with a trim

This article appeared originally in Gulf News: link to original article

I have always been against the idea of starting a business while having a full-time job. Similarly, I never believed that someone who’s serious about their business would maintain a full-time job.

Anyway, I broke my own rule recently as an opportunity presented itself, when someone whom I have known for some time needed seed money for his business venture. I agreed, subject to full management being his responsibility.

Starting the business was quite straightforward, a clear testament of where the UAE stands today with regards to its global ranking in Ease of Doing Business, published annually by the World Bank. What wasn’t easy though was choosing a name, to our own surprise, and the costs involved.

Choosing the name is probably our own fault for naively presuming that we will pick any name within a certain theme, and be fortunate enough to find that name available. We figured it out eventually, without having to go for any of our names, or that of a poet or a philosopher because of the push for Arabic names.

More on that later.

Steep entry cost

Now to get the trading license, it costs us more than Dh20,000, spread between one federal entity and five local entities. This is of course not taking into account any other costs that could come up in the future as more individuals are employed by the business.

Again, this is the amount to be paid to be able to open a business. I find this a bit bizarre and out of place. Here’s why.

One, if we would like to support entrepreneurship and the development of a vibrant environment for small and medium enterprises (SMEs), high start-up fees are surely not the way to go. The higher those business start-up fees are, the more they discourage individuals from starting their own businesses, encouraging them instead to find a job, and most probably in the public sector.

In addition to that, high start-up fees can affect the nature of the business that one would get into, getting into a business with the ability to make a quick buck and recover those high start-up fees. For instance, getting into food and beverages (F & Bs) instead of manufacturing.

Cost of a name

Two, part of the high start-up fees is having to pay an annual fee of Dh2,000 for the use of a non-Arabic name. If the aim is to encourage start-ups, then we should accept that a majority of those will not be owned by Arab individuals.

It thus makes no sense to charge such an annual fee. This is even more so the case given the new law that allows up to 100 per cent foreign ownership.

Now for the UAE to stay entrepreneurially competitive, the start-up fees model will need to go by introducing a corporate tax model in its place.

In the UK, for instance, start-up costs are negligible. The idea is that those start-ups should not be squeezed out of business before they have even started, especially when there are other costs to take care of, including rent and payroll. As such, governments make it easy and cheap to start a business, realising that doing so will generate additional economic activities.

That is, those businesses will create jobs and will obtain loans to expand their business or even expand into other sectors, which by itself fuels additional economic activities. Governments are, therefore, better off allowing those businesses to actually grow with fewer start-up financial obligations in their first years, then make more money from income-connected corporate taxation.

In conclusion, the UAE’s start-up model must move away from one that focuses on burdensome start-up fees to one that taxes corporate income. Corporate taxes, with growing businesses and incomes, will generate higher government revenues than fees would, ever.

The last thought that I want to leave you with: At what income level should the corporate tax kick in?