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Caution When Using Loans for Company Formation in the UAE
When financing business activities in the United Arab Emirates (UAE), companies should exercise particular caution with so-called loan-based company formation models. These often involve the disbursement of a loan being tied to the setup of a company — typically in the form of a Special Purpose Vehicle (SPV).
There have been repeated reports of cases in which borrowers were required to make significant upfront payments into the newly established company. However, despite these advance investments, the promised loan was never disbursed by the UAE-based lender. In known cases, the funds already invested could not be recovered.
Before entering into such agreements, we recommend carefully checking the following:
- Is it clearly defined when and how the loan will be disbursed?
- Is there a reliable contractual guarantee?
- Are the required investments realistic and appropriate?
- Are disproportionately high upfront fees requested before disbursement?
- Is the lender reputable and transparent?
- Have you sought legal advice?
AHK strongly advises caution with such offers and recommends obtaining legal counsel, especially when significant advance payments are required.
Additional Risk Warnings
The UAE offers excellent business opportunities for German companies. At the same time, initiating new business relationships — especially with previously unknown partners — requires a high level of due diligence. Below are important recommendations to help minimize risks.
Secure Payment Processing: Letters of Credit and Prepayments
For export transactions, we strongly recommend insisting on irrevocable letters of credit or full advance payments. Without such safeguards, companies risk long, costly legal disputes abroad — or may face a complete lack of enforceability.
Due Diligence on Potential Business Partners
Before entering new partnerships, thorough due diligence on the prospective partner is essential. This includes at least one in-person meeting — especially when dealing with unfamiliar companies. When in doubt, the AHK UAE team can support you in evaluating potential partners.
Caution with Large Orders Allegedly Linked to Government Entities
Be cautious of unsolicited offers from intermediaries claiming to represent powerful local firms or even members of ruling families. These offers often involve high pressure and demands for rapid decision-making. In multiple cases, these contacts led to substantial advance payments for "registration fees" — without any actual returns. Serious business relationships are rarely established this way.
Beware of Alleged Public Tenders
German companies are repeatedly contacted with tender documents that appear to come from official institutions. These are often followed by demands for unreasonable prepayments or fees after the supposed contract is awarded. Always verify the legitimacy of such tenders and directly contact the relevant authority to confirm their authenticity.
AHK recommends that German companies approach new business relationships in the UAE with care, ensure secure payment arrangements at all times, and seek legal or institutional advice in case of doubt.
If you have any questions or would like an initial assessment, our team will be happy to assist you.
Get in touch:
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Laura Moussa
Senior Advisor Innovation, Startups & Sustainability / DEinternational
+971 (0)2 6455200 Laura.Moussa@ahkuae.com
