The United Arab Emirates
The United Arab Emirates (UAE) comprises of a federation of seven emirates – namely, Dubai, Abu Dhabi, Sharjah, Fujairah, Ras Al Khaimah, Umm Al Quwain and Ajman – which have their own rules and regulations.
Dubai is a city and emirate in the United Arab Emirates (UAE).The emirate is located south of the Persian Gulf on the Arabian Peninsula and has the largest population with the second-largest land territory by area of all the emirates, after Abu Dhabi. Dubai and Abu Dhabi are the only two emirates to have veto power over critical matters of national importance in the country’s legislature.
Over the past years, UAE has increasingly emerged as a popular jurisdiction for relocation of High Net worth Individuals, and a strong alternative to traditional jurisdictions including UK, Switzerland and Monaco.
Although Dubai’s economy was built on the back of the oil industry, revenues from oil and natural gas currently account for less than 6% of the emirate’s revenues. Real estate and construction (22.6%), trade (16%), entrepot trade (15%) and financial services (11%) are the largest contributors to Dubai’s economy.
The official language is Arabic, however, English is widely spoken and many documents and publication are available in English. Its currency is UAE Dirhams (AED)
The UAE could be an attractive hub for investors to locate their business interests for the following reasons:
- No corporate and income taxes, no exchange control restrictions
- Possible to have unrestricted repatriation of income and capital
- Political stability and a favorable tax environment
- Excellent network of Double Tax Treaties
- Well-established infrastructure and a strong banking system
- Good health care, safe and secure family environment
- Pro-business government regulations
- Secrecy, asset protection and no international exchange of information agreements
- Global headquarters center
- Talented, multilingual and diverse labor pool
- Straight forward administrative procedures and low processing costs
- World class logistics and IT infrastructure
- Strategic location on the trade routes of East and West
- Sunny weather throughout the year
Under UAE federal law, foreign businesses have three main entities to choose from in order to conduct business in the UAE: a local limited liability company (“LLC”), a free zone entity (“FZE”) and an international business company (“IBC”). Companies can also operate by setting up a branch of a foreign company, a representative office of a foreign company.
There are many free trade zones established in UAE, each having its own free zone authority. They are profit making entities. Their main source of income derives from renting office space, collecting license fees, and providing services to the companies operating in the free zone. The rules and regulations of each free trade zone do not differ substantially
Six out of seven emirates (the exception is Abu Dhabi) offer the possibility to conduct business out of a free zone. And two emirates, Dubai, Ras al Khaimah (RAK) and Ajman, offer an IBC regime.
International business companies (IBCs)
Dubai, through its Jebel Ali Free Zone, and Ras al Khaimah, through the RAKIA Free Zone and the RAK Free Trade Zone, offer an International Business Company (IBC) regime. These companies are ideal for any type of business that does not require a local office. This includes any passive investment activity e.g. holding shares in local or free zone companies, holding UAE real estate, or trading activities outside the UAE. IBCs cannot rent office space nor can they apply for staff visas and they are not allowed to trade with parties inside the UAE. RAK IBCs have the following attractive features:
- Not necessary for the owner or manager to visit the UAE in person
- No requirement to deposit capital in a bank account
- The only data on public record is the name of the company and date of incorporation
- No requirement to submit financial statements
As with local and free zone companies, offshore companies can benefit from some of the tax treaties concluded by the UAE, by setting up a free zone branch. If a local corporate bank account is required, for instance in order to benefit from the strong client confidentiality rules applicable in the UAE, then an offshore company from another jurisdiction is simply not a feasible option. There are very few banks in the UAE that even allow foreign entities to open bank accounts, and for the ones that do, the attestation fees are high.
Offshore companies can only be incorporated through a licensed registered agent.
Main features of a UAE OFFSHORE COMPANY
- It does not need to have physical offices in the UAE.
• It may not carry on business within the UAE.
• It may not obtain a UAE residency visa.
• It can have non-UAE residents as directors or shareholders.
• It can have UAE residents as director or shareholder.
• It can have corporate shareholder(s)/corporate director(s)
• The shareholder/director does not need to be physically present in the UAE for incorporation.
• It may own real estate in the UAE, with prior authorization from RAK Investment Authority.
• It cannot operate a banking or insurance business without a special license.
• It may maintain bank accounts and deposits in the UAE or worldwide.
• It is not obliged to maintain any books and records.
• It may hold shares in other UAE and worldwide companies.
Advantages of a UAE (Dubai) International Business Company
- 100% income tax exemption
• 100% corporate tax exemption
• 100% capital and profit repatriation
• 100% ownership in Free Zones
• No capital gains tax
• No value-added tax
• No withholding tax
• Proximity to Gulf and global markets
Main activities of an International Business Company
Activities held outside the UAE
• General trading
• Consulting and advisory services
• Holding company
• Property ownership
• International services
• Professional services
• Shipping and ship management companies
Activities done within the UAE
• Holding assets
• Holding a bank account
• Property Ownership (freehold areas)
Limited Liability Companies (LLCs)
Main characteristics of LLC are the following: A LLC can be formed with a minimum of two and a maximum of 50 persons whose liability is limited to their shares in the company’s capital. Foreign partners can hold shares up to 49% of capital, 51% of capitals must be national partners. The voting rights in the company may not exceed 49 percent, profit and loss distribution, and the share in allocation of liquidation proceeds can be mutually agreed upon. LLCs can sell directly to the local market. Taxation is zero while they can make use of the double tax treaties and obtain VISAs for the employees and the shareholders.
There is no minimum share capital required to form an LLC company anymore and the shares are not open to the public. The profits of shareholding are pre divided in rations agreed by the two partners (national – foreign partners).
If the scope of the activities in the UAE is limited, a branch or representative office can be considered. Such an office would also need a local sponsor.
However, the sponsor in this case does not gain any voting rights and the role is limited to dealing with local and federal government requirements.
Unlike LLC, professional license company is 100% foreign owned but is required to appoint a local services agent. The individual that will apply for a professional license company is required to have a professional qualification for related activities of company which is ones in the service sector (consultancy, medical etc.).
Branch office of a foreign company
Similar to a professional license, branch of office is owned 100% by foreigners. They must have the same name as the parent company. A national service agent must be appointed, parent and branch company need to engage to the same activities and also branch office is not allowed of importing products of the parent company.
Representative office of a foreign Company
The representative office company represents its parent company in the U.A.E. and can only promote activities of their parent company. They can carry out marketing and promotion of their sales, production of products as well as facilitate contracts in the U.A.E for the parent company. It is not permitted to credit facilities nor put forward offers.
They are a representation of a principal for the purpose of distributing, selling, offering or providing merchandise or services within the state for commission or profit. They can Import goods into Dubai in large volumes Similar to LLC, they are comprised of a national owning 51 % and the possibility of a foreigner owning the remaining 49% there are two forms of Commercial Agencies, Registered and Unregistered Commercial Agency. The main difference between the two is that a Registered Commercial Agent provides safeguards to protect the Principal and the Agent, opposed to the very few safeguards provided with Un- Registered ones.
Free Zones Entities (FZEs)
If there is no need to sell goods directly to the local market, but office space and local staff are required, then setting up in a free zone is often more attractive than using a local company. There are two different types of free zone entities being the Free Zone company (FZCo) which has at least two shareholders or Free Zone Establishment (FZE) which has minimum one shareholder.
To operate in a Free Trade Zone, a business needs a license, depending on the nature of its business. Generally in most of the FTZs the following licenses are available:
- Trading license which allows the companies to carry out general trading activities
- Industrial/ Manufacturing license required for product manufacturing
- Services license
The main advantages of setting up in one of the free zones in the UAE are as follows:
- 100 percent foreign ownership is allowed
- Guarantee for 15-50 years against the future imposition of corporation tax. It is not clear whether the guarantee would provide exemption against an imposition of VAT as well
- Import of goods duty free, provided the goods are not supplied to the local market
- Streamlined procedures: all formalities are typically dealt with through the free zone authorities instead of the various government departments
- Can apply the benefits of the double tax treaties
- No restrictions on hiring expatriates
The main disadvantages as compared to operating as a local business are that there is higher rent than outside the free zones and it is not possible to supply goods directly to the local market. Goods can be supplied to the local market through a local commercial agency which has to be wholly owned by a UAE national and after paying the import duty, usually 5 percent. Note that the practice is to allow the provision of services through a free zone entity to the local market as long as a significant proportion of the turnover is realized abroad.
Currently, the UAE federation does not impose a federal corporate income tax. However, most of the emirates constituting the UAE federation introduced income tax decrees in the late 1960’s and taxation is therefore determined on an emirate by emirate basis.
Tax residence under the tax decrees of the various emirates is based upon the French concept of territoriality. Basically, the French territoriality concept taxes profits based on territorial nexus, rather than taxing profits earned outside the country.
Under the emirate based tax decrees, corporate income taxes may be imposed on all companies – including branches and permanent establishments – at rates of up to 55 percent. However, in practice the corporate income tax is currently imposed only on oil and gas companies and branches of foreign banks having operations in the emirate.
In addition, some of the emirates have introduced their own specific banking tax decrees which impose tax on branches of foreign banks at the rates of 20 percent.
Entities established in a free trade zone in the UAE are treated differently than a normal “onshore” UAE entity. As previously noted, free trade zones have their own rules and regulations and typically, from a tax perspective, they generally offer guaranteed tax holidays to businesses and their employees set up in the free trade zone for a period between 15 to 50 years, which are mostly renewable.
On the basis of the above, most of the entities registered in the UAE are currently not required to file corporate tax returns in the UAE, regardless of where their UAE business is registered.
Personal income tax
There are currently no personal income taxes imposed on individuals working in the UAE.
There is a social security regime in the UAE which applies to employees who are GCC nationals. Generally, for UAE nationals the social security payment is at a rate of 17.5 percent of the employee’s gross remuneration as stated in an employee’s employment contract and applies regardless of the free zone tax holidays. 5 percent is payable by the employee and the remaining 12.5 percent is payable by the employer.
Double Tax Treaties
Double tax treaties are aimed at making UAE a more attractive territory in which to operate by reducing taxation levied in the foreign jurisdiction on profits remitted abroad by foreign corporations operating here.
UAE has an extensive and growing list of double tax treaties, which currently numbers over 60. This network includes treaties with China, Cyprus, France, Germany, India, Indonesia, Italy, Luxembourg, Malaysia, Malta, the Netherlands, Singapore, South Korea and Ukraine.
Over the last couple of years United Arab Emirates has signed important tax treaties with developed countries like China, Egypt, Finland, France, Germany, India, Italy, Malaysia, Sri Lanka , UK, Switzerland. Another important aspect is that UAE is not blacklisted by EU, UN and OECE therefore companies that are incorporated under this Jurisdiction can be extremely useful for tax planning purposes.
Exchange of Information
The majority of UAE treaties do not contain the new OECD exchange of information clause.
Even with a post 2005 OECD information exchange clause, countries are not at liberty to enter into “fishing expeditions”.
Information exchange even under a new treaty is far more restricted than, for example, information exchanges pursuant a Tax Information Exchange Agreement (TIEA), that many OECD grey list countries will be forced to enter into.
JEBEL ALI OFFSHORE COMPANY
One of the latest initiatives by the Jebel Ali Free Zone has been the setting up of offshore companies which are regulated by the Jebel Ali Free Zone (JAFZ) Offshore Companies Regulations 2003. This company can be used to own real estate properties on the Palm Islands, properties owned by Nakheel Company LLC and any other real estate approved by the JAFZ Authority. A JEBEL ALI OFFSHORE COMPANY requires two directors to be appointed and minimum one shareholder. Corporate shareholders are authorized but corporate directors are not permitted. One residence visa can be issued for one director provided the company maintains an office in the JAFZ, but the company will not be allowed to do business within UAE, with UAE residents or trade in JAFZ/UAE unless it has first obtained the appropriate license in the free zone.
The company can hold a bank account in the UAE for conducting routine operational transactions. The Register of Members is open for inspection by any member of the offshore company and any other person. Details of Directors are not available for public inspection. Companies must maintain a registered office within JAFZ, have a secretary and keep accounting records. Every company must appoint an approved auditor to examine and report on the accounts in accordance with the regulations. Registration of the company in free zone will take between 1 to 2 weeks.
RAS AL KHAIMAH INTERNATIONAL COMPANY
In September 2006, Ras Al Khaimah Government launched an offshore facility, the second in the UAE, which is regulated by the Ras Al Khaimah Free Trade Zone Authority International Companies Regulations 2006.
100% foreign ownership is allowed. The law must be cited in the Memorandum & Articles of Association. RAKFTZ have imposed very few restrictions on the activities of International Companies allowing for a wide range of business activities to be carried out.
The International Company can own any local freehold real estate property.
Despite a general prohibition on International Companies to conduct business with persons resident in UAE, the Authorities frequently allow offshore companies to hold shares in both offshore and onshore UAE companies.
The International Company can hold a bank account in the UAE for the purpose of conducting routine operational transactions and can also maintain professional relations with legal consultants, accountants and management companies or other similar persons carrying out business within UAE. Incorporation documents can be signed at our associated offices without having to visit. A shelf company list of RAK Offshore companies can also be provided upon request.
Documentation required for UAE company registration
- Application form
- Proof of residence (for each shareholder/director)
- Passport copy – all pages (self-signed)
- Original bank statements – no more than 3 months old (for each shareholder/director)
- Original bank reference (for each shareholder/director, and for a company, a set of company documents self-signed)
- Board resolution if account is to be operated by an individual
- Company mailing address