The 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.
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
- Provides a favourable tax environment
- Excellent network of Double Tax Treaties
- Has a well established infrastructure, strong banking system and a stable political system
- Robust economy
- Provides a safe and secure family environment with one of the lowest crime rates in the world
- Pro business government regulations
- Secrecy, asset protection and no international exchange of information agreements
- Global headquarters centre
- Talented, multilingual and diverse labour pool
- World class logistics and IT infrastructure
- Strategic location on the trade routes of East and West
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 and Ras al Khaimah (RAK), offer an IBC regime and Ajman is ready to introduce IBC regime before the end of 2013.
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Limited Liability Companies (LLCs)
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. Maximum 49% of the shareholding can be held by expatriate partners and minimum 51% has to be held by locals. 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 trea- ties and obtain VISAs for the employees and the shareholders.
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.
Branch of a foreign company
Foreign companies can establish a branch office in the UAE. A branch office may not carry out any commercial activity in its own name, it may only negotiate and enter into contracts on behalf of the parent company, and if goods and services are required to fulfil that contract, they have to come directly from the parent. Support activities by the branch are allowed.
A foreign company may also establish a representative office in the UAE. Such representative offices may undertake marketing and promotional activities on behalf of their parent company, but are not permitted to trade.
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.
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 eg 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 attesta- tion fees are high.
Offshore companies can only be incorporated through a licensed registered agent. Other types of entities listed above are not cov- ered by this publication as they are not widely in use.
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 perma- nent 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 holi- days to businesses and their employees set up in the free trade zone for a period between 15 to 50 years, which are mostly renew- able.
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 for- eign 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.
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 Infor- mation Exchange Agreement (TIEA), that many OECD grey list countries will be forced to enter into.